Insurance companies are businesses, and like any other business, they aim to make a profit. In the insurance industry, this is achieved by collecting premiums from policyholders and then paying out claims when necessary. However, insurance companies must also control their expenses to remain profitable. One way they do this is to make sure that the claims submitted by their policyholders are paid fairly, and not overpaid. Another way to do this is to control the amount they pay staff adjusters, independent adjusters, and attorneys who defend their policyholders for liability claims.
Adjusters are responsible for investigating claims made by policyholders, determining the extent of the damage, and then deciding how much to pay out in compensation. They are paid by the insurance company they work for, but the amount they are paid and the structure of their compensation can vary.
Some adjusters are paid a salary, while others are paid on a fee schedule, whereby their pay on each individual claim increases with the size of the loss. The idea here is that the adjuster has to spend more time on a larger claim, and the fee is then increased proportionally to account for the additional time spent to evaluate that claim.
One common myth is that claims adjusters are paid on a commission basis, receiving a percentage of the amount of money they save the insurance company. Some refer to this as a type of contingency fee. The presumption is that the adjuster’s pay is directly tied to the amount of money they save the insurance company. To be clear, this is not a practice in the industry.
Having spent nearly 30 years as a staff adjuster and independent adjuster, I have never seen such a pay structure, and there is a good reason for this. Incentivising underpaid claims will create a conflict of interest. An adjuster who is paid more money if they can reduce the amount of a claim cannot possibly work in the best interest of the policyholder. This type of scenario will quickly lead to a bad-faith allegation against an insurer.
When a fee schedule is involved, insurance companies pay their adjusters a flat fee based on the size of the loss, with no incentive to reduce the value of a policyholder’s loss. It is actually quite the opposite. An independent adjuster stands to earn more money on a larger file, or a larger loss, simply because those claims involve more work on the part of the adjuster.
In fact, most insurance companies have policies in place to prevent staff adjusters from being incentivized to reduce the value of a policyholder’s loss. For example, some companies have performance-based bonuses that are not tied to the amount of money saved by the adjuster, but rather to their overall performance in resolving claims fairly and efficiently.
Insurance company adjusters are typically paid on an hourly, or yearly salary. Bonuses are often tied to metrics regarding claim file handling such as open/close dates and file documentation measures. Any insurance company that pays bonuses to reduce the size of a claim should prepare themselves for an inevitable lawsuit.
There are regulations in place to prevent bad faith practices, and many insurance companies have policies to ensure adjusters act fairly and ethically. It is important for policyholders to understand how their adjuster is paid and to work with an experienced attorney to ensure they receive fair compensation for their loss.
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