AI in Insurance Claims: Balancing Innovation with Legal Obligations

Concise summary of the key elements from "When Algorithms Deny: AI and the New Frontier of Bad Faith" (originally published on JDSupra by Cozen O'Connor):

Key Elements

The insurance industry's adoption of AI in claims processing presents both opportunities and challenges. While AI can enhance efficiency and speed up claims resolution, recent legal cases highlight the importance of transparent implementation and adherence to good faith obligations.

Legal Framework and Emerging Risks

• Insurance companies must operate within the Model Unfair Trade Practices Act (UTPA) framework
• Recent court cases (Estate of Lokken v. UnitedHealth Groupand In Re Humana) indicate courts may treat non-disclosure of AI use in claims handling as potential breaches of contractual duties
• The failure to disclose AI usage in claims decisions could lead to legal exposure, particularly when marketing materials suggest human-only review

Critical Considerations for Claims Professionals

1. Transparency is Essential

   • Be upfront about AI implementation in claims processes
   • Ensure marketing materials accurately reflect how AI is used
   • Maintain clear communication with policyholders about automated processes

2. Operational Safeguards

   • Implement robust review procedures for AI-generated content
   • Establish testing protocols for accuracy and bias
   • Maintain human oversight of AI systems
   • Provide clear pathways for customers to appeal automated decisions

3. Risk Management

   • Regular review and updates of disclaimer language
   • Training claims staff on AI capabilities and limitations
   • Documentation of AI oversight procedures

Key Takeaways for Claims and Insurance Professionals

1. Documentation and Disclosure: Be transparent about AI usage in claims processing
2. Human Oversight: Maintain meaningful human judgment in the claims process
3. Quality Control: Regularly test AI systems for accuracy and potential bias
4. Customer Rights: Ensure clear appeals processes for automated decisions
5. Marketing Alignment: Review all customer-facing materials to ensure they accurately reflect AI usage

The successful integration of AI in claims processing requires balancing technological innovation with traditional insurance obligations of good faith and fair dealing. Claims professionals must ensure that efficiency gains from AI don't compromise transparency or customer trust.

Remember: The difference between successful AI implementation and potential legal exposure lies in maintaining transparency, proper oversight, and adherence to good faith principles.