FLSA2002-11 — Insurance claims adjusters and section 13(a)(1)

U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

November 19, 2002
FLSA2002-11
Dear
Name*,

This is in response to your request for an opinion regarding the exempt status of certain insurance claims
adjusters under the Fair Labor Standards Act (FLSA). Your inquiry focused on whether the adjusters
qualify for the section 13(a)(1) exemption for employees employed in a bona fide administrative capacity.
29 U.S.C. 213(a)(1). You asked only whether the adjusters' duties are consistent with the administrative
exemption, because they are paid in accordance with all of the salary requirements of the regulations. We
assume, for purposes of this analysis, that the adjusters in question are compensated on a salary basis in
excess of $250 per week exclusive of board, lodging, or other facilities.

You stated that the adjusters in question are primarily involved with the investigation and evaluation of
insurance claims. As part of this process, they are responsible for a number of tasks. For example, the
adjusters gather the facts by interviewing the insureds, witnesses, and physicians; they also may visit the
scene of the event, inspect property damage, and take and review photographs. The adjusters then
weigh the factual information and prepare damage estimates. In doing so, they consider a variety of
losses such as time lost from work, damages to personal property, the nature and extent of bodily injury,
medical bills, and pain and suffering. They also must evaluate whether there is coverage for the claim
under the policy. Therefore, the adjusters must be knowledgeable in the areas of various state laws
pertaining to insurance and theories of liability and tort law.

After determining coverage, liability, and the total value of the claim, the adjusters establish the level of
company reserves for the claim. They then attempt to negotiate settlements with the insured or with the
third-party claimant. They have full authority to settle claims within their established authority, and they
recommend resolutions to their supervisors for more costly claims, which are generally approved. If their
negotiations are unsuccessful, the adjusters advise the company on whether to settle the claim or to
pursue litigation. If a claim results in litigation, the adjusters collaborate with counsel and make
recommendations in preparation for litigation. In that situation, claims adjusters may be deposed and may
testify at the trial. You stated that the adjusters remain primarily responsible for resolving a claim, even
when it is in litigation and the policyholder or the third-party claimant is represented by an attorney.

You ask whether insurance claims adjusters with these duties qualify for the exemption for an employee
employed in a "bona fide executive, administrative, or professional capacity." 29 U.S.C. § 213(a)(1). The
Act gives the Secretary of Labor authority to "define and delimit" those terms in regulations.

The Department's regulations provide that the administrative exemption applies to an employee who is
compensated on a salary or fee basis at a rate of not less than $250 per week:

(1) whose primary duty consists of the "performance of office or non-manual work directly related
to management policies or general business operations of his employer or his employer's customers";
(2) which includes work requiring the exercise of discretion and independent judgment.
29 C.F.R. §§ 541.2(a)(1) and 541.2(e)(2).

1. Directly Related to Management Policies
or General Business Operations

The interpretive regulations clarify that the phrase "directly related to management policies or general
business operations of his employer" describes activities relating to the administrative operations of a
business as distinguished from production or, in a retail or service establishment, sales work. In addition
to describing the types of activities, the phrase limits the exemption to persons who perform work “of
substantial importance to the management or operation of the business of his employer or his employer’s
customers”. 29 C.F.R. § 541.205(a). Our regulations provide that the administrative operations of a
business include the work of employees "engaged in 'servicing' a business as, for example, advising the
management, planning, negotiating, representing the company, purchasing, promoting sales, and
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U.S. Department of Labor
Employment Standards Administration
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business research and control." 29 C.F.R. § 541.205(b). Significantly, our regulations specifically identify
claims agents and adjusters as jobs that ordinarily satisfy the test for exempt administrative work. See 29
C.F.R. § 541.205(c)(5). This regulation is based on the 1940 Stein Report, which followed a series of
public hearings relating to the scope of the Section 13(a)(1) exemptions. Thus, Wage and Hour has long
recognized that claims adjusters typically perform work that is administrative in nature.

Your description of the claims adjusters' duties indicates that they perform many duties related to
servicing the business. They are responsible for planning the processing of a claim from the beginning to
the end, whether it is easily and quickly resolved or whether it proceeds to litigation. They represent the
company and advise the management throughout the process of gathering the evidence, assessing
credibility, reviewing the insurance policy, determining whether there is coverage, evaluating liability,
making a decision on whether and how much to pay on the claim, establishing a reserve for the case,
making a recommendation on claims above their established authority, and collaborating with the
company's counsel if the case results in litigation. They also negotiate on behalf of the company with the
claimant, whether the claimant is a policyholder or a third-party claimant. Because these duties involve
servicing the insurance company in the same manner that claims adjusters traditionally have done so, as
is reflected in the regulatory reference to claims adjusters, we find that their duties are administrative in
nature.

The next issue is whether the claims adjusters perform work of substantial importance to the
management or operation of the business of the employer. You state that the claims adjusters in question
possess full and final authority to settle claims within their established settlement authority. That authority
ranges from a minimum of $3,000 to more than $50,000. Every adjuster expends at least $1,000,000 in
claims funds every year, and an adjuster with even minimal independent authority may commit as much
as $8,000,000 a year in company funds. Moreover, the adjusters may recommend settlements in excess
of their established authority, the majority of which are approved by their supervisors. Thus, they are not
mere conduits for providing factual information to supervisors on claims in excess of their established
authority. Rather, once supervisory approval of a particular settlement amount is provided, we understand
that they play the same role in resolving such large claims as they do on those within their established
authority.

You also noted that a claims adjuster's decision as to fault or liability affects both the policyholder's and
the company's legal rights and obligations. The decisions made by claims adjusters affect policyholders,
because their eligibility for continued coverage may be affected and their premium level may be affected.
If an adjuster erroneously recommends that coverage should be denied, even on a claim of relatively low
value, the insurance company may be liable for significant extra contractual damages for bad faith denial
of the claim.

The regulations interpreting whether work is of substantial importance provide that the exemption is not
limited to employees who participate in the formulation of management policies or in the operation of the
business as a whole. Rather, it covers employees whose work affects policy or whose responsibility it is
to execute or carry it out, including those "whose work affects business operations to a substantial
degree, even though their assignments are tasks related to the operation of a particular segment of the
business." 29 C.F.R. § 541.205(c). The regulations note that the standard for exempt work is met by
many workers "employed as advisory specialists and consultants of various kinds, credit managers,
safety directors, claims agents and adjusters, wage-rate analysts, tax experts, account executives of
advertising agencies, customers' brokers in stock exchange firms, promotion men, and many others." 29
C.F.R. § 541.205(c)(5) (emphasis added).

While job titles alone are of little assistance in determining the true importance of an employee to the
employer, § 541.201(b), the facts you described support the conclusion that these claims adjusters
perform work that is of substantial importance to the company. For example, their determinations
regarding whether a particular incident is covered by a policy, and their determinations regarding liability
and what the damages are, can result in extremely large financial consequences for the firm. Those steps
are essential aspects of every claim processed, and they must be done correctly in order to assure that
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U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

the insurance company pays what it is contractually obligated to pay, whether to a policyholder or a third
party claimant. The claims adjuster also is responsible for setting the level of reserves for each claim,
which is required for compliance with state law. If an audit reveals that adequate reserves have not been
established, the state insurance commissioner may sanction the company. These responsibilities clearly
are of substantial importance to the management or operation of the insurance company. See Palacio
v.
Progressive Insurance Co.
, 2002