Are You Really in Good Hands? How Do You Know If Your Insurer Will ...

Not surprisingly, one of the core consumer protection issues in insurance is ensuring that carriers pay claims fairly and expeditiously.  Unlike many contracts, insurance policies are sequential and contingent: whereas the policyholder performs routinely by paying premiums, the insurer performs by paying a claim if, and only if, a loss occurs.  This dynamic creates special risks of unfair business practices.  These risks are enhanced by the fact that many insurance policies (outside of the life insurance context) necessarily rely on abstract language to describe insurers’ coverage obligations.  For these reasons, much of insurance law – including the availability of bad faith lawsuits and state prohibitions on “unfair claims practices” – is devoted to ensuring carriers’ fair payment of claims.

Despite the centrality of claim-handling to consumer protection in insurance, regulators do essentially nothing to promote transparency in insurance markets with respect to this issue.  The reason is not that it would be particularly difficult to measure this variable:  useful metrics might include how often claims are paid within specified time periods, how often claims are denied, how often policies are non-renewed after a claim is filed, and how often policyholders sue for coverage.  In fact, state regulators already collect some of this data for their own use in policing the market place.   But none of this data is systematically made publicly available to consumers.  Rather, this information is generally treated as confidential on the basis that it could reveal proprietary company information or mislead insurance consumers.    

The only insurer-specific information that regulators do provide to consumers that might partially reflect carriers’ claims-handling philosophies is information about how often consumers complain to insurance departments about their carriers.  But this data is obviously of limited use for a variety of reasons. Most importantly, only a small and unrepresentative subset of consumers ever complain to state insurance departments.  Thus, consider the possibility that the best companies who most clearly inform policyholders of their right to complain to state insurance departments may actually have the worst complaint ratios.  Additionally, consumer complaints concern myriad issues that are not disaggregated in the data, which is itself a product of inconsistent coding rules and department practices (although recent NAIC efforts will hopefully improve data reliability).

In the absence of real regulatory efforts to promote transparency with respect to this crucial issue, market mechanisms do a limited job of filling the informational gap.  Insurers, of course, routinely promise to pay claims fairly and promptly in their marketing materials and advertisements.  But assessing the credibility of these vague promises is essentially impossible, as Michelle Boardman convincingly shows in a recent article.  Meanwhile, consumer information sources like Consumer Reports and J.D. Power conduct surveys of consumer satisfaction with different carriers.   But without access to the key data described above, these surveys are also of limited use: they ultimately rely on the subjective reports of consumers, many of whom have never experienced a substantial claim and are ill-equipped, in any event, to know whether they have been treated fairly if they did file a claim. 

As with disclosure of insurance coverage, these deficiencies in crucial market information may be partially addressed in health insurance markets as a result of the Patient Protection and Affordable Car Act (“ACA”).  That Act requires exchanges to offer a system that would rate plans “on the basis of the[ir] relative quality and price” as well as to devleop and utilize “an enrollee satisfaction survey system.”  Depending on how these provisions are implemented, insurance exchanges could provide consumers with substantially improved information about health carriers’ claims paying practices.