Insurers calculating to under-settle claims

INSURANCE companies are commercial operations. Their primary function is not to show sympathy to accident or injury victims, or to give away money. It is to deliver profits to their shareholders.

It is, therefore, not in their interests to settle claims at a level generally seen as reasonable and in the full interests of the victim. The less they have to pay out, the more they retain for themselves.

Over the last couple of decades, this attitude has hardened. A culture has developed within the industry to deliberately seek to under-settle claims.

This is done in the hope that claimants – and their legal advisers – will take the money on offer rather than engage in the risk, cost and effort of holding out and fighting for more.

Of course, this doesn’t always work – some legal practitioners, such as Digby Brown, are happy to pursue a case to court if they feel it has merit. But it certainly works often enough to make it an attractive way of achieving closure quickly. Indeed, under-settlement has proved to be so successful that it has effectively been adopted by the global insurance industry.

There is a growing practice of using computer software programmes to value cases and then to suggest a figure which should be put forward to attempt to agree a case.

“It’s a highly effective way of settling claims,” says Digby Brown’s Fraser Oliver. “If the computer makes discounted offers and enough people accept them, then clearly the insurance company is going to make greater profits.

“People might decide to accept these offers because their non-qualified claims handlers recommend them, or they may not have the financial means to argue with the insurance firm or to proceed to litigation.”

Oliver’s colleague and fellow partner at Digby Brown, Graeme Garrett, explains the background to this formulaic, technology-driven approach to under-settling claims.

“When I first became involved in personal injury work more than 30 years ago, claims tended to be dealt with by experienced claims inspectors, most of whom had a reasonable understanding of the issues,” says Garrett.

“They would meet claimants’ solicitors face-to-face, and while there would always be cases in which litigation was inevitable, a substantial volume of claims were settled extra-judicially, including fairly substantial cases.”

Today, he notes, that system has largely disappeared. “The insurers have moved to a call-centre approach in which negotiations, such as there are, tend to be conducted by telephone with fairly junior personnel.

“It’s relatively rare that the person one speaks to will have visited the locus or conducted the investigation. Levels of knowledge among claim handlers vary from mediocre to woeful, particularly in employers’ liability claims.”

It is common, Garrett adds, to be met with a common law defence such as non-forseeability when dealing with a claim based on a strict liability statutory provision. “Frequently, when such cases are subsequently litigated, the defences are accompanied by a minute of tender. This dumbing down of the claims-handling process may make sense to a cost accountant, but does nothing to reduce litigation.”

This technocratic approach opens a large gap between an initial offer and the final settlement of a challenged case which then goes before the courts.

“Insurers are not pitching offers just below the level of judicial awards. The reality is that cases have to be litigated because insurers are making offers which represent only a fraction of the true value,” Garrett adds.

“Our records show, consistently over the last five years, that the average settlement in our Sheriff Court cases is twice what the insurers are prepared to offer our clients – and in the Court of Session, it was nearly three times more.”