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By Tami A. Tanoue, CIRSA Executive Director
So you might have read the title above and thought to yourself, “This should be a short article. The CIRSA claim adjuster’s role in the management of a liability claim is to adjust the claim, duh!” But when it comes to the complicated liability claims that our members often experience, the claim adjuster’s role is actually complex, shifting, and not always visible. In this article, we introduce you to the important and sometimes mysterious role played by the CIRSA liability claims adjuster in managing your claim.1
There are, of course, relatively straightforward claims that our members experience. An example might be an intersection accident where a municipal employee driving a City- or Town-owned motor vehicle was clearly at fault and caused a fender-bender. In such a claim, the claim adjuster might be the sole point of contact with whom the member and the claimant interact and the claim adjuster would likely do the following:
With larger, more complex claims, it is likely that the CIRSA claims adjuster will be one of several other players involved. An example might be an allegation of excessive force by a police officer in arresting a suspect, or an allegation of a procedural due process violation in your governing body’s consideration of a quasi-judicial matter. In such a matter, your City/Town Attorney will likely be involved. If your municipality is lucky enough to have a dedicated risk manager on staff, he or she will likely be involved. The City/Town Manager/Administrator, the affected department head, and other City/Town management members may play a role. Outside counsel may be assigned to provide assistance and, if appropriate, defend the claim.
With so many players at the table in the event of a complex claim, the “resource” role of the claims adjuster may not be as prominent. After all, there’s plenty of expertise in the room in terms of knowledge, strategy, and direction. Nonetheless, the adjuster continues to play an important role in the management of the claim. This role may not be visible to the member, but is still a critical one not only for the member, but for CIRSA and its excess insurance and/or reinsurance partners. And with so many experts in the room, there may be a natural inclination to wonder…what value is the adjuster adding to a complex claim? Is he or she going to be telling the City/Town Attorney or assigned defense counsel what to do?
Well, the adjuster’s experience can certainly continue to add value to the discussion of a complex claim, but the adjuster’s role will likely shift. Although the management of every claim involves the additional responsibilities of reserving, reporting, and documentation, these are the responsibilities that take the forefront in complex claims. So let’s explore these concepts.
Claims Reserving: The Lifeblood of Insurance
Claims reserving is the practice by which the organization – whether it be CIRSA or an excess/reinsurance partner – sets aside money to pay for the defense of, and if appropriate indemnity for, a claim. (Indemnity means the cost of a settlement or judgment that is paid to the claimant.) If your municipality carries a high liability deductible, you may be estimating your own reserves for deductible payments as well.
For each claim that comes in from a member, the claims adjuster sets an initial reserve within 30 days based on the investigation to that point. In a litigated claim, the initial reserve relies heavily on the defense counsel’s initial evaluation, litigation plan, and budget, as well as the adjuster’s experience and expertise in sound reserving practices.
Over the life of the claim, the reserve is continually reviewed and revised as necessary. That’s one reason why the adjuster needs to be at the table. How else will he or she understand new developments in the claim, the discovery of information that could be critical to the defense or settlement of the claim, and the need for changes in the litigation plan and therefore the budget? The adjuster’s eyes and ears need to be on the claim at all times to ensure accurate reserving.
Every penny that is reserved for a claim is set aside by the organization under the assumption that it will eventually need to be paid. Multiply this by the number of claims that all CIRSA members have, and the dollars reserved for each of those claims! That’s a big number, but it needs to be an accurate number. That is the amount we need to have in the bank to pay for the defense and/or indemnity of those claims.
Accurate reserving thus ensures that we have collected and hold on to enough money – not too much and not too little – to meet our claim-related obligations. You can see that under-reserving can be deadly to the organization. At its worst, under-reserving means that the pool’s financial condition could be impaired, or even worse, hit insolvency, if it turns out that we need to pay more than we have reserved and set aside. But over-reserving is also harmful. It means we’ve tied up money – money belonging to the members – that would otherwise be counted in the net position of the organization and allocated to each member. It also means that we’ve created an inaccurate picture of our liabilities and thus are likely paying too much for excess or reinsurance coverage.
When you think about it, reserves touch the past, present, and future of the pool. Let’s start with the present. Reserves must be accurate TODAY to assure we have enough money set aside TODAY to pay our claims obligations. If we don’t, we could have financial impairment/insolvency issues!
Our reserves are a continually updated projection of what we will pay in the FUTURE until the claim is closed. What those reserves look like in any given year will also influence what the actuaries think our claims trends look like, and how much we should charge our members NEXT year. So inaccurate reserving can mess up those projections.
And finally, the past. When all of the claims for a given year are finally closed out, what was reserved must equal what is paid. If we had a practice of under-reserving, that year’s going to look bad, and the specter of impairment/insolvency looms. If we over-reserved, we’re going to be putting money back into the pool’s (and thus your) net assets. But maybe that was money we didn’t need to collect in the first place.
