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Old-School Claims Handling Staples to Promote Efficiency and Minimize Fraud

In an era of technological velocity, don't lose sight of the importance of simple and tested practices.

October 28, 2015 Photo

Implementing best practices to facilitate prompt and efficient resolution of claims is part of the “new normal” in claims handling and civil defense litigation. However, in its drive to improve efficiency, the industry must not lose sight of fundamental safeguards designed to prevent collateral attacks that seek to invalidate release and settlement agreements negotiated in good faith by the carrier.

The process of settling first- and third-party claims does not lend itself to electronic or digital signatures or many other features inherent to secure document technology and authentication. By and large, the basic elements of settlement agreements in the property and casualty business are confirmed by telephone conversations, emails, and correspondence culminating in the transmission and execution of a release and settlement agreement and settlement check.

The claimant’s execution of the release and the settlement draft is generally accomplished by obtaining the claimant’s “wet signature,” also known as pen on paper. Further, in the vast majority of claims, the agreement is obtained without counsel’s presence, which would mitigate against risk of settlement fraud  for no other reason than the attorney will not want to risk license forfeiture by being implicated in a fraudulent settlement. So for many claims, the entire settlement process can be completed without the parties to the negotiations ever meeting or even speaking with each other.

Fraud prevents mutual consent to the settlement agreement because at least one party is deceived as to its material terms. Generally, a contract that is based on fraud is void or voidable. If there is fraud in the contract’s execution, then there is fraud “in fact” and the agreement is void from inception. If there is fraud in the agreement’s inducement because a party is falsely persuaded to enter into it, even though he knows and understands its terms, the agreement is voidable.

Fraud in the inducement goes hand in glove with fraudulent misrepresentation when committed by an injured party’s proxy or agent, such as a spouse or close family member. For example, in a claim involving an unrepresented claimant with significant injuries, clear liability, and relatively modest policy limits, the claims professional is rightfully eager to promptly resolve the matter in order to protect his insured and avoid potential excess exposure. After several phone calls and email exchanges with the injured party’s spouse, who confirms she is acting for her injured and hospitalized husband, the matter is quickly settled. The settlement documents are prepared and signed by the claimant’s spouse, and the carrier receives the signed, witnessed, and notarized release and closes its file.

However, on the eve of the statute of limitations’ expiration, the injured party files suit against various defendants, which inevitably includes the insured and perhaps the now-estranged spouse who negotiated the settlement. The insured will plead the settlement agreement and release as a defense, and the plaintiff will contend that his alleged agent fraudulently represented to the insured’s carrier that she had the plaintiff’s consent or authority to negotiate the settlement. Such a scenario often will lead to the insurer’s joinder by the insured, turning a seemingly simple settlement into a problematic situation for the insured, claims representative, and his company.

When an agent commits fraud, it is axiomatic that the principal who enabled the agent should bear the losses rather than the third party who justifiably relied upon the agent’s misrepresentations. Of course, the operative term here is “justifiable reliance.” Accordingly, when evaluating a settlement agreement’s validity obtained by the proxy of an unrepresented party, consider whether it was reasonable for the claims representative to believe that the injured party authorized and consented to the assignment of the right to negotiate his claim to a third person (agent); and think through the terms of the settlement.

The following measures individually and collectively help establish that the insured and carrier were justified in believing that the claimant consented to the settlement and authorized his agent to act on his behalf in negotiating his claim:

  • The insurer’s representative conducting an in-person visit and verification with the claimant/injured party and his agent/proxy to confirm that the agent is authorized to negotiate/act on the claimant’s behalf for a finite period of time.
  • Obtaining the claimant’s written, signed, and notarized authorization stating that he has duly designated the agent to negotiate his claim.
  • KAcquiring a copy of generally accepted photo identification for both the claimant and his appointed agent that bears their signatures (e.g., driver’s license or passport).
  • Claims file documentation of the time, place, and substance of all conversations with the claimant that evidence his authorization of the agent to discuss and negotiate his claim.
  • Confirming all material settlement communications with the agent and requiring claimant’s written confirmation of all key terms of the agreement before the release is sent for the claimant’s execution.
  • Direct transmission of the release and settlement agreement to the claimant instructing him to sign and return the executed, witnessed (not by the agent), and notarized release, which may include a recital that the claimant authorized the agent to negotiate the settlement’s material terms to which he consents.
  • Sending the distribution draft directly to the claimant accompanied by the executed and notarized release.

The claim should never be settled through the agent when there is reason to believe that the claimant lacks the capacity to designate an agent or consent to the terms of the settlement, or where it is not clear that the agent has the claimant’s actual authority to negotiate on his behalf. Instead, the reasons why the carrier is unwilling to negotiate with the agent should be documented and sent to the claimant with a written request for the information that would eliminate the carrier’s concerns.

In short, “old school” claims handling practices, even in the new technology and enhanced document security era, remain simple and efficient for eliminating any potential that your settlements with unrepresented claimants later will be attacked to the detriment of the carrier or its insureds.   

About The Authors
Gregory S. Hirtzel

Gregory S. Hirtzel, Esq., is a partner at Fowler Hirtzel McNulty & Spaulding LLP. He has been a CLM Member since 2012 and can be reached at (717) 553-2601,  ghirtzel@fhmslaw.com

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CLM’s Insurance Fraud Committee identifies, analyzes, and offers education on emerging fraud schemes and tactics; monitors and reports on developments in case law, state fraud statutes and applicable regulations; collaborates with other anti-fraud industry organizations and associations; and seeks to provide amicus support in matters of importance in the fight against insurance fraud.

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