Market Conduct Examination
ESIS/ACE American Insurance Company
Federal Id #95-2210809
Maine License #TAF34553
2 Waterside Crossing
Windsor, CT 06095
Examination Period:
10/1/05 thru 2/28/06
TABLE OF CONTENTS
SCOPE OF EXAMINATION
HISTORY OF ENGAGEMENT
METHODOLOGY
STANDARDS
APPLICATION OF TESTS
SUMMARY EXAMINATION REPORT
COMMENTS AND RECOMMENDATIONS
CONCLUSION
I hereby certify that the attached report of a targeted market conduct
examination dated June 21, 2006 shows the condition and affairs of ESIS/ACE
American Insurance Company of Windsor, Connecticut as of February 28,
2006 and has been filed in the Bureau of Insurance as a public document.
This report has been reviewed.
_______________________
Eric A. Cioppa
Deputy Superintendent
This _____day of _______________, 2006
June 21, 2006
Honorable Alessandro Iuppa
Superintendent of Insurance
State of Maine
Bureau of Insurance
State House Station #34
Augusta, ME 04333
Dear Sir:
Pursuant to the certification of findings in accordance with Title 39-A
M.R.S.A § 359 (2) from the State of Maine Workers’ Compensation
Board (hereinafter, “WCB”) and under the authority of Title
24-A § 221 and in conformity with your instructions, a targeted market
conduct examination has been made of:
ESIS/ACE American Insurance Company
(Federal Id #95-2210809 )
(Maine License #TAF34553)
(hereinafter, “ESIS”). The examination covered indemnity
claims with dates of injury (DOI) after December 31, 1992 and with indemnity
payments paid during the examination period from October 1, 2005 through
February 28, 2006. These indemnity payments relate to injuries for employees
residing in the State of Maine or claimants involved in losses in the
State of Maine.
The following report is respectfully submitted.
SCOPE
OF EXAMINATION
The targeted market conduct examination of ESIS was the result of a
WCB Audit conducted in July 2004 culminating in the issuance of a Maine
Workers’ Compensation Board Compliance Audit Report, dated February
14, 2005 (hereinafter, “WCBAR”). Findings outlined in the
audit report consisted of failure to pay claims timely, failure to pay
benefits due, failure to calculate benefits accurately, failure to file
or timely file required forms with WCB and failure to report accurate
information on forms filed with the WCB. The pervasiveness and magnitude
of the findings was determined by the WCB to constitute a pattern of questionable
claims-handling techniques and in accordance with Title 39-A M.R.S.A.
§ 359 (2), the audit findings were certified to the Superintendent
of Insurance. Accordingly, the Superintendent of Insurance was charged
with the responsibility to take appropriate action as to bring such practices
to a halt.
In as much as the Superintendent of Insurance is tasked to “take
appropriate action so as to bring such practices to a halt”, a determination
as to whether or not the “pattern of questionable claims-handling
techniques” still exists is in order. This examination consisted
of developing and employing procedures to enable the Superintendent of
Insurance to arrive at a reasonable conclusion as to ESIS’s continuance
or discontinuance of a “pattern of questionable claims-handling
techniques”. The examination was conducted in accordance with Title
24-A M.R.S.A., Title 39-A M.R.S.A and the National Association of Insurance
Commissioners Market Conduct Examiners Handbook and Guidelines (hereinafter,
“Handbook”) for purposes of sample determination and overall
guidance. Specific procedures from the Handbook that applied to verifying
ESIS’s compliance with certain form filing and claim processing
procedures, as outlined in Title 39-A M.R.S.A. and the WCB Rules and Regulations
were used as part of this examination. Specifically, the scope of the
examination consisted of reviewing all indemnity claims with October 1,
2005 thru February 28, 2006 DOI to determine if all WCB forms are filed
timely and accurately and if indemnity claims are paid in a timely and
accurate manner. Additionally a random sample of claims with a date of
injury from January 1, 1993 through September 30, 2005 that had indemnity
payments paid during the examination period were reviewed. Since the consent
agreements between ESIS and the WCB were not signed until April, 2005,
it was deemed appropriate to select claims from the last quarter of 2005
and the first two months of 2006 to determine what actions or corrective
steps had been implemented by ESIS.
