The Business of Insurance

I've always wanted to write an article about what I learned while working at a couple of different law firms in the 2010-2016 era before I started my current law firm, in order to help people understand how insurance works at a practical level in conjunction with lawsuits. This post relates to my CCW legal plan and recent related threads on a discussion board where folks have been discussing CCW "insurance" (not really insurance), and I thought it might be helpful. You're welcome.

Between 2010 and 2016, I worked at two different "insurance defense" law firms, which means they are law firms hired by insurance companies to defend policyholders from lawsuits. These were not departments of insurance companies, which some firms are. These were outside privately owned law firms (both have since gone out of business). Once the claim has reached one of these firms, it has been through several hoops/over several hurdles internally and determined to be not possible to settle or pay-- for a variety of reasons. I would summarize it as a continuous tension between four principal factors: Size of Loss/Exposure, Strength of Legal Defenses, Sympathy of Claimant, and Sympathy of Insured/Client.

Let me use this helpful chart as an example:

I originally came up with this chart to explain something else, but it works well here, also. If viewed in 3D, this would be a pyramid where the "litigation possible" section is toward the top, and the "litigation certain" section is the capstone. If you are too far in any direction but toward the center, you fall to a lower level of the pyramid and the claim is paid out without a lawsuit. The cases that go to litigation involve larger losses, better legal defenses, and issues of sympathy on either side (positive for claimant or negative for insured/client). Insurance companies all have the same or similar software that they use to assess litigation exposure, which is done through multivariate regression analysis of many inputs, such as who the claimant is, what zip code the loss occurred in, where the trial would happen, what prior juries have awarded in similar cases, etc. One key thing I did at one of these law firms was evaluate jury verdicts in cases of similar types and report to the carrier with a range of damages so they could decide whether to defend or settle at any particular stage of the case. A common tactic was to spend $X for a year of litigation in order to make the plaintiff weary of the case and settle for $Y when they initially wanted and probably would have won $Z. In other words, if $Y < ($Z - $X), the carrier comes out ahead of where they would have been if they went to trial and lost. Their goal is to minimize the actual payout and defer it as long as possible so that $Y is as low as possible, preferably far less than $Z - $X. Thus, in 99% of cases that are litigated, it is a war of attrition for the first year or so of the case until the plaintiff gives up and takes less money. In the few cases that reach trial, the carrier is literally rolling the dice because it makes economic sense to take a chance at a defense verdict for $0 when the claimant is demanding $Y and has an A% chance of prevailing. It's a complete numbers game since insurance is a business-- most importantly, remember that nobody is a good neighbor, nobody is there for you, and nobody cares about you unless they are legally required to do so. Nobody is quite a pal!

Let me break down how a typical case progresses:

1.  Incident/loss happens.

2.  Loss reported to carrier.

3.  Initial screening of claim (is it within policy period?  Is the named insured nominally covered for this peril?  What evidence is available?  How large is the loss?)

4.  If over a certain amount, flagged as a "large loss" and sent to headquarters.

5.  If under a certain amount, adjuster is assigned at field office in the area of the loss.

6.  Adjuster interviews insured, inspects property, etc.

7.  Adjuster inputs data into computer program and writes their assessment/recommendation.

8.  Computer program produces reports with ranges of loss, exposure, and other data, recommending $Y as a likely resolution.

9.  Carrier uses calculations and adjuster report to make a business decision whether to settle early and pay $Y.  If claim is for significantly less than $Y, claim is settled as soon as possible.

10.  If claim is significantly more than $Y and/or: liability is uncertain, there are valid defenses, the insured is sympathetic and the claimant is not, and/or there are other positive factors in the carrier's favor, the claim is routed to litigation.

11.  Carrier hires panel counsel from its stable of attorneys to defend case.

12.  Law firm defends case, continuously updating carrier on all information gained.

13.  Carrier recalculates #8 and regularly evaluates #9.  If $Y has decreased and is trending downward, defense continues and may intensify.  If $Y has increased and is trending upward, carrier may raise authority (amount approved internally to settle loss) and ask law firm to try to settle.

14.  90% of cases settle after a year or two of litigation, during which carrier has spent $X.

15.  Remaining 10% of cases are a fusion of: large loss, uncertain liability, sympathetic insured, unsympathetic claimant, or other bad facts for claimant.  In other words, the easy cases with sympathetic claimants and lower losses all have settled by #14.

16.  Law firm agressively tries to settle 90% of the last 10% of cases remaining through a combination of carrot and stick tactics against claimant.

17.  70% of the last 10% of cases settle in this window, leaving 3 out of 100 cases that are going to trial.

18.  Two of the 100 cases settle on the courthouse steps.

19.  One remaining case goes to trial and the carrier either wins big (defense verdict--common) or loses big (rare).

20.  Carrier appeals any loss and can sometimes flip the result, which would be a couple of years later. If the loss is large enough, they would put the money into a surety and bond around the judgment, meaning they pay nothing during the appeal while it is pending.  So the claimant is screwed.

Insurance companies are absolutely ruthless. They will file a motion for summary judgment claiming no coverage at the drop of a hat, and sometimes those are granted. Meaning suddenly, your insurance company drops you during a lawsuit and you are left to fend for yourself! As I said, insurance is a business-- it's nothing personal, because they never cared about you in the first place. This is one reason I laugh at insurance commercials. They are all the same and it makes virtually no difference who you select as your insurance company. Protip: the companies that don't have cringe mass market advertisements are the ones that you want to be with (AAA was the best one I have worked with, which was via the law firm in 2016, and USAA is another great one).

Protip: the insurance companies absolutely love it when the insured or claimant tells a doctor their symptoms, pain level, medical history, etc. via the doctor's messaging system. Those statements are conclusively presumed to be the truth, and often reduce the claimant's damages or the insured's exposure. So be careful not to mis-state anything to a doctor-- anything you say can and will be used against you in a court of law. Same with the adjuster-- they are not your friend, so you want to say as little as possible while still being truthful. And you cannot be indemnified for an intentional act, such as a "contest of speed" or other reckless driving.

Trucking accidents are their own kind of hell. What happens is that you get a crappy defendant driving a crappy truck carrying the cheapest load on junk tires, and they were going 70 in a 55 and killed someone. You're most commonly defending some third party, such as the aggregates company that hired the trucking company to carry a load of rocks to a distribution center. I had one case where the victim's car was crumpled into a ball and was unrecognizable as a car. The point is that the insurer and the attorney in that scenario are reluctant participants who are only in the case because there is some argument for why their insured is liable, such as negligent hiring. The law firm ends up with a bunch of cases where everything went to shit. These things tend to cluster, just like behavioral issues-- either someone is a law-abiding citizen or they have 20 felonies on the court case portal, with nothing really in between. I should write a separate article on being a cog in a wheel for the defense of these cases, if anyone is interested in how law firms operate. Essentially, the owners of the law firm often delegate the "bitch work" to a revolving door of associate attorneys, and it's common to have a new face every few months on a typical case (this is not true of every law firm, but many are this way). Your individual insurance defense associate attorney has zero stake in the outcome and does not care in the least about anything, except not getting fired by their law firm-- the law firm partner is the one with the book of business and the contacts at the insurance company. It is not possible to keep track of where everyone works or who they represent because there are 20 or more attorneys on the mass email, and they all have a habit of reply-all saying "Thanks!" or reply-all to rudely tell people to cc some other combination of staff at their law firm. I'll get to that angle some time. Meanwhile, just keep in mind that insurance companies are not your friend and don't give a shit about you. Sorry for the bad news.