# What insurance is - part 2 ## Claim payments The purpose of a claim is to award "remedy" for a party's "injury" to "indemnify" them. However, without insurance, the entire event can become the basis for a court case. - Compensatory damages pay an injured party due to negligence of an insured. - Special damages are direct financial damages and lost income affected by the negligence. - General damages are non-economic, natural, necessary results of a wrongful act or occurrence. - Punitive damages are over and above the compensatory damages, typically to punish someone and typically outside the scope of insurance. In the event of a claim, an insured has quite a few responsibilities, and failing to perform *one* of those duties may void coverage: - Give prompt notice of the claim to the insurer or their producer - Prepare an inventory of damaged property showing quality, description, actual cash value, and amount of loss - Present the damage as often as reasonably required - Submit to examination under oath and a signed proof of loss within 60 days of request - Protect the property from any further damage and make reasonable repairs necessary to protect it - Keep an accurate record of expenses during the interim before the claim payout - Property claim duties: - If a crime, notify the police - If a theft, notify all affected banks - Liability claim duties: - Promptly forward every notice, demand, and summons related to the occurrence - Assist the insurer in settlement by attending hearings or trials The claims process is mostly the same no matter what: 1. The claimant calls the insurer. - The claimant is either the insured (in a property claim) or holding the insured liable (in a liability claim). - In health insurance, the claimant is technically the healthcare providers' medical billing departments. 2. A customer service representative opens up a claim with a claim number. - It includes important information like the names of everyone involved, the policy number, details of the event, etc. - Even when a claim is *absolutely* certain to not result in a payout, claims department workers are legally forbidden from "steering" a claimant away from opening a claim. - Irrespective of a payout, a claim is still reported on the insurance reports and lingers for at least 3 years. 3. A claims representative/adjuster opens a claim investigation, which often complies to a rigid, legally framed procedure. - Throughout the process, the scope of their effort is somewhat connected to the size of the expected claim and likelihood that the carrier will have to pay it. - They are typically looking for specific criteria that indicates the claim is *not* fraudulent (e.g., police report, evidence of forced entry). 4. If needed, a special investigations unit (SIU) makes initial contact with all affiliated parties, and gather whatever information they can to determine liability. - The investigation will determine the proximate cause for the event. - Generally, the longer they actually devote to the investigation, the more [fair](morality-justice.md) the outcome will be. - If there's a legal complaint, then it triggers a "discovery" as well to gain more documentation. - Nobody is legally required to provide documents without a court order or subpoena, which can *really* slow down the process. - At the same time, the insurance companies may acquire a statement from the claimants by using leading questions to make the person [confess to something they didn't mean to](legal-safety.md). 5. In the case of health insurance, the claims department may request access to claimants' *complete* medical information. - They may find pre-existing conditions, though that may or may not apply depending on the law. 6. If it's property and casualty, they'll also perform a damage inspection to determine how much the damages will be (and sometimes arrange for repairs) while they're determining liability. 7. Once they've determined liability (when applicable), the coverage limits apply to determine the amount(s) of the claim. - The only way a claims investigator will pay is if the conditions on the policy document are met, which may include canceling the policy, filing a proof of loss, or protecting the property from further loss. - The insured is responsible to submit a signed sworn proof of loss within 60 days of the request (which is the insured's demand for payment), and the insurer has 30 days to respond to it. 8. The adjuster must then determine *whom* to pay. - The payment for a loss will go to an insurable interest or contractor, who is often *not* the insured (e.g., [lienholder](money-2_debt.md), collision center, construction company). - In a total loss, the payment may be a check for the entire balance minus the deductible, payable to the insured or lienholder. - Sometimes, a contractor may require a direction to pay form, which can direct the *entire* claim payout to them. 9. The adjuster may deny the claim outright. - The contract may clearly state the situation is not covered (e.g., an event was excluded). - There may be differing criteria for different conditions (e.g., a medication taken orally may have different requirements than the same medication taken rectally). - The law is framed in a way that the rejection *must* be a legitimate reason, and everyone is entitled to know why their claim is denied. - However, in all cases, the capacity to appeal the decision is *very* limited, and the claimant will typically need to [file a lawsuit](legal-safety.md) to get a denied claim paid. 10. The claims adjuster gives an offer to the claimant. - They'll sometimes make absurdly low initial offers, *far* below the value of a claimant's case. 11. Depending on the policy, the claim payment also triggers other expenses which may apply: - Rental vehicle reimbursement - Additional living expenses (ALE) 12. Key details of the claim investigation are reported to insurance reports (e.g., CLUE), which nearly the