HISTORY
OF ENGAGEMENT
Pursuant to 39-A M.R.S.A. § 153 (9), the WCB was required to establish
an audit, enforcement and monitoring program. The functions of the audit
and enforcement program include, but are not limited to, auditing timeliness
of payments and the claims-handling practices of insurers including the
requirements of 39-A M.R.S.A. § 359. In July 2004, the Audit Division
of the WCB began conducting an audit of ESIS’s claims-handling processes.
As a result of the WCBAR, and the State of Maine Workers’ Compensation
Board v. ESIS/Ace American Insurance Company Consent Decree dated April
11, 2005 the WCB certified its findings to the Superintendent of Insurance
in accordance with 39-A M.R.S.A. § 359 (2).
METHODOLOGY
In fulfilling the intent of 39-A M.R.S.A. § 359 (2), the Bureau
of Insurance worked closely with the WCB to gain an understanding of the
“pattern of questionable claims-handling techniques” identified
as a result of the WCB audit. The ultimate goal of the examination is
to determine whether or not ESIS’s “pattern of questionable
claims-handling techniques” still exists and if so, what action
is necessary to bring such practices to a halt.
STANDARDS
Because of the relatively small population of indemnity claims, it was
determined that all fifteen (15) indemnity claims with dates of injury
between October 1, 2005 and February 28, 2006 would be selected for testing
as well as a random sample of 35 claims with a date of injury from January
1, 1993 through September 30, 2005 that had indemnity payments paid during
the examination period. The following standards were applied and tested
through review of the selected claims. All references are from either
Title 39-A M.R.S.A., Maine WCB Rules and Regulations or the WCB Protocols
of the Monitoring, Audit & Enforcement Division. The specific Handbook
standards and tests developed by the examiners are outlined in this section.
- Standard G-4
The Company responds to claim correspondence in a timely manner.
Test Step 1: Determine if correspondence (e.g. WCB
forms) related to claims was responded to (filed) as required by applicable
statutes, rules, regulations or protocols and was completed correctly.
| WCB-1, First Report of Injury |
39-A M.R.S.A. § 303 |
| WCB-2, Wage Statement |
39-A M.R.S.A. § 303 |
WCB-2A, Schedule of Dependent(s)
And Filing Status |
39-A M.R.S.A. § 303 |
| WCB-3, Memorandum of Payment (MOP) |
39-A M.R.S.A. § 205 (7) |
| WCB-9, Notice of Controversy (NOC) |
ME WCB Rules & Regs, Ch 8 § 2 |
| WCB-11, Statement of Compensation Paid |
ME WCB Rules & Regs, Ch 8 § 1 |
Standard G-4 established a general framework for the timely correspondence
of claim documentation. Failure to file any WCB forms within established
time frames was a violation of Title 39-A M.R.S.A. § 360 (1) (A)
or (B).
- Standard G-3
Claims are resolved in a timely manner.
Test Step 2: Determine if initial and subsequent claim
payments were made in a timely manner.
Standard G-3 established a general framework for the timely settlement
of claims in accordance with Title 39-A M.R.S.A. § 205 (2).
- Standard G-5
Claim files are adequately documented.
Test Step 3: Determine if the quality of the claim
documentation (e.g. wage statements, schedule of dependents and filing
status) was sufficient to support or justify the ultimate claim determination (accuracy of payment) and whether state requirements
were satisfied.
