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Insurance adjusters rewarded for shrinking claims checks

Insurance companies calculate everything. From a policyholder's ability to pay bills to the likelihood that he or she will contract a rare disease, insurance companies assign numbers to even the most straightforward concepts, such as age, in order to rate the "riskiness" of a policyholder. It should be no surprise, then, that insurance companies calculate with pinpoint precision how well their employees — specifically, their claims adjusters — perform their jobs.

And why not? Insurance companies, like other corporations, seek a good value for their employees' services and reward those who boost the company's bottom line. Performance-based pay or incentive-based pay (as this concept is known) is one way insurers retain their employees in today's increasingly competitive job market. It's also a way for the company to build long-term wealth.

Financial strength is certainly a characteristic consumers look for when shopping for an insurer, but documents obtained by show that Allstate Insurance Corp., Farmers Insurance Group, and State Farm Mutual Automobile Insurance Co. — the three biggest auto and home insurers in the nation — have in place companywide practices that reward their claims adjusters for reducing expenses and cutting costs, including strategies for cutting the amount the insurer pays for claims. Adjusters are insurance company employees who come out to survey your car or house damage and estimate your repair costs.

Critics say these compensation practices are, at best, shrewd efforts to maximize profits, maintain a competitive edge, and keep insurance costs as low as possible. At worst, they are inappropriate and unethical practices that represent gross conflicts of interest. And sometimes it's difficult to distinguish between the two.

Performance Planning & Review

What is surprising about performance-based pay programs at some insurance companies are the standards by which insurers judge their adjusters' performances.

In May 1979, the late Bruce Callis, an executive at State Farm, introduced an employee compensation program called "Performance Planning & Review" (PP&R) in order to "actuate corporate, region, department, and function annual plans into individual action plans for all levels of employees," according to State Farm's PP&R manual from 1979. A sample goal for a claims superintendent or claims supervisor, who both oversee the handling of customers' claims, included limiting the average Personal Injury Protection (PIP) paid. Another way was to ensure that adjusters were settling totaled-car claims at or below the National Automobile Dealers Association (NADA) guide value, and using (cheaper) aftermarket crash parts on a specified percentage of all automobile repairs.

How much of a raise?

Typical raises for State Farm adjusters who receive "meets expectations" on their yearly PP&R would be a $500 raise in base pay, which would then be multiplied by the consumer price index (CPI) for the year to establish the actual dollar amount of the raise. For example, an adjuster at the MA1 pay rate — the entry-level pay position — might earn $18,000 in base salary in a year in which the CPI is 1.2. If he or she meets the PP&R expectations, State Farm would raise the base pay $18,500 and multiply that by 1.2 to arrive at the adjuster's new salary: $22,000.

An adjuster's base pay would jump to a higher level when he or she is promoted to a higher pay rate, such as MA2 or MA3. Currently, MA3 is the highest claims adjuster pay rate at State Farm. Team leaders, formerly known as claims superintendents and supervisors who oversee a group of claims adjusters in one office, receive the next highest pay rate: MA6.

Interestingly, if an adjuster receives a "below expectations" PP&R review, he or she might not receive as high a raise. For example, rather than multiplying the base pay rate by the full CPI, State Farm would multiply it by a percentage of the CPI, such as 90 percent, to arrive at an adjuster's raise. So, the same adjuster as above might end up with a salary of $19,980 if he or she didn't meet State Farm's expectations.

These goals were designed to cut expenses, specifically by reducing the payout on automobile insurance claims. Similar goals were set for claims supervisors and adjusters who handled home insurance claims. Claims supervisors and adjusters who met or exceeded goals were rewarded with raises and promotions under State Farm's PP&R system, used nationwide from 1979 through 1994.

State Farm stopped the PP&R program in September 1994 when Frank Haines, its top claims executive, fired off a memo to company claims executives and managers throughout the country telling them that State Farm's PP&R goal of reducing claims payouts was "inappropriate."

There are myriad reasons why PP&R is inappropriate, sources say. The No. 1 reason is that it rewards claims adjusters and supervisors for making unethical decisions in an ethical dilemma: Should adjusters and supervisors reduce the amount of the claim payment to a deserving customer in order to boost the company's bottom line and their own chances for promotions and raises, or should they pay properly, which could hurt their chances for advancement?

"The insurance company owes a duty of good faith and fair dealing, which means that the claims people should be paid and compensated for doing a good job and arriving at fair settlements," says Eugene Andersen, a New York-based attorney who specializes in insurance. "But if a fair settlement is $1, and adjusters get paid bonuses for settling for $.90, that's not a fair settlement," he says.

State Farm acknowledges that, in the past, PP&R goals included reducing the average dollar of claim checks, but the company insists it no longer rewards its claims personnel for keeping payments low. "State Farm is definitely not 'rewarding' claims people with bonuses and promotions for reducing claims payouts," says Dave Hurst, a spokesperson for State Farm. Further, Hurst says the goals of PP&R were not to create profits at the expense of customers.

Claims personnel at State Farm understood that PP&R goals could be met by performing "quality investigations," handling claims efficiently, and paying claims promptly, Hurst says.

State Farm today continues to evaluate its employees' performances but now uses a system called Quarterly Performance Review (QPR), and Hurst assures that claims adjusters are not compensated based on the dollar value of claim payments they approve.

Andersen and other critics who spoke to doubt the practice has ended. State Farm may have changed the name of the program, but it didn't change the substance, they assert. The goals of reducing claims payments by specified amounts are no longer written on an adjuster's QPR evaluation, and thus harder to trace, but adjusters are encouraged to send medical claims to medical-review companies, which provide support for an adjuster to limit or deny payments, sources say. State Farm reportedly uses more than 500 medical-review companies.

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