Settlement Authority – Should Adjuster Ask Insured?

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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.

Picture Of Businessman Shaking Hand Settlement Authority with Couple
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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.

Couple Settlement Authority Signing Paper
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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.

Graphic Of Settlement Authority Contract And Quill Pen
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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.

©J&L Risk Management Inc Copyright Notice

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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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