Insurance companies manipulate computer software and use other techniques to underpay injury claims, according to the Consumer Federation of America.

A new report by the federation says insurance companies regularly use computer programs and non-medically trained adjusters to set payment rates that underpay claims to shortchange policyholders. The report, Low Ball: An Insider's Look at How Insurers Can Manipulate Computerized Systems to Broadly Underpay Injury Claims, also offers some solutions to the problem.

The report was written by Mark Romano, the federations' claims project director and a former insurance company executive. The federation is an association of almost 300 not-for-profit consumer organizations based in Washington.

"This report is a wake-up call for consumers and regulators who are not aware of the many ways that computer claims software can be manipulated to produce unjustifiably low injury payments to consumers and tens of millions of dollars in illegitimate savings for insurers," said Romano.

Insurance companies use software, the dominant one in the industry being Colossus, to evaluate bodily injury claims consistently, said the federation, but the software can be used to lower payouts.

Insurance companies use the software to lower rates across the board to all claimants rather than evaluating individual claims, the federation said. They can also remove higher cost claims from the data when determining the acceptable range of payments for particular injuries, thereby lowering the payment range.

The insurance companies use adjusters "to second guess medical professionals by altering injury determinations, thus dictating lower payments for certain injuries," the report said.

The system is also manipulated when companies "encourage adjusters to downplay or even ignore the likelihood that injured consumers will need future medical treatment or will be permanently impaired, thus lowering payouts," the report continued.

Adjusters also are encouraged to determine that drivers are partly at fault for automobile accidents that cause injury, even though they may not be.

In addition to these specific actions, insurance companies can use computer software to fine tune claims information so that all payouts are lowered, the report said. The report said the class action lawsuit, Hensley versus Computer Sciences Corporation, which sells Colossus, revealed the software can be used to produce across-the-board reductions.

The federation recommended that software companies be better monitored. It would like the National Association of Insurance Commissioners and state regulators to investigate methods used by large insurers "to directly or indirectly reduce claims payouts in an illegitimate manner."

Consumers should be notified in writing when a computerized claims assessment is used to process their claim, the federation said.

The National Association of Insurance Commissioners replied, "Computerized claims systems, such as Colossus, are generally geared for use in the claims settlement portion that involves pain and suffering, which can be a very subjective process. It is the expectation of state insurance regulators that these systems are just one factor in helping a claim representative reach a settlement conclusion.

"States monitor the settlement of claims through the Unfair Claims Settlement Practices Laws, which provide consumers with specific protections," the association continued in a written statement. "For example, the Unfair Claims Settlement Practices Act of the NAIC prohibits an insurer from (1) failing to adopt and implement reasonable standards for the prompt investigation and settlement of claims; (2) not attempting in good faith to effectuate prompt, fair and equitable settlement of claims in which liability has become reasonably clear; (3) compelling insureds or beneficiaries to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them; and (4) refusing to pay claims without conducting a reasonable investigation."

-Karen DeMasters