5.3 Adjuster Professional Ethics, Fair Practices & Fraud Detection

Adjuster Professional Ethics, Fair Practices & Fraud Detection

Quick Answer: Adjusters operate under strict legal and ethical guidelines dictated by the Unfair Claims Settlement Practices Act. Failing to act in good faith can expose the insurer to massive punitive damages in bad faith lawsuits. Simultaneously, adjusters act as the frontline defense against insurance fraud, which costs the industry billions annually through both staged "hard" fraud and exaggerated "soft" fraud.

The role of a claims adjuster is fundamentally one of trust. Adjusters handle significant amounts of money and deal with individuals who have just experienced severe, often traumatic losses. Because of this power dynamic, the industry is heavily regulated to ensure fair and ethical treatment.

The Fiduciary Duty and Good Faith

A fiduciary is a person holding a position of trust and confidence who must act for the benefit of another. Adjusters are fiduciaries for the insurance company; they must handle the company's funds responsibly and act with utmost loyalty.

Concurrently, adjusters owe a duty of Good Faith and Fair Dealing to the policyholder. An insurance contract is essentially a promise of financial protection. The courts require insurers to honor that promise by looking for ways to find coverage, not just looking for excuses to deny it.

Unfair Claims Settlement Practices Act

To standardize ethical behavior, the National Association of Insurance Commissioners (NAIC) drafted the Unfair Claims Settlement Practices Act. Most states have adopted versions of this model legislation.

Common violations (unfair practices) under the Act include:

• Misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue.
• Failing to acknowledge and act reasonably promptly upon communications with respect to claims.
• Failing to adopt and implement reasonable standards for the prompt investigation of claims.
• Refusing to pay claims without conducting a reasonable investigation based upon all available information.
• Failing to affirm or deny coverage within a reasonable time after proof of loss statements have been completed.
• Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.
• Compelling insureds to institute litigation to recover amounts due by offering substantially less than the amounts ultimately recovered.
• Attempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application.

The Threat of Bad Faith

If an insurer consistently violates fair claims practices, or acts maliciously, recklessly, or intentionally to deny a valid claim, the insured can sue the insurer for Bad Faith.

Bad faith is a tort action that exists outside the bounds of the insurance contract. While a breach of contract lawsuit limits the plaintiff's recovery to the policy limits, a bad faith lawsuit allows juries to award punitive damages.

• Example: An insured's house burns down, causing $200,000 in damage (the policy limit). The insurer maliciously denies the claim without investigation, knowing the insured is destitute. The insured sues for bad faith. A jury could force the insurer to pay the $200,000 contract limit, plus millions of dollars in punitive damages to punish the insurer's egregious behavior.

Detecting and Combating Fraud

Insurance fraud is a massive financial drain. The National Insurance Crime Bureau (NICB) estimates that property and casualty insurance fraud costs over $30 billion annually in the United States. This cost is passed on to honest consumers through higher premiums.

Adjusters are the industry's primary defense against fraud. Fraud is generally categorized into two types:

Hard Fraud (Premeditated Fraud)

Hard fraud occurs when someone deliberately invents, stages, or plans a loss for the purpose of receiving an insurance payout.

• Examples: Intentionally setting fire to a failing business (arson), staging an automobile collision with co-conspirators, or reporting a vehicle stolen when it was actually driven into a lake and abandoned.

Soft Fraud (Opportunity Fraud)

Soft fraud is much more common. It occurs when a policyholder experiences a legitimate, covered loss, but chooses to exaggerate or inflate the claim to get more money.

• Examples: A homeowner suffers a legitimate break-in where an old laptop is stolen, but they tell the adjuster a brand-new MacBook Pro was taken. Or, a driver is legitimately rear-ended at low speed but exaggerates their neck pain to receive a larger bodily injury settlement.

Red Flags of Fraud

Adjusters are trained to look for "red flags" that might indicate a fraudulent claim. While a single red flag doesn't prove fraud, a cluster of them warrants investigation by a Special Investigative Unit (SIU).

Common Red Flags include:

• The loss occurs shortly after the policy inception date, or right before cancellation.
• The insured is overly pushy for a quick settlement and is willing to accept a low-ball offer.
• The insured provides receipts for expensive items that lack sales tax, store logos, or contact information.
• The injuries claimed are vastly disproportionate to the physical damage in an auto accident.
• The insured has a long history of frequent, suspicious claims.
• The insured is unusually familiar with insurance terminology and the claims process.

When fraud is suspected, the adjuster must proceed carefully, continuing to document the file thoroughly while referring the claim to the insurer's specialized SIU division for a deeper, often covert, investigation.