entire insurance industry will track for future premium rating. - The date and cause of the event - Claim payment amounts (with thresholds defined at $1,000) - Whether an accident was the insured's fault 13. The insurer is entitled to "subrogate" against third parties whose negligence caused the insurer to pay a claim (transfer of rights of recovery). - In other words, if a liable party does *not* have insurance, but the claimant does, the insurance company can send their lawyers to sue on behalf of the claimant to get back the claim money they paid. 14. If the insurer suspects fraud, they *will* report it to the government. - Fraudulent conduct can involve a fine or up to 10-15 years' imprisonment, along with civil penalties if an Attorney General is involved. While not all the parts are expressed, insurance claims use the same framework every time: 1. The insurance company expects the insured to self-insure up to the deductible. - A deductible is often $500 or $1000, or not mentioned because it's $0 (which is frequent for liability claims). - Sometimes, that deductible is a calculated percentage of the loss amount, property value, or limit (e.g., some property perils like earthquake or windstorm). - Sometimes, a time deductible mandates a certain number of hours/days before a claim payout. 2. Up to a certain point past the deductible, both the insurance and insured will provide a copay. - Most insurance beyond health insurance doesn't have a copay. - The co-payment is often 50% (e.g., $100 is 50% paid by insurance and the insured pays the other $50). 3. Beyond the deductible/copay, the insurance carrier covers losses all the way up to the predefined limit. - Some professional liability policies include a consent to settle provision that requires the insurer to have the potentially liable professional to agree to a settlement before payment (to protect the professional's reputation if that professional doesn't want to be held responsible). 4. If the insured and insurer can't agree on the value of damaged property, either one can make a demand for an appraisal. - Each party will select an appraiser who will each select an impartial umpire, then submit their estimate of damage, and any 2 of them agreeing creates a final decision. - This specific process promotes claim settlement and cuts down on expenses by requiring each party to split the costs equally for their appraiser instead of hiring attorneys. - If the insured and insurer *still* can't agree on the amount for the loss, anyone can demand [arbitration](people-6_contracts.md), each with an appointed arbitrator who selects an impartial umpire, and any 2 of them agreeing creates a final decision. 5. The insurance carrier pays. - Typically, the payment will be to a service provider to fix things. - If the damages are too significant and the insurance company can take the asset, they'll purchase the asset for the value minus the deductible/copay. 6. To recuperate some losses, the carrier will sell the salvaged property in its salvage condition. Most claims departments, to some small effect, take advantage of people who are not aware of their rights: - They may imply retaining legal representation (i.e., an attorney) will void their claim. - The statements they gather may provide leading questions that may invoke an insured to confess to something they don't mean to. - They may delay claims for the claimants' bills to pile up, meaning they'll [settle for less](people-5_conflicts.md). - Finally, they may simply rush the case as fast as possible before claimants can understand their rights. ## Property valuation/limits For any property, an insurable interest of that property *must* exist at the time of the loss. The property calculation can come from multiple possible valuation methods: - Replacement Cost Value (RCV) - the cost to actually replace it (often simply by applying a simple formula to square footage or consulting a chart). - Functional Replacement Cost - the cost of the insurer replacing the damaged property with a functional equivalent (e.g., sheet rock walls replacing plaster). - Actual Cash Value (ACV) - the RCV, minus depreciation (typically the most common property insurance valuation). - Market Value - how much it could have been sold for right before the loss (policies are *rarely* written on this basis). - Agreed Value - the insurer and insured agree to a discrete coverage limit, with no attachment to anything else, and becomes coinsurance if it's not extended during a renewal. - If the insured and insurer can't agree on a coverage amount, the insurer can waive the coinsurance requirement with an Agreed Value Approach with an inflation guard endorsement to reflect automatic coverage increases. - Stated Value - a value given by the insured, where the insurer pays the lower of their stated amount, the ACV, or the repair cost. - Salvage Condition - the remaining value of a total loss, typically used to recuperate some costs to the insurance company. This valuation or its calculation is often clearly defined in the policy contract. - The property's value must typically be determined before binding, meaning most of the underwriters' work comes *before* the policy starts. - ACV conforms to the philosophy of indemnity, while RCV gives *more* than indemnification would imply. - Older buildings tend to be valued through ACV, with newer ones through RCV. Property coverages have a few scopes: - Specific coverages indicate coverages for one type of property. - Blanket coverages indicate set coverage for multiple classifications of property. - Scheduled insurance covers specific property for specific amounts when it surpasses standard peril coverages (e.g., a diamond ring). - Sometimes, there will be *no* dollar limit on some property coverages. - Other times, insurers can place special lowered limits on property with a high possibility of a severe or total loss. - One form of lowered limit is a sublimit, where a fixed percentage of the total limit will go to a specific type of coverage (e.g., business lawsuit liability policy for $500,000 will have a 10% sublimit for punitive damages). Coinsurance can allow an insurance policy that will cover less than the property is worth, which is common in commercial property: 1. The property is assessed for a specified value. 