CFA calls for insurers to be penalized over delayed claims payouts

The Consumer Federation of America is pushing for legislation that would penalize insurers for delayed payments of insurance claims, including requiring insurers to pay interest to customers for late payouts.

This comes after the CFA argued American insurers have an “incentive” to delay payouts as a study conducted in collaboration with Weiss Ratings found insurers can earn millions of dollars in investment income every day they delay paying a claim to a client.

Meanwhile, Americans depending on those claim payouts must bear the burden of often-catastrophic losses while taking on extra expenses that can impact their immediate and long-term financial well-being.

“We think it’s time, especially in light of all of the consumers’ frustrations with this industry, with the way industry handles claims, for policymakers to get rid of this incentive,” Douglas Heller, director of insurance, Consumer Federation of America, said.

“One way to do that would be to require insurance companies to pay interest on any claim that they owe to customers that they haven’t paid in a timely fashion. Once they have to pay anything they earn back to the consumer, then there’s no incentive to hold payment in the mailroom for a couple of extra days.”

‘Perverse incentive’

Heller alleged that the insurance business model has a “perverse incentive” to deny or delay claims payments in order to turn a profit on invested premiums.

He noted that insurance is “unique among American large business sectors in that the income precedes the expense” and consumers must buy a policy before they can use it.

“This creates this opportunity for insurers to earn investment income on the money that they hold onto before they have to pay out claims, and also the extra surplus that they hold onto as a protection against a worst-case scenario,” Heller explained.

Working with Weiss Ratings, the CFA found that if all property/casualty insurers in the U.S. delayed their claims payments by just one day, the industry would earn $52.3 million in investment income.

In the homeowners insurance sector, the research found if all insurance companies in that sector delayed claims by just a day, insurers could earn $8.8 million per day, almost hitting $62 million per week.

“We thought it was very important to illustrate the perverse incentive that insurance companies have to withhold or delay claims payments to their customers,” Heller said. “If we don’t pay our premium on time, the insurance companies cancel us. But if they don’t pay their claim on time, they make more profit. And of course, the reason people are complaining to the insurance commissioner isn’t because their claim payment was delayed a day or a week, but a month or several months.”

‘Endless catastrophe’

Heller also pointed out that, from a consumer’s perspective, delayed claims payouts make the recovery process after a traumatic event that much more difficult. According to data from the National Association of Insurance Commissioners, delayed claims payouts are one of the biggest complaints of American insurance customers.

“People have paid premiums for years so that when a disaster strikes, they have the resources to repair or rebuild their homes and lives. But, too often, insurers make the recovery process a second and seemingly endless catastrophe of its own,” he said.

He said this makes “the trauma of the actual loss so much more difficult,” and also “much more expensive than it ought to have been.

“It means people start taking hits on their credit score because they’re maxing out their credit cards to make payments that the insurance company should be covering. They are cutting back on things that they need. Sometimes, they’ll lose access to their additional living expenses, so they suddenly are worrying that they’re going to be able to have a place to live if they haven’t been able to rebuild their home,” Heller said.

A new normal

The CFA, in calling for penalties for insurers who delay claims payouts, wants a “new normal” where consumers can trust insurers will hold up their end of the contract in a timely fashion, Heller said.

“I think that if we can establish an accountability rule for claims payments, hopefully it will just establish a new normal in the relationship between consumers and insurers — a normal that is expected by the contract but hasn’t been achieved in reality because insurance companies hold all the cards,” he said.

He added that the CFA wants legislation to set a standard for how claims are paid and how insurers are penalized if they don’t meet that standard, which could set a precedent for “better practices in the market” if not additional legislation to protect consumers.

California, a “trendsetter” in insurance legislation, has already introduced a bill, SB 878, which proposes interest due on claims payments more than 30 days late without fair reason. That bill has already passed through the state Senate and is pending a vote by the Assembly.

“We need insurers to pay those claims, and it’s scary for consumers to push too hard because they really are counting on those insurance companies. I think it’s important that we see these new rules, and maybe this legislation will take hold in California and set a trend for fair claims handling across the country,” Heller said.

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