Best’s News & Research Service - November 15, 2010 09:55 AM (EST)
New York Regulators in Early Stages of Examining Auto Claims-Handling Software
OLDWICK, N.J. //BestWire// - The New York State Insurance Department is in the preliminary stages of examining automobile insurers' use of claims-handling software, including Colossus and similar programs, according to the deputy superintendent for frauds and consumer services.
The department wants to make sure that bodily injury claims are being handled fairly and that software programs are just one of many factors considered in settling claims, said Deputy Superintendent for Frauds and Consumer Services Steve Nachman. Other such software includes Claims Outcome Advisor, Injury IQ, and Injury Claims Evaluations.
Nachman said New York may broach other states about joining the examination and possibly bring up the issue with the National Association of Insurance Commissioners.
New York regulators announced the broader examination following a $10 million settlement between Allstate Corp., which uses Colossus, and 45 states. An investigation found no systemic evidence that Allstate underpaid claims. However, it did find "deficiencies" in Allstate's management and oversight of the software (BestWire, Oct. 18, 2010).
Critics, including trial lawyers, contend Colossus is used to lowball claims payments, a charge adamantly denied by the maker of the software, Computer Sciences Corp.
"The software system is not a substitute for the experience and judgment of a claims professional," Marian Kelley, spokeswoman for Computer Sciences, said in an e-mail. "The recommendations generated by the system are intended to be a starting point for case evaluation, not the ending point."
Bob Hartwig, president of the Insurance Information Institute, said Colossus is a tool that helps adjusters get a sense of what a typical claim should settle for, adding allegations that the software lowballs claims are "groundless, baseless, meritless, ludicrous."
Colossus is used by nearly 25% of the top 100 U.S. insurers, Kelley said. It is also used by third-party administrators.
The software works by having claims adjusters input information through a series of interactive questions. Based on that information, Colossus provides a recommended settlement range based on "severity points."
Before the software can provide a range, it must be "tuned" by the customer. The tuning process uses past payments from specific regions to get an accurate picture of the customer's payment history, according to the company's website.
One of the software's biggest critics is Washington attorney Aaron DeShaw, who wrote the book "Colossus - What Every Trial Lawyer Needs to Know." He contends use of the software leads to intentional underpayment of claims.
"Having studied this back to the program's origin, [one] can't evaluate a case in good faith using Colossus," DeShaw said.
Rutgers University law professor Jay M. Feinman also has concerns about the software. He worries about whether the information fed into the software that ultimately is used for evaluating a claim is complete and accurate.
In addition, the "way in which companies translate (severity) points into dollars is not always clear," he said. Finally, Feinman expressed worries about the tuning process.
"We want to know if that's done on accurate information of what cases are worth," and if all settlements are included in the tuning process, Feinman said.
"Each claims professional and claims organization remains ultimately responsible for determining the actual amount of the settlement offer for any given claim," said Kelley.
Development of Colossus began in 1988 by an Australian company, Computations Property Ltd., after regulators there found little consistency in bodily injury claim values. Computations was acquired by another company, which was subsequently acquired by Computer Sciences. Since the software was introduced commercially in 1993, there have been 15 major updates to the U.S. version, Kelley said.
In addition to Allstate, USAA Group confirmed it uses Colossus. State Farm does not use Colossus, spokesman Bob Lapinski said in an e-mail. Nationwide does not use utilize Colossus or other similar program, said spokeswoman Elizabeth B. Stelzer.
Farmers uses software called eXposure Manager. Doug Menges, senior vice president of auto claims, said eXposure Manager provides claims handlers with "a useful starting point for evaluating injury claims, because it prompts the CH to organize and consider all the relevant factors involved in determining the likely settlement value of an injury claim."
He added that there is no requirement or expectation that the claims handlers settle within the software's ranges.
Attempts to contact Geico, Progressive and Liberty Mutual for comment were unsuccessful.
(By Diana Rosenberg, senior associate editor, BestWeek)