Quote of the Day - I hereby resign from Prudential Insurance Company of America. As I look back over my years with the company, I note there have been three of them.
When an insurance carrier initially receives a claim from its insured, it typically sets a "reserve" of money that it anticipates it may have to pay to satisfy the claim. These reserves are required by many insurance commissioners, and particularly here in California. That way, the state can be assured that the insurance company is adequately capitalized to handle the amount of insurance that it issues to its policyholders.
There are other reasons, too. Claims adjusters try to pay less than the amount "reserved" for the claim in order to demonstrate their value to the insurance company. The greater the differential between the reserve and the amount paid to satisfy the claim, the more valuable the claims adjuster. That value sometimes translates directly into raises, bonuses and other perks to the claims adjuster.
There's a dark side to the whole concept, however. Given the financial pressure on claims adjusters, they sometimes get stubborn and either don't pay or try to underpay legitimate claims. The interests of the insurance company and claims adjuster in saving money are not in line with the interest of the policyholder to be fully compensated for the loss.
That conflict between the insurance company and the policyholder frequently leads to charges that the insurance company's underpayment or failure to pay amounts to bad faith, exposing the insurance company to a lawsuit coupled with a demand for hefty punitive damages.
Such is the case in the battle between Bernstein v. Travelers Insurance Companies, Case No. No. C 05-01528 SBA (WDB), a case recently decided in the United States District Court for the Northern District of California. Unfortunately, the case isn't available on the Northern District's website, but here's a short summary from the case itself: "the plaintiffs [policyholders] assert that the defendants [Travelers Insurance] made unjustifiable demands for proof of claims during the claims processing period. The defendants also allegedly delayed payments."
So Plaintiff/Policyholder Ronald Bernstein sued The Travelers for bad faith, and then sought to find out how much Travelers had set aside as a "reserve." Travelers resisted the discovery request, forcing Bernstein to bring a motion to compel.
In a wonderfully written opinion comparing federal civil procedure with California substantive insurance law and procedure, the Court found that the policyholder had the right to know how much Travelers "reserved" when the claim was filed. Bernstein will then most likely be able to argue that the alleged delays and underpayments by Travelers were unjustified and Travelers may very well end up with a bad faith judgment, depending on how reasonable the final payment of the claim was compared to the initial amount reserved.