Settlement Authority Should Be In TPA Contracts or Policies
When should the adjuster settlement authority be approved by the insured? One of the most repeated comments we hear when reviewing claims loss runs is an adjuster settled or agreed to accept a file without the insured agreeing to the settlement. We often hear that an adjuster increased the reserves to a very high level without consulting the employer.
Almost all insurance and TPA policies for Workers Comp coverage will have a clause in it that reads something akin to:
We have the right to reserve and settle files as we deem necessary.
That is not necessarily the exact language. However, if you pull out any policy, be it auto, liability, Workers Comp, etc. the clause is included somewhere in the text. The settlement part of the clause usually refers to some third party. In this case, it is the injured worker.
The best way to avoid any loss run surprises IS AT CONTRACT SIGNING TIME. Many larger employers, especially in a TPA environment, will ask that if the file reserves reach, for example, $100,000, the reserve increase and all subsequent ones to the file are only entered into the TPA’s system with written approval from the insured.
A similar limit can also be instituted for any settlements, of say, over $50,000. This notice is very critical for TPA’s working with a self-insured.
Some carriers will also make sure the adjuster receives employer permission to settle or make a large file reserve increase. However, the service is usually an expensive cost add-on in quite a few WC policies.
If the carrier or TPA agrees to insured pre-authorization, the reserve or settlement limit should not be set too low. I have seen authority levels at $10,000. The adjuster tends to spend so much time on making sure they have the proper authority with such low levels that they are handcuffed in their ability to handle the file.
Most claims adjusters also have to have the proper company internal authority. Turning the adjuster into an authority-seeker takes them away from their main job tasks.
One of the reasons to have the adjuster ask for settlement and reserve authority is to avoid violating reinsurance contracts. Most reinsurers want to hear from someone when a file reaches, for instance, 50% of the retained level – when the reinsurer has to start paying out funds.
This is one area that is not well-tended. One way to trigger a massive reinsurance audit is to have a file blow the $250,000 retention level without the reinsurer every knowing about the file. This happens more than one might think even in the age of advanced IT.
The level of insured authority will vary from state to state depending on how expensive files are in the states of coverage. Emails are great for documentation. Having the adjuster call for settlement or reserve authority is basically wasting their time.
Online access to all claims, or at least receiving a monthly loss report will avoid any surprises down the road. Online access is very well worth the extra charge if the TPA or carrier does not provide the service for free.
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