In summary, in large and complex claims, a primary role of the adjuster is in ensuring accurate reserving. This is one of those invisible, perhaps mysterious, roles, but a critical one. And now you know!
The Superstructure of Your Coverage
How your coverages are structured and layered is another piece of the claims picture that may not be entirely visible to you. But it’s helpful to see the adjuster’s role in the context of that structure. Let’s use your liability coverages as an example.
As a member, you have chosen a liability deductible. It could be $1,000 per claim for a small member, or as much as $250,000 per claim for a large member. On top of that, CIRSA has a self-insured retention (SIR) that goes up to $1 million per claim, inclusive of your deductible, in a liability claim.
But obviously, considering your risk exposures and the current litigation climate, $1 million per claim in coverage may not be adequate. That’s why we form relationships with excess insurers or reinsurers2 to take your limits of coverage to higher levels without undue risk to the pool. Thus, in a claim that could exceed the $1 million CIRSA SIR, the excess insurer or reinsurer becomes a direct partner in the management and payment of the claim. In fact, they want to partner even earlier in the life of certain types of claims, such as a claim involving a death or a civil rights violation, and typically always want to begin active partnering when a claim is reserved at 50 percent of CIRSA’s SIR.
All of the dollars spent on a claim – from your deductible, to CIRSA’s SIR, to the amounts subject to excess insurance or reinsurance, are interrelated. So, our partners don’t say to us, “come see us when you’ve spent your $1 million SIR,” and we can’t say to you, “come see CIRSA after you’ve spent your deductible.” If a claim hits our layer or the excess/reinsurance layer, someone has to make sure that each dollar spent getting there is properly charged to the claim. Who? Why, it’s your friendly CIRSA adjuster.
Let’s use an example. Say a claim is reserved at $2 million, and CIRSA has spent $1 million (inclusive of your deductible) in defense of the claim. We have an excess insurer, and we now say, “OK, now we’re handing this off, excess insurer.” Don’t we have a responsibility to show that every dollar of the $1 million spent, including your deductible, was properly spent in the defense of the claim? We sure do, and that’s the adjuster’s job. If we can’t document that every penny spent was spent properly, then the excess insurer’s going to disallow the expenditure. We’re not going to be able to tap into their money until they’re satisfied that the dollars spent within your deductible and our SIR were spent properly.
Also, excess insurers and reinsurers insist on timely reporting of claims by us. As mentioned previously, some types of claims, like death or civil rights claims, must be reported at the start. Others must be reported when reserves are at 50 percent of the CIRSA SIR. What’s the penalty for late reporting? In a worst case scenario, the excess insurer or reinsurer may DENY any responsibility for partnering in the loss. At a minimum, an adverse comment in an audit may appear. The relationship with the excess insurer or reinsurer may be harmed. Future years’ renewals with that partner may be jeopardized. We depend on you, the member, to report your claims to us in a timely manner, so that we, in turn, can meet our reporting responsibilities in a timely manner. If you were to decide, “well, we have a $250k deductible, and we won’t report this claim to CIRSA until we spend all of that $250k ourselves,” then you’ve effectively thrown timely reporting out the window (among other terrible consequences). Thus, one of the adjuster’s critical but unsung roles is coordinating with members and our excess/reinsurance partners to ensure timely and accurate reporting of claims.
You might be wondering if the fiscal solvency of the liability pool rests solely in the hands of the adjusters who handle liability claims for CIRSA, one claim at a time. Well, no. This is such a lifeblood issue that there are multiple levels of scrutiny and accountability. But part of the adjuster’s job is to ensure that the reserves, and indeed all of the documentation related to the claim, will hold up under scrutiny.
Each adjuster has his or her level of reserve authority. Beyond that level, each reserve change is subject to review and approval by others in the organization. So at CIRSA the supervisor, the Claims Manager, the Finance Director, and the Executive Director can be involved, depending on the magnitude of the claim. Each will have requirements and expectations regarding documentation.
Also, as mentioned above, CIRSA has excess/reinsurance partners. These partners expect certain serious types of claims to be reported to them immediately and through the life of the claim. Other claims reach a reporting threshold once a certain level of reserve is reached. And then reserves are subject to continual scrutiny by the excess insurer/reinsurers, too. These partners depend on accurate reserving the same way we do, and for the same reasons.
And reserves aren’t just reviewed at the time they are established or changed. They are subject to multiple audits. Supervisors and the Claims Manager may choose to do a “desk audit” or “box audit” to verify the accuracy of reserves and compliance with other standards. CIRSA also undergoes a claims audit each year by an independent claims auditing firm. In fact, this year, we’ve decided to invite the claims auditor back for quarterly audits, just for fun. Well, maybe not fun, but we think there will be a value in quarterly reviews and fine-tuning opportunities. Among the responsibilities of the auditor is to review a sampling of claims and determine the accuracy of reserves. Reserves that need to be taken up or taken down will be noted, and an overall accuracy rate will be provided. If that accuracy rate raises red flags, further scrutiny of additional claims may be in order.
CIRSA’s annual financial audit also has a claims review component. Part of the job of the financial auditors is to review the adequacy of our reserves, because they’re a huge piece of our overall financial solvency.
But wait, there’s more. We are subject to annual audits by the Division of Insurance and the Division of Workers’ Compensation. And every excess insurer or reinsurer with whom we have a current relationship, or a past relationship with still-open claims, also has the right to audit us…and they do! Thus, the CIRSA Claims Department is subject to 5, 7, 10 audits every year…but who’s counting?
But there’s still more! We engage actuaries who tell us the big picture of whether our reserves are adequate, and help us determine what we should be charging our members in the coming year. And we have yet another consultant, who tells us, from the thousand-foot perspective, what our funding needs and capital model should look like. Reserves are a big part of that picture.
All this scrutiny should persuade you of two things. One, we take all prudent measures to assure the fiscal solvency of CIRSA so that we can continue to serve you effectively, efficiently, and without unpleasant surprises. And two, you should have some sympathy for the hard work of the adjusters! There are a lot of eyes scrutinizing their work from start to finish. So, the next time you sense that one of them might be, well, wound a little tightly, you’ll understand why.
Documentation, Documentation, Documentation
There’s a saying in the adjuster world: If it wasn’t documented, it didn’t happen. With all of the eyes involved in scrutinizing a claim, it’s critical that each aspect, of the reserving process, as well as of each expenditure, be well-documented. Everyone in the supervisory levels, and all of the excess insurers and reinsurers, need to be able to look at the documentation and understand the adjuster’s thinking, and must agree that any given expenditure was appropriate. Auditors will audit the adjuster against our own documentation standards as well as industry best practices. If the adjuster makes it difficult for an auditor to understand what’s happening in the life of a claim, and what may be driving a reserve amount, then the adjuster – and the organization – will be called out for a standards and practices fail.
Rest assured that when an adjuster is involved in, say, a legal strategy discussion with the City/Town Attorney, outside counsel, municipal management, etc., he or she isn’t there to boss everyone around. But the adjuster must understand what is happening and what’s going to happen. The adjuster needs to approve and document significant expenditures, especially if they were not anticipated in the original budget and litigation plan. If a case is going seriously south, the adjuster needs to know, document, and report that up. All of these activities are critical to protecting the accuracy of the reserves, to document the appropriateness of the money going out, and to keep the excess insurers, reinsurers, and others appropriately informed.
You can see that the relationship between the adjuster and outside counsel is a critical piece of the reserving, documentation, and reporting picture. If outside counsel is late with reports, excludes the adjuster from critical discussions, or continually blows the litigation budget, then the adjuster can’t do his or her job. And then the adjuster must face the wrath of the supervisor, Claims Manager, Finance Director, Executive Director, and others! That’s one reason why we value the relationships we have with experienced outside counsel who are not only superb litigators, but who understand and accommodate the adjuster’s responsibilities.
Finally, the adjuster can continue to bring value on the member-facing side of a large or complex claim. The adjuster has the big picture of the claims that members experience. The adjuster sees all of the successes (and sometimes failures) that happen in court, in mediation, and in settlement conferences. The adjuster has well-honed negotiation instincts and skills, and perhaps insights developed from experience with similar claims, or the same claimants and/or their counsel. So while certainly not seeking to get in the way of the legal and management talent in the room, the adjuster can bring the value of his or her experience to the discussion.
We hope this article illuminates the less visible side of the adjuster’s job, helps to demystify it, and helps explain why the adjuster occupies an important place at the table when your claim is being discussed. We’ve focused on liability claims, but the reserving, documentation, and reporting responsibilities in first party property claims (i.e., those that involve damage to or loss of the member’s property), and workers’ compensation claims work much the same way.
Managing claims is truly a partnership between our member, CIRSA, and the applicable excess insurers and reinsurers. For that partnership to work optimally, we all must participate, and honor each other’s participation. When the partnership works well, we can all rest assured that the claim is being managed as best it can be for the member’s benefit.
1 The author is an attorney who has substantial experience in municipal pooling issues, but who is not a claims adjuster, financial professional, or actuary. While the content of this article has been reviewed by CIRSA’s General Counsel, Finance Director, and Claims Manager, any irregularities in the characterization of the financial and/or claims adjusting issues discussed herein are entirely the author’s.
2 There are technical differences between excess insurance and reinsurance. Basically, when CIRSA purchases an excess policy, it is a second policy that sits above the CIRSA self-insured coverage document. So CIRSA provides the first $1 million/claim of coverage under its coverage document, and the excess insurer provides, say $9 million/claim of coverage, under its own policy. In reinsurance, CIRSA provides the entire $10 million/claim of coverage under its own self-insured coverage document, but “reinsures” $9 million/claim of that coverage through a contract with a reinsurer. The practical import of this difference is not likely to be very visible to you.
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