APPLICATION
OF TESTS
This section outlines the application of the tests to the sample of
claims selected. The sample consisted of all indemnity claims with a DOI
during the examination period (15) as well as a random sample of 35 claims
with a DOI from January 1, 1993 through September 30, 2005 with indemnity
payments made during the examination period. The results of criteria application
follow:
TEST 1: Verify the timely filing of the following forms with
the WCB in accordance with the applicable Statute, Rules & Regulations,
or Protocol and that the forms are completed accurately:
Test 1
| |
Form
Type |
Filed
Timely |
Not
Filed
Timely |
Not
Filed |
Not
Applicable |
Percent in
Compliance
2006 |
2004 Audit
(A) |
| Test |
WCB-1 |
16 |
3 (B) |
0 |
31 |
84% |
90% |
| Test |
WCB-2 |
15 |
4 (C) |
0 |
31 |
79% |
29% |
| Test |
WCB-2A |
18 |
1 (D) |
0 |
31 |
95% |
7% |
| Test |
WCB-3 |
18 |
2 (E) |
1 (F) |
29 |
86% |
73% |
| Test |
WCB-9 |
1 |
0 |
0 |
49 |
100% |
100% |
| Test |
WCB-11 First |
15 |
0 |
0 |
35 |
100% |
34% |
| Test |
WCB-11 Annual |
18 |
0 |
0 |
32 |
100% |
34% |
- For comparative purposes, these compliant percentages
of timely form filing were taken from the WCBAR.
- Of the three determined to be not filed
timely, two were the result of a data submission problem with IBM where
the Company showed the form as being electronically sent, but it was not
actually received by the WCB. This problem was corrected on October 18,
2005.
- In two instances of untimely filed forms,
the insured employer did not submit the information to ESIS promptly which
resulted in ESIS’s failure to comply with the form filing deadline.
- This form was not filed within the required
timeline due to ESIS not receiving the information in a timely manner
from the employer.
- One of the late filed forms related to
a WBC-3 was required to be filed within 10 days of a decree.
- ESIS failed to file a WCB-3 after a decree.
It should be noted that in the WCBAR, ESIS was found to be using fictitious
data in Box 24 and Box 28 of the MOP (WCB-3). During this examination,
no instances of the use of fictitious data were identified. Therefore,
it appeared that this “questionable claims-handling technique”
was no longer an issue at February 28, 2006.
TEST 2: Verify that initial and subsequent indemnity payments
were made in accordance with 39-A M.R.S.A. § 205 (2).
Test 2
| |
Paid
Timely |
Not Paid
Timely |
Not
Applicable |
Percent In
Compliance |
2004
Audit (A) |
| Initial Payment |
19 |
0 |
31 |
100% |
60% |
Subsequent
Payments |
37 |
5 (B) |
8 |
88% |
88% |
- For comparative purposes, these compliant percentages
were taken from the WCBAR.
- Two of these payments were due to ESIS not setting
the claimant on a automated repetitive payment schedule so payments were
to be done manually and were missed due to human error. One payment was
not paid timely due to the insured employer failing to provide ESIS with
information in a timely manner.
TEST 3: Verify that indemnity payments are calculated accurately
for both total and partial incapacity.
Test 3
| |
Paid
Accurately |
Not Paid
Accurately |
Percent In
Compliance |
2004 Audit (A) |
Partial & Total
Indemnity Payments |
36 |
14 |
72% |
22% |
- For comparative purposes, these compliant percentages
were taken from the WCBAR.
