Historically, insurance companies were only funded by policyholders and were designed to spread risk among a group to minimize risk to the individual. Eventually, insurance companies attracted investors who realized they could invest premiums, generating revenue. Over time, insurance companies transformed from organizations of shared risk into shareholder-owned profit centers. The more premiums an insurance company could collect and retain, the more investment revenue they could accrue. This leads us to an insurance term called "float."
In technical terms, float is the money held by insurance companies that has not yet been paid out to claimants. In other words, it's money that belongs to the policyholder that isn't in their hands yet. Float is a natural part of the insurance process, but it's also a significant source of revenue for insurance companies. Investment income from float generates billions of dollars a year for the insurance industry. Some of the industry’s most prominent figures even boast about it. In a 2009 letter, Warren Buffett proudly told shareholders, “We were paid $2.8 billion to hold our float in 2008.” With this statement, Buffett briefly pulled back the curtain to reveal how lucrative float is for revenue in the insurance industry.
How Float Harms Your Insurance Claim
Generating revenue isn't a bad thing, and like we said, float is a natural component of the claims process. But making billions from money that rightfully belongs to policyholders presents an ethical problem. An insurance company's duty is to pay claims promptly to policyholders. As a publicly-owned company, an insurance company's duty is also to maximize revenue for its shareholders. How can it both maximize revenue by holding float and pay claims promptly (thus minimizing float)? When the choice is between maximizing and minimizing float, which duty do insurers listen to?
Float harms policyholders because it encourages insurance companies to avoid paying them out for as long as possible. By delaying claims, an insurance company can profit for every day their investment revenue grows. However, when insurance companies do not pay out valid insurance claims to policyholders, they are breaking the law with bad faith practices. Insurers are required by law to investigate and resolve claims in good faith toward claimants. In short, insurance companies have to pay your claim unless they have real reason to believe it's invalid.
If you are having trouble getting your insurer to honor your claim, it’s time to obtain the help of an experienced bad faith insurance attorney. Arnold & Itkin has secured billions of dollars for our clients by holding large companies and insurers accountable for unethical practices. Call (888) 493-1629 to get a free case review today.