Opinion ID: 166830
Heading Depth: 3
Heading Rank: 1

Heading: Farmers' internal auditing procedure

Text: 7 On January 1, 1998, Farmers instituted a new quality control program that included the Balanced Scorecard, an attempt objectively to measure an office's performance in four categories: (1) customer satisfaction; (2) financial perspective; (3) internal perspective; and (4) organizational learning/innovation. 8 As part of the Balanced Scorecard evaluation, executives conducted a Quality Assurance Review, which was basically an audit of claims for each individual insurance product. Under the company procedure, auditors would review a statistical sample of claims files and measure two factors: compliance and leakage. 9 The compliance score measured the thoroughness of the files reviewed. In other words, the auditors would make sure that each file had the necessary documentation, claimant contacts, and paperwork. After reviewing the files for completeness, the auditors assigned a percentage score based on how much of the required information was missing or improperly recorded. 10 The leakage score measured the percentage of overpayments. There were two components to this score: hard leakage and soft leakage. Hard leakage referred to objective overpayment. These were amounts that absolutely should not have been paid because, for example, the policy did not cover the injury or because the claim exceeded the policy limit. Soft leakage was a more subjective determination. It was the amount of overpayment on a claim based on the auditor's evaluation of the claim's worth. Thus, if the adjuster paid out $5,000 on a claim that the auditor felt was worth only $4,500, this would represent $500 in soft leakage. The hard and soft leakage amounts were totaled up and measured against the total payments of all files reviewed in order to determine the overall percentage of leakage for the reviewed files. 11