2. The insured makes an agreement to coinsure for less than 80% of the insurable value (e.g., 75%). 3. If a loss happens, the insurance will pay the percentage of that coinsurance (e.g., 75% of a $5,000 loss). ## Liability valuation/limits Since liability can theoretically be unlimited, all liability insurance has a limit up to a specific, even amount. - The strict liability doctrine (everyone is responsible for themselves) applies when conduct is hazardous in nature or a defect must be proven. - Otherwise, the vicarious liability doctrine (an entity is responsible for other entities) applies. All liability claims have 3 parties: 1. The claimant who is seeking a remedy 2. The insured who holds the policy 3. The insurer who pays the claim For a liability claim to be valid negligence, it *must* have 4 non-negotiable components: 1. A "duty" for the insured to act or not act. 2. Violation of a "standard of care". 3. "Proximate cause" that connects to the liable party. 4. An actual, measurable damage or injury toward another person (e.g., earnings, medical expenses, etc.) Anything that isn't resolved within insurance liability will make its way directly into the domain of tort law. - Intentional torts/acts are carried out with purpose and knowledge of their consequences (e.g., assault) and generally excluded from *all* liability policies. - Unintentional torts (aka negligence) is failing to exercise care that a reasonable/prudent person would take under similar circumstances, and is generally covered by liability insurance. Liability insurance clarifies precise limits: - Split limits specify different coverage amounts for different types of losses. - Bodily injury (BI) and property damage (PD) are often separate limits. - BI - bodily injury, sickness, or diseases sustained by a person, including death. - PD - all damage to *tangible* property, including loss of use. - Per person - limits coverage per person. - Per occurrence - limits coverage per occurrence. - Most standard auto insurance policies give barely adequate liability coverage of $100K bodily injury per person capped at $300K per occurrence, with $100K property damage per occurrence (100/300/100). - Boring and small cars (e.g., Toyota Camry, Honda Civic) are cheaper to insure than [identity-associating](identity.md) vehicles (e.g., Dodge Challenger). - Liability limits can also be aggregate limits instead of broken out. - Auto policies can have a combined single limit (CSL) instead of broken into BI/PD. - Liability policies can also point some of that liability back toward the insured as well. - Some states also accommodate for personal injury protection (PIP) to protect the insured for their injury. - Most states cover uninsured motorists (UM) and under-insured motorists (UIM), where the insurance company will cover the insured's losses in the event of the *other* person not having sufficient insurance. ## Insurance organizations An insurance company needs several key departments: - Legal - attorneys and actuaries frame the policy document. - Underwriting - company underwriters and field underwriters (aka insurance agents) write new business. - [Marketing](marketing.md) - branding to attempt to differentiate a fundamentally identical product. - Finance - performs [accounting](money-accounting.md) and billing activities. - Claims - manages insurance payouts. There are a few ways to structure an insurance business. - Stock companies - incurs profits/losses and owned by shareholders who have voting rights - Mutual companies - incurs profits/losses and owned by policyholders who have voting rights - Assessment mutuals require policyholders to pay additional fees when premiums are insufficient for claims. - Nonassessment mutuals can't require additional amounts from policyholders when premiums are insufficient (most modern companies are nonassessment mutuals). - Fraternal/benefit societies - memberships are based on religious, national, or ethnic affiliations, and members of the society must become a member of that organization. - They're charitable organizations, so they're exempt from [taxation](money-accounting.md). - Reciprocals - an unincorporated group of subscribers who agree to pool their risks together to pay for losses and purchase reinsurance. - An "attorney-in-fact" solicits new subscribers, collects premiums, and performs administrative tasks. - Risk retention groups - members of a similar trade pool their risks to mitigate them together, and is effectively a [cartel](mgmt-badsystems.md) when *very* powerful. - Lloyd's associations - a group of members, which is *not* insurance, where professional underwriters accept risk on syndicates' behalf. Beyond private organizations, governments also create insurance policies. - Social Security, Medicare, Medicaid - State worker's compensation programs - Special military insurance like Servicemembers Group Life Insurance (SGLI) and Tricare - Specific coverages like the National Flood Insurance Program (NFIP) However, government and private insurance are *not* the same: 1. Participating in government insurance programs is mandatory and automatic for all citizens (i.e., through [taxation](money-accounting.md)). 2. The benefits to participants are through passing specific laws, *not* through a policy, and changing benefits means a cumbersome legislation process. 3. Social insurance programs are always adequate to meet public needs, but aren't equitable: while private insurance payments are approximately proportional to statistical likelihood, the least-contributors (indigent, elderly, dependents) benefit the most in government insurance. 