What Chief Claims Officers Can Do About a Growing Trend of Alleged Bad Faith Claims

In the past few years, we’ve seen a significant rise in bad faith claims against insurers in the U.S.

According to a 2022 article by Reuters, multiple jurisdictions have lowered barriers for insured parties, making it easier to establish bad faith claims, which increases insurers’ potential exposure. Concurrently, plaintiffs’ attorneys are employing aggressive strategies, such as increasingly leveraging time-limit and policy-limit settlement demands as part of their litigation efforts.

At its core, good faith claims handling means paying what is owed based on the policy language and applicable law and doing so in a timely manner.

Common examples of bad faith claims handling include:

• Delayed claim processing
• Offering less than the claim is worth
• Inadequate investigation
• Denying a claim without explanation
• Misrepresenting the law or policy terms
• Threatening or misleading policyholders

Adding to this challenge, the U.S. Bureau of Labor Statistics forecasts roughly 21,500 annual openings for claims professionals due to retirements and turnover. With bad faith claims on the rise and experienced professionals leaving the industry, the question becomes: What can chief claims officers (CCOs) do to mitigate their company’s exposure to such claims?

While there is no one-size-fits-all solution, CCOs can follow several fundamental best practices to help reduce the risk of bad faith allegations:

Document All Claims Handling Activities

Comprehensive documentation of every step in the claims process is crucial. Proper recordkeeping not only provides a defense in the event of a bad faith claim but also ensures transparency and accountability.

Develop and Adhere to a Target Operating Model (TOM)

A clear TOM, supported by key performance indicators (KPIs) and metrics, ensures consistency in claims handling and sets benchmarks for performance. Regular monitoring of these metrics can highlight areas for improvement before issues escalate.

Measure and Monitor Performance

Regularly measuring the effectiveness of claims handling processes based on the established KPIs can reveal inefficiencies and potential vulnerabilities to bad faith claims.

Invest in Ongoing Training

Ensure that claims professionals are continually trained in both the legal and practical aspects of claims handling. This includes keeping staff updated on changes in laws, claims trends, and internal procedures.

Implement Mentorship Programs

Pairing less experienced adjusters with seasoned professionals through mentorship can ensure that younger staff members receive guidance on best practices and develop the skills needed to handle complex claims appropriately.

Beyond these fundamental steps, specific practices can help mitigate the risk of bad faith allegations, particularly in the following two areas:

Delayed Claim Processing

Time-sensitive claims are a primary source of bad faith allegations. Proactively managing claim timelines and using technology to flag critical deadlines can help ensure timely processing and resolution.

Offering Less Than the Claim Is Worth

Insurers must evaluate claims fairly and ensure reserves are set at appropriate levels. Offering less than a claim’s actual value can lead to allegations of underpayment or bad faith.

Leveraging Data and Technology to Improve Claims Handling

In addition to traditional best practices, claims organizations can leverage advanced analytics and AI to further reduce the risk of bad faith claims. Augmenting adjusters’ workflows with data-driven insights can be particularly effective in the following ways:

Proactive Management Through Technology

Modern claims management systems can help adjusters identify potential issues earlier in the claims life cycle. Well-designed systems can highlight critical deadlines, settlement demand timeframes, and other time-sensitive elements that require prompt attention.

Identifying Mismatched Reserves and Dormant Files

Technology solutions, including claims AI, can assist in flagging potential discrepancies between reserves and expected outcomes as well as identifying files that have been inactive for concerning periods. This proactive approach can reduce errors and demonstrate a commitment to handling claims in good faith.

Improving Training Through Data Insights

Claims data can be analyzed to identify trends and gaps in claims handling. By reviewing past claims, CCOs can pinpoint areas where staff may need additional training, leading to better overall performance and a reduction in bad faith risks.

Ultimately, mitigating the risk of bad faith claims requires a seamless integration of decision-making expertise with data-driven precision. By using appropriate tools and systems that synthesize claims data and provide real-time guidance, claims organizations can enhance their handling of complex situations, improve outcomes, and reduce exposure to bad faith allegations. This blend of human expertise and AI-powered insights—what I call augmented intelligence—can contribute to claims processes that are more efficient, transparent and equitable.

Wilson is the CEO of CLARA Analytics. She has more than a decade of executive experience in data, analytics and artificial intelligence, including at global head of innovation and advanced technology at Kaiser Permanente and chief data officer of AIG.