When an insurance company is first placed on notice of an actual or potential injury claim, it must set a reserve for that claim. Simply put, the insurance company must estimate the maximum value of the claim and place that money aside, in reserve. This process is called setting the reserve.
Insurance companies are required to do this so that there is enough money set aside in reserve to settle all reported but not settled (“RBNS”) claims in the event that the insurance company goes bankrupt.
There is a tremendous business tension in placing money in reserve. Money placed in reserve cannot be used to expand the insurance company or make investments. Money held in reserve is far less profitable than money the insurance company can use as it wishes. It is in the best interest of the insurance company to get as much money out of reserve as fast as possible so that it can be used to further the company’s business interests.
At the same time, people who bought insurance selected limits and paid for those. They are entitled to have claims against them paid by the insurer up to those limits and are personally liable if the insurer cannot pay claims. Injured people are certainly interested in knowing that the insurer of someone who injured them isn’t able to gamble with money that they may ultimately be entitled to. The public also has an interest in reserves being properly set so that the costs of claims aren’t passed on to society at large.
This tension between the business interests of the insurance company and the interests of people who bought insurance, people who got hurt, and the general public is managed by the various state insurance commissions which set rules and regulations concerning, among other things, claim settlement practices including policies on how reserves must be set, when money can be released from reserve, and the like.
Understanding and estimating reserves is a very important part of what any personal injury firm has to do to represent the interests of its clients.
Let’s take the typical example of an auto accident where the at-fault driver has bodily injury liability limits of $50,000. There has been an accident, and the at-fault driver promptly notifies his insurer of the accident. The insurance company is glad to have prompt notice so that it can promptly set a reserve for the case, and that is why they strongly encourage drivers to report accidents right away.
When the at-fault driver notifies the insurer of the accident, the agent will set an initial reserve. If the driver has no information, that reserve will be set at the policy limits. On the other hand, if the driver can confirm that all parties drove away on their own, or that no ambulances were called to the scene, etc. the initial reserve might be set lower.
Over the course of the claim, the insurance company may lower reserves a few times, or not at all, depending on the information it receives. For example, if the injured party is treating only with a chiropractor and has limited tort insurance, reserves may be set low indeed as treating only with a chiropractor indicates whiplash types injuries and limited tort claimants are generally barred from pursuing claims for whiplash type injuries.
Insurance companies almost never settle for an amount in excess of the reserve. If they do, they are admitting that they didn’t have enough in reserve and that they have violated their duties to set proper reserves for all claims. If you want more than the amount in reserve, you will almost certainly have to go through the risk and expense of a trial. If you obtain more than the amount in reserve at trial, the insurer can point to the unpredictable nature of jury verdicts as the reason you get more than the reserve amount, instead of having to make a tacit admission that it violated its duties to set a proper reserve.
Good personal injury lawyers know all of this. The actual reserve amount on any given case is usually kept secret, but smart lawyers know that it exists and they avoid doing things and giving information that would allow the insurance company the excuse it wants to lower reserves and return that money to its general fund.
Smart personal injury lawyers are careful about the information that they provide to the insurer leading up to and during settlement talks because they want the maximum amount of money available for the settlement of their client’s claim. This is not because smart personal injury lawyers fear court, but rather, it’s their duty to get their client the maximum amount of money possible with the minimum amount of risk.
I have often wondered about people who try to settle their own cases. I know they are getting less than they should, and I wonder if reserves are set lower the instant that the insurance company understands that there is no lawyer involved – they shouldn’t be, but they probably are.
I wonder how many mistakes the person representing themselves makes along the way. Do they discuss prior injuries right away? Do they disclose that they drove their self to the hospital? Do they let the adjuster trick them into saying things like “I wasn’t hurt so bad?” Each of these and a hundred other mistakes will allow the insurer to lower the reserve, making the final offer much lower with no room to negotiate upward.
And what does the person who is representing his or herself do when presented with this lowball offer after the insurance company had used every possible way to get the reserves down as low as possible? They take it quietly. Sometimes they brag about representing themselves, but they never get full value, and there is nothing they can do about it – because they aren’t lawyers, don’t understand reserves and policies in setting reserves, and, because they are not lawyers, if they don’t like it they have no ability to sue.
An understanding of reserves and reserve policies is just one of possibly a hundred factors that go into what I believe are personal injury representation best practices.
They say a man who represents himself in court has a fool for a client. If you are trying to settle a case for yourself with no understanding of nuances like setting reserves, it is proof that you can have a fool for a client without ever even going to court.
If you want to learn more about your personal injury case involving an auto accident or of our other practice areas, please check out our page to find out how we can assist you.