KEEP UNDERWRITING SECRET 

Many times, over more than a few years, I have seen insurance companies and third-party administrators refuse to give information in response to all sorts of discovery requests. Of course, some lawyers and some carrier officials resist providing anything and nearly everything, but information regarding underwriting is especially like that. Even truly professional lawyers and insurers fight giving up this sort of information. They claim it is irrelevant to coverage and bad faith cases.

This contention is obviously false if any of the text of the insurance contract is actually drafted by the insurer, its lawyer, or a risk manager. (What risk managers do is itself often a component of underwriting.) The pricing of policies is also sometimes an underwriting function. 

Insurance is a business, and large insurance companies are often publically held. Such an insurer has duties to its stockholders. If there are sufficient profits over time, some investors will bolt. This fact has two consequences. First, underwriting must get done in such a way as to keep stockholders happy–or at least minimally satisfied. Second, claims must get paid, in whole or in part, or denied in frequency and amount to keep stockholders satisfied. These functions interact; holism is the order of the day. Anyone who thinks otherwise is ill-informed, ignorant, and doltish.

So far as underwriting is concerned, an insurer must sell at least X number of policies of Y sort and the Z price. This is a necessary insurance business truth. In addition, it is required for business flourishing. 

So far as claims handling is concerned, an insurer must pay at some level of dollars not more than a specified amount. This fact means that somewhere in the company there is a person, a unit of artificial intelligence, or both who/which knows those amounts and the acceptable variants. 

A general underwriting file will have computations, records, reflections, and probable arguments regarding those numbers, even though the claims department does not have them. If an insurer is failing to pay claims at a reasonable level, if an insurer is unreasonably denying a claim, and it is facing a number of large claims which are in controversy, the chances are that the insurer is under pressure from its stockholders, absent excess insurance or reinsurance Information about that will probably be in the files of the Underwriting Department. 

How many of X policies have been sold?
At what price?
Any unusual term?
What sorts of endorsements?
How the main policy and components thereof prices?
How were relevant decisions made and by whom?
Statistical studies as the X policies, e.g., pricing, marketing, dealing with agents and brokers?
What about probabilistic studies regarding expectable coverage claims?
If stockholders or other investors are dissatisfied with the return, they are likely to look at underwriting decisions,* agency decisions, and claim-handling decisions.  Where is the relevant data to be found? Setting aside counsel, the aggregate information is likely to be in the underwriting files and in the files of the office which handles stockholder relationships.  If there is any suggestion that claim payments are running too high or policies are selling too cheaply these two categories of files are likely where the relevant information may be found. (*I am talking about “real underwriting.” I am not talking about the work of those who review applications for insurance.” That not really underwriting.)

Information like this not relevant to claims disputes? Nonsense. There are two other features of this situation that are worthy of notice. 

First, discovery disputes over this range of information will be expensive. It should not be pursued by a policyholder lawyer unless the claim is quite a large one. An expert witness may be required just to get a court order giving access to the information desired. 

Second, underwriting departments are full of people who know very little about the fundamentals of underwriting, e.g., statistical and probability theories practices. It is often nearly pointless to depose these people. Be sure to get corporate representatives as to underwriting who actually understand underwriting and its foundations. 

Of course, we now live in a digital age, so lots of this sort of thing will appear to be computerized, and no doubt this is true. But digitalization begins with human discourse and decision. The team of policyholder lawyers needs to have a relevant member. If an insurer witness says, “All such information controlled by algorithms, and none of us really understands it,” the policyholder has been given several treasures. (1) What is being said is almost certainly false. (2) Probably someone is lying.* (3) The discovery route into the underwriting files–and some other–has just opened. (4) Immediately seek the deposition of the head of the underwriting. (5) Seek the deposition of all IT guys who tend to underwriting affairs. Of course, all this is expensive, so make sure records get kept for which fees can be obtained from the relevant court. (*There is an alternative. Suppose no one in the underwriting department knows anything about any of this. Someone does. That person will be connected to another affiliated company or it will be a genuine vendor. Go to one or both of those two types.)

(There is at least one exception. If the lawyer for the policyholder has the intent of making the insurer look really bad, get a corporate regarding underwriting who knows about as much as Sargent Schultz.)

Finding the right people may be difficult. This is particularly true in the surplus lines market where some of the insurers are really shells or near-shells, and where the underwriting functions of the company are presented to regulators, stockholders, claimants, and lots of others as being handled by “Managing General Agents as to Underwriting.” 

Often “affiliates” of large insurers are, legally speaking, the actual insurers. Insurance companies and their employees are awful about this vocabulary and its legal implications. For example, two cooperating companies are often referred to as “partners.” Of course, they are not legal partners and there is no legal partnership. Potentially this could matter when it comes to service or process and things like joint liability or respondeat superior.

By the way, it seems to me that what has been said applies to mutual companies as well as publically traded companies or affiliates of larger companies. The members of a mutual company are really a sort of investor, so they will have at least some of the same concerns.

I suppose that it must be admitted that the education textbooks in the CPCU group and in similar groups do very little to educate students as systematic underwriting. 

SOME FINAL REMARKS: IF THE UNDERWRITING DEPARTMENT, AND THOSE WHO REPORT TO OR SERVICE IT, THINK THAT PRICING IS TOO LOW, THAT POLICY CONTENTS ARE MISCONCEIVED, OR THAT PAYMENTS OF/ON CLAIMS ARE TOO HIGH, SOME PAYMENTS ON SOME CLAIMS WILL DROP (i.e., BE DRIVEN DOWN). ALL OF THIS IS RELEVANT TO A COVERAGE CASE, WHETHER BREACH OF THE INSURANCE CONTRACT OR SOME SORT OF INSURER BAD FAITH.   

Policyholders should be able to get relevant information as to this. After all, at least in Texas, insurers have “special relationships” with their customers who are also their insureds.

Michael Sean Quinn, PhD, JD, CPCU, Etc

Michael Sean Quinn, PhD, JD, CPCU, Etc. (530)

One of Texas's leading insurance scholars, Michael Sean Quinn is a past chair of the Insurance Section of the State Bar of Texas and has a broad legal practice.

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