4. Any government insurance provider effectively owns a [monopoly](mgmt-badsystems.md) on the system from the lack of [competitive alternatives](economics.md). ## Insurance product distribution There are several ways to distribute insurance services: 1. Captive/Exclusive Agency System - insurance producers who are part of an insurance company - Trained and supervised by a company employee or General Agent (GA) who may also be a producer - Represents the insurer and not the insured - Paid first year commissions, plus a training allowance, and comparatively smaller renewal commissions 2. Independent Agency System - no direct affiliation with a particular insurer - Can be a General Agent or Managing General Agent (MGA) - Represents the insured more than the insurer - Can represent as many insurers as they desire and paid commissions on new business they write 3. Managing General Agent System - recruits, hires, trains and [supervises](mgmt-1_why.md) other producers - Producers tend to only insure with companies the MGA has had business relationships with 4. Brokers - independent producers who sell insurance, but *can't* bind insurance contracts - They're a third party to any insurance arrangement 5. Direct Response - non-agent services that involve media advertising and the customer responding by contacting with an advertised phone number or response document 6. Direct Writing Companies - producers are salaried employees of a direct writing company, so the company itself owns the policy and not the producer 7. Internet Insurance Sales Systems - insurance that can be purchased online directly through the insurance company or agent 8. Franchise Marketing Systems - covering employee groups that are too small to meet the requirements of a group policy, so no group underwriting or premium rate reduction involved 9. Non-Insurance Marketing Systems - insurance products through financial institutions which issue credit cards, with the product deducted from that bank's accounts For this reason, there can be *multiple* unrelated entities that form an insurance contract: 1. The insurance carrier itself, which pays out a claim. 2. An insurance agent, which can be independent of the carrier. 3. A broker, who is independent of the insurance agent. One strange language distinction in insurance is that a domestic company is an insurer domiciled with the same legal address as the insured, a foreign company is still in the country but outside the state, and an alien company is outside the country. ## Sustainability To stay in business, an insurance company has to maintain a delicate balance: 1. The insuring company must compete with other insurance, so they must keep their premiums as low as reasonably possible. 2. The insuring company's loss ratio (losses from claims / premium income) must always stay low (never break above 100%, or they're losing money). 3. Ideally, an insurance company's loss ratio is <60% because a typical insurance company's expense ratio ([business](business.md) costs / operating income) is 35-40%. Since insurance needs liquidity to pay for claims, multiple organizations track their performance: - They check underwriting performance, management economy, reserve adequacy, adequacy of net resources, and the soundness of the investments. - A.M. Best is the oldest and largest financial rating service, but Standard & Poor's, Moody's, Duff & Phelps, and Weiss Research all rate performance. - The Insurance Division of each state also performs examinations and has the authority to place restrictions on writing new business, give directives on [managing](mgmt-1_why.md) the company, and in extreme cases order liquidations of the company. - The National Association of Insurance Commissioners (NAIC) has no regulatory authority, but actively creates uniform recommendations which each state generally adopts (including minimum insurance regulatory standards and ratios), as well as conducting Zone Examinations, maintaining an Insurance Regulatory Information System (IRIS) to review insurance company operations. There are only 3 ways for insurance companies to make money: 1. Profit directly from underwriters. - The underwriters' profit most steadily comes from insuring good risks with few to no losses. - Underwriters can also sell more coverage (e.g., higher liability limits) or adding more features (e.g., extra insurance gimmicks). 2. [Investments](money-investing.md) with income not related to claim payments. - They can't simply invest into anything, and their investment portfolios are typically tracked. 3. Reducing overall claims expense, typically from finding legal ways to *not* pay a claim. - This often comes through adapting policy language to conform to *very* specific situations. - Insurance companies have the most control over reducing claims expense, but it's also the most [unethical](morality.md). If an insurance company ever becomes insolvent (i.e., can't pay claims), the government has its guaranty. - That government's Insurance Division will manage claims for certain admitted property, casualty, life, accident, and health insurance policies. - In effect, they end up requiring other carrier organizations to pay for a certain amount of policy claims and return unearned premiums. If a person seeking insurance can't get it through any conventional channels, most Insurance Divisions provide their insurance plan. - Government-rated insurance typically has *insanely* expensive premiums, and its coverage is typically weak. - Sometimes, a government will mandate a private insurance carrier to insure a particular risk. Insurance companies will use *any* information available to adjust their rating. - Auto insurance companies will use individuals' driving data to adjust rating, sometimes without the insured's consent. - Satellite images are enough information for insurers to drop homeowners policies due to roof status or unclaimed trampolines.