I teach a class to paralegal students one evening per week. On last week’s midterm exam, I asked them to write an essay outlining possible tort claims that could be brought on behalf of a fictional woman who sprained her ankle slipping on water in Fred Meyer. In her answer, one of the students wrote a great analysis of all the lawsuits that could potentially be brought against Fred Meyer, and then wrote “of course, bringing such a small case to trial would be silly; it’s just a sprained ankle and so it will certainly settle.”
Ah, the innocent naïveté of the student, not yet exposed to the real world of insurance companies.
At our law firm, we get cases all the time that “should settle.” It is crystal-clear who’s fault it is, and the injuries are completely documented in the medical records. And we know from other similar cases in the past that the case is worth, let’s say, somewhere between $10,000 and $30,000. So we have a private conversation with our client, who decides she is willing to settle if she can get $20,000 or more. We explain to her that if she’s not willing to settle for less, like $15,000 or so, we may have to go to trial. After much thought, she decides that she will take any offer above $15,000, but that is her bottom line.
Then the insurance company offers $1,700. We all shake our heads in disbelief, file the lawsuit, and start preparing for trial.
Of course, with about 1% of cases going to trial, this one will probably settle, likely for around $20,000, but not for another 8 months, and not until the lawyers, the insurance adjusters and their supervisors, and the people and companies involved in the accident, have all spent dozens or hundreds of hours working on the case. And we all knew it would probably settle for about $20,000 months earlier. And, if they had acted more quickly, they could have settled it for only $15,000. What a waste of effort!
It is typical for people who are not in this field to think “oh, such-and-such accident is so clear-cut, and it’s not a million-dollar injury, so I’m sure it will settle quickly.” But insurance companies make sure that doesn’t happen with dismaying frequency.
Why do they do this? One interesting fact about insurance companies may give some insight: they make money through their “float.” Warren Buffet explained in his annual letter of 2009 that “Insurers receive premiums upfront and pay claims later…. This collect-now, pay-later model leaves us holding large sums — money we call “float” — that will eventually go to others. Meanwhile, we get to invest this float for [our] benefit.”
In other words, the longer insurance companies can hold on to money, the more they can take advantage of the profit-making capabilities of their “float.” They have no incentive to pay early, and every incentive to pay as late as possible. “Delay, deny, defend,” has been the unofficial motto for many insurance companies for years. The fact that a human being cannot pay their rent or buy food for their family in the meantime is simply not taken into account.
And that’s why we sue them. Even when it seems silly.