There were 6 claims with one or more instances of overpayments and 8
claims with one or more instances of underpayments in the claims files
reviewed. These under and overpayments resulted from a variety of actions,
including:
- Use of the wrong number of weeks in certain benefit calculations
- Average Weekly Wage (hereinafter, “AWW”) miscalculations
due to subtraction or rounding error
- Incorrect use of benefits table – wrong number of dependents
- Incorrect use of benefits table – wrong year
- Failure to include a recent raise in pay in the AWW calculation
- Incorrect use of week of hire in the AWW calculation
- Incorrect use of week of injury in the AWW calculation
Failure to calculate correct benefits pursuant to a decree
It should also be noted that in our sample of 50 claims we found three
instances where ESIS made initial estimated payments in excess of the
actual amount due. ESIS subsequently netted the initial overpayment from
the next payment sent to the claimant. This issue was brought to the attention
of ESIS management. Through discussion it was discovered that ESIS had
interpreted the pertinent rules and regulations to allow for overpayment
offsets. Once ESIS management was advised that offsets of future payments
were implicitly prohibited by the WCB, ESIS claims processors were instructed
to cease all offset practices.
SUMMARY
EXAMINATION REPORT
Timely Filing of Forms (Test 1)
The WCB applies two benchmarks of compliance during their audits. The
benchmark for timely initial indemnity payments is 80% and for timely
filing of WCB-3 forms the benchmark is 75% compliance. All tests showed
an increase in compliance from the 2004 Audit. ESIS met the WCB’s
initial payment benchmark of 80% for the examination period with a percentage
of 100%. ESIS also met the WCB’s benchmark of 75% for the timely
filing of WCB-3’s during the examination with a score of 86%.
Timely Initial and Subsequent Payments (Test
2)
The results of this examination indicate that ESIS is in compliance
with Title 39-A M.R.S.A. § 205 (2), as ESIS was deemed to be in compliance
with the timeliness of payments during this examination and “a pattern
of questionable claims-handling techniques” did not appear to exist.
Payment Accuracy (Test 3)
The primary cause of inaccurate indemnity payments identified in the
WCBAR were: incorrectly calculated AWW and incorrectly calculated weekly
benefit rates. The incorrect calculations were due to not using overtime
and bonus pay in the AWW calculation, not including week of hire in the
equation, adding incorrectly and incorrectly counting the days of incapacity.
During the WCBAR the compliance rate for accuracy of payments was 22%.
The results of this Market Conduct examination indicate that the rate
of compliance for payment accuracy was 72%. The issues that led to inaccurate
payments were:
- Incorrect use of number of weeks in the benefit calculation
- Incorrect calculation of AWW due to subtraction or rounding error
- Incorrect use of benefits table – wrong number of dependents
- Use of benefits table from the wrong year
- Not computing the AWW using a recently received raise
- Incorrect use of week of hire in the AWW calculation
- Incorrect use of week of injury in the AWW calculation
- Failure to calculate benefits correctly pursuant to a decree
Although there was a significant improvement in the accuracy of payments
when compared to the results of the WCBAR, the error rate of 28% was still
considered high. However, an additional mitigating note related to the
combination of underpayments and overpayments was observed. When underpayment
issues were separated from overpayment issues, the error rate improved
to 16% and the accuracy rate improved to 84%. Therefore, while it was
determined that the “pattern of questionable claims-handling techniques”
no longer exists, there was still an unacceptable amount of errors documented
during the examination. (See comments and recommendation #1)
It was observed that ESIS offset initial overpayments by reducing future
payments. While the offset practice did not appear to result in aggregate
underpayments the practice is implicitly prohibited by the WCB. Discussions
with ESIS management resulted in the immediate cessation of payment offsets
by ESIS claims staff. (See comments and recommendation #2)
It should be noted that ESIS has taken steps to ensure that the personnel
responsible for processing and overseeing Maine claims receive additional
training to make sure they process claims accurately. Shortly after the
commencement of the examination, ESIS hosted Marlene Swift of the WCB
onsite to provide training on advanced payment calculations to the home
office manager and all staff that handle Maine claims. This training will
hopefully eliminate the issues noted above that led to inaccurate claim
payments.
