Part 2 of 10
Insurance companies do not pay claims because they are legally obligated to pay them to properly compensate injured victims for their losses. Every payment made by an indemnity and surety company to a car accident or slip and fall victim is a cold and calculated business, cost / benefit decision generally premised on weighing the crucial concepts of “Leverage”, “Out of Pocket Costs” and “exposure” (LOE) versus the benefit of the “float”.
part 1 of 10: Why Insurance Companies Delay, Deny & Objectify Injured Victims as “Float”. Hate the Player & the Game.
When the Insurance Company floats your money it is put into a reserve designated to potentially pay your claim. State and federal regulators and Insurance Law requires insurance companies to set aside a reserve for all outstanding claims. The Insurance Company initially evaluates the value of the claim and can adjust the reserve as facts and circumstances changes. For example if the victim becomes unable to work as a result of a truck collision, the insurance company would adjust their reserve higher when they are informed of the disability.
Float is “The ability to invest proceeds on a tax-free basis while it is being accumulated. From a tax perspective, it is important to remember that income derived while assets are in reserve are not taxable until the claim is paid. Insurance companies benefit fully from the untaxed reinvestment of income during this time.” http://www.ehow.com/how-does_4564495_insurance-companies-invest-their-money.html http://insurancelawhelp.com/car-accident-claims/
The Wall Street Journal reported “Mr. Buffett has previously described this as investing using other people’s money without having to pay interest on the borrowed funds.” http://online.wsj.com/news/articles/SB10001424052748704520504576162782244276342
The Wall Street Journal describes the float as “Effectively borrowed funds at little or no cost… float enables the company to acquire businesses and assets beyond what its equity capital alone would permit….” id.
An insurance decision to pay a claim is purely a business decision, a cost benefit analysis and a financial decision by the indemnity company and not done with the motivation to meet their legal obligations to comfort and compensate injured victims for their loss. Insurance companies have no regard and do not care about the pain and suffering of legitimately injured claimants.
You are permanently disabled and unable to work and are in desperate need of cash flow as a result of a motorcycle crash caused by a negligent at fault tortfeasor and are facing foreclosure. You want to be compensated now by the at fault motorist’s Insurance. The Liability Company does not care about your plight because they are using the funds designated for you (the reserve) to cut their losses, invest and earn income and benefit financially.
And if that seems like a bitter pill to swallow, they are getting these funds tax deferred! In essence you are loaning your pain and suffering, lost wages and reimbursement to the insurance company involuntarily without interest. Your settlement money is depreciating with inflation taking into account the time value of money in which a dollar a year later is worth less than a dollar now
This is your money and you are effectively being forced to loan it to the insurance company interest free and tax deferred.
The Wallstreet Journal reported about Warren Buffets’ company Berkshire Hathaway“This float is money Berkshire holds to pay insurance claims in the future, but in the meantime can be put to work in stocks and long-term investments that earn returns for Berkshire’s own benefit. Effectively borrowed funds at little or no cost, Berkshire’s float enables the company to acquire businesses and assets beyond what its equity capital alone would permit, Mr. Buffett has previously said.” http://online.wsj.com/news/articles/SB10001424052748704520504576162782244276342
The Wall Street journal reported that: “Berkshire’s pool of funds from insurance—something known as “float”—could have swelled to roughly $67 billion at the end of 2010 from $63 billion a year earlier. It is poised to rise further in 2011 despite challenging insurance-market conditions amid the slow economy, analysts say.” http://online.wsj.com/news/articles/SB10001424052748704520504576162782244276342
An insurance company will delay paying a claim as long as economically feasible if it is financially beneficial to them.
An insurance company settles when the injured victim has leverage and it becomes apparent that the costs of resolving the injury claim and potential exposure of the auto injury claim outweigh the benefits of the float. The float may not seem like a lot of money but when there are tens of thousands of claims, the float could be hundreds of millions of dollars and perhaps billions.
Understanding float is crucial to comprehending why Insurance companies usually delay and only settle when their comfortable float model is challenged by aggressive personal injury lawyers.