Tag Archives: concealment

The Consultants Are Here to See You…

If you are running an insurance claims operation, and your boss or the board brings in outside consulting experts to evaluate it, chances are you have a problem. Not just the problem the consultants are being called in to examine but a pricklier, more personal problem–a perception problem. Someone with some clout in your organization apparently doesn’t believe you are capable of doing whatever it is the consultants are going to be doing.

That puts you in a tricky situation, one that demands thoughtful action.

First off, don’t try to convince your boss or the board that you are an expert and that you don’t need outside assistance. Don’t waste time arguing that your training and years of experience managing claims qualify you for the challenge. Do understand that the decision has already gone the other way, and any attempt you make to reverse it looks like resistance, concealment, perhaps even cluelessness.

Think about it. If you argue that there is no problem, or the problem is outside of claims, or that every claims operation has the same problem, you risk being classified as stubborn and averse to change. Don’t protest that you have already diagnosed the problem and designed a solution; others don’t see things that way.

They want another opinion, another perspective. Maybe they don’t like your plan, or perhaps it conflicts with some other course of action they want to pursue. It could be they don’t quite know what the problem is, but there’s something troublesome in the loss numbers, and they want to understand why it is happening and what to do about it. Or, worst case for you, they might just be looking for evidence and justification for overhauling your organization and escorting you out the door.

The reason really doesn’t matter, but your response does. As activist and author Jerry Rubin once said: “The power to define the situation is the ultimate power.” You have the power to assist in framing the inquiry and shaping the outcome by being visible and playing an active, cooperative role with the experts during the engagement. Take advantage of that power.

First, welcome the consultants and make arrangements to provide them with whatever help and information they need. Brief them fully on your organization, your strategy and your operating procedures. Impress them with the dashboards and controls you use to manage risks and results. Talk to them about process efficiency, effectiveness and loss-cost management techniques. Show them how you establish and monitor key performance indicators and how you interact and communicate with your stakeholders. Demonstrate how you identify and incorporate best practices in your claims handling processes. If some of the consultants lack industry knowledge and have no background in claims–don’t be dismayed. Instead, patiently take the time to make sure they fully grasp how your company functions and how your operation contributes to results.

In other words, do whatever you can to provide the experts with plenty of evidence supporting the proposition that when it comes to running an insurance claims operation: 1) you know what to do, 2) you know how to do it and 3) you are doing it, quite well.

The consultants’ job is to identify performance gaps and root causes and propose actions to close those gaps. Your objective should be to provide them with the information, the insights and the support they need to do that job well. People who hire consultants usually believe the consultants will bring very high levels of knowledge, objectivity, credibility and perceptiveness to the engagement. While that belief might not always be accurate, the reality is that consultants’ findings are accepted as authoritative in most cases. That means their recommendations will affect you and your organization, so it makes sense for you to invest your time and effort into framing the inquiry and shaping the outcome. Give it your best shot–you might even learn something in the process.

The downside is that in tricky, prickly situations like this there is no guarantee things will turn out well even if you do everything right. Sometimes there are hidden operating agendas, foregone conclusions and predetermined outcomes underlying the consulting engagement, and unless you know about those factors going in, there’s not much you can do to manage their impact.

To Rescind Or Not to Rescind?

Rescission of an insurance policy is serious business. Such action could result in serious financial difficulties to insureds, especially if it occurs after a major loss. Furthermore, costly and protracted litigation almost inevitably follows to contest the rescission.

Fortunately, insureds and their brokers can minimize the potential for rescission by simply exercising greater care to ascertain the accuracy of underwriting information, and by providing all material information to insurers. Also, rescission decisions are made by insurers only if they are convinced that they have adequate justification for them.

An insurer may rescind its policy in the event of material misrepresentation or concealment of a fact by the insured. Misrepresentation is the false statement of a fact by the insured. Concealment is the neglect to reveal a fact that the insured knows and ought to communicate to the insurer.

Misrepresentation or concealment is material if it affects the underwriting decision of the insurer. For example, the premium would have been higher had the insurer been aware of the true and complete facts.

Property-casualty policies typically include conditions pertaining to the subject of rescission, such as:

  • The policy is issued in reliance upon the truth of representations made by the insured.
  • The policy is void if the insured intentionally conceals or misrepresents a material fact.
  • The insured, by accepting the policy, agrees that the statements in the policy declarations are accurate and complete.

In most cases, rescission is based on materially misrepresented facts in the policy application, or in underwriting information provided by the insured or its broker. However, unless there is a satisfactory answer to each of the following questions, the rescission is not justifiable:

  • Is the fact known only to the insured? If the insurer possesses a fact that differs from what the insured had provided, then it must attempt to reconcile it before proceeding further with consideration of rescission.
  • Is it false? The insurer must have incontrovertible evidence to demonstrate that the fact obtained from the insured is false.
  • Is the falsity material? Materiality is determined within the context of probable and reasonable influence on the insurer by the false fact. Consequently, if the insurer’s underwriting decision is not affected, then the falsity cannot be deemed material.
  • Is it reasonable to rely on it? The insurer cannot reasonably rely on a fact received from the insured alone if it is aware of a conflicting fact.
  • Did the insurer rely on it? There must be clear evidence to demonstrate that the insurer did rely on materially false facts when making its underwriting decision.

State insurance codes and legal precedents also have an impact on the insurer’s decision-making process concerning rescission.

For example, the California Insurance Code allows policy rescission even in cases of unintentional misrepresentation or unintentional concealment, and it provides that materiality is to be determined solely by the probable and reasonable influence of the facts on the insurer.

Also, case law precedent prevents insurers from relying solely on representations contained in the policy application or underwriting information if an inspection of the insured’s property is conducted.

A policy may be rescinded even after a loss that would otherwise be covered by the policy. Since rescission could have severe negative financial impact on the insured, the insurer must be certain that the reasons for rescission are based on solid grounds and able to withstand potential legal challenge.

In a 2001 case, an insurer rescinded their policy following a major fire loss, alleging material misrepresentation and concealment by the insured, pertaining to several matters, including square footage of the premises.

The pre-trial discovery proceedings included examination of ambiguous questions contained in the insurer’s application form, and the accuracy of the inspection report provided by an independent inspection company retained by the insurer.

Major weaknesses emerged in the insurer’s justifications for its decision to rescind the policy, including:

  • The insurer previously issued policies for a previous owner, covering the same premises, and therefore it had prior knowledge of the underwriting information, including square footage, which differed from what the insured had provided.
  • Just because the square footage information provided by the insured differed from the prior information in the insurer’s underwriting files, it was not sufficient for the insurer to conclude that the insured’s statement is false, especially since its insurer failed to make any attempt to reconcile the difference.
  • The square footage figures provided by the insured and its broker in the application was lower than the figure in the inspection report that was ordered by the insurer after it issued the policy. In asserting materiality, the insurer disregarded another inspection report subsequently ordered by the insured, which confirmed the original figures in the application for the policy.

Based on the above points, it was not reasonable for the insurer to rely on the square footage information provided by the insured, and the insurer’s contention that it did rely on the square footage data provided by the insured was questionable.

Although this case was resolved and the insured received payment for its claim, the pre-trial discovery process took over a year, with detrimental financial consequences to the insured.

The lesson from cases like this is that all parties should take thorough measures to ensure the accuracy and completeness of underwriting information, and that conflicts or ambiguities are promptly resolved before coverage is bound.