COMMENTS
AND RECOMMENDATIONS
- Comment: Test #3
was designed to verify that indemnity payments were calculated accurately
for both total and partial incapacity. The compliance percentage during
the examination period was 72%. The incorrect payments were the result
of various actions, including:
- Incorrect use of number of weeks in the benefit calculation
- Incorrect calculation of AWW due to subtraction or rounding error
- Incorrect use of benefits table – wrong number of dependents
- Use of benefits table from the wrong year
- Not computing the AWW using a recently received raise
- Incorrect use of week of hire in the AWW calculation
- Incorrect use of week of injury in the AWW calculation
- Failure to calculate benefits correctly pursuant to a decree
Recommendation: It is
recommended that ESIS implement certain policies and procedures to ensure
that claims adjusters are aware of the Maine statutes, rules and regulations
governing workers’ compensation claim payments. ESIS managers should
monitor performance to ensure accuracy and compliance.
- Comment: Test #3
was designed to verify that indemnity payments were calculated accurately
for both total and partial incapacity. While performing this test step
we noticed three instances where the initial claims payment was an estimate
that exceeded the amount that was determined to be due once all the documentation
was received. ESIS would then offset the initial overpayment against the
next indemnity payment sent to the claimant. According to the WCB in no
instance can a third party adjuster offset for an overpayment. Through
discussion it was discovered that ESIS had interpreted the pertinent rules
and regulations to allow for overpayment offsets. When it was brought
to their attention that the practice of payment offsets was not allowed,
ESIS promptly instructed their claims adjusters to cease offsetting overpayments
immediately.
Recommendation: It appears
that ESIS has taken steps to ensure that the practice of offsetting overpayments
does not continue going forward. It is recommended that ESIS follow up
with the claims adjusters to ensure that this practice has been halted.
CONCLUSION
The Superintendent of Insurance recognizes the significant improvements
made by the Company since the WCBAR. Based on the result of this examination,
while charged with the task of taking appropriate action as to bring such
company practices to a halt, the Superintendent of Insurance concludes
the following:
- Regarding ESIS’s untimely and inaccurate form filing, the Superintendent
of Insurance concluded that a “pattern of questionable claims-handling
techniques” had been brought to a halt. Noted in the WCBAR was
ESIS’s non-filing of forms. It was noted during the examination
that ESIS routinely filed the required forms (with one noted exception)
and the accuracy appeared to have improved.
- Regarding ESIS’s timeliness of initial and subsequent indemnity
payments, the Superintendent of Insurance concluded that a “pattern
of questionable claims-handling techniques” had been brought to
a halt.
- Regarding the accuracy of indemnity payments, the Superintendent
concluded that ESIS maintained a 28% error rate, which appeared to be
excessive. While the Superintendent observed that a significant improvement
in this category occurred since the WCBAR, the 28% error rate remained
high. However, an additional mitigating note related to the combination
of underpayments and overpayments was observed. When underpayment issues
were separated from overpayment issues, the error rate improved to 16%.
In other words, injured workers received payments at or above their
statutorily determined benefit 84% of the time. Therefore, while it
was determined that the “pattern of questionable claims-handling
techniques” had been halted, there was still an unacceptable amount
of errors documented and certain corrective actions shall be taken as
identified in Recommendation #1.
STATE OF MAINE
COUNTY OF KENNEBEC, SS
Kendra L. Godbout, CPA, CFE, being duly sworn according to law, deposes
and says that in accordance with the authority vested in her by Alessandro
A. Iuppa, Superintendent of Insurance, pursuant to the Insurance Laws
of the State of Maine, she has made a targeted market conduct examination
on the condition and affairs of
ESIS/ACE American Insurance Company
of Windsor, Connecticut as of February 28, 2006 and that the foregoing
report of examination, subscribed to by her, is true to the best of her
knowledge and belief.
The following examiners from the Bureau of Insurance assisted:
Stuart Turney, CPA
William Bourne, CPA
_______________________
Kendra L. Godbout
Director of Financial Analysis
Subscribed and sworn to before me
This _____day of _______________, 2006
___________________
Notary Public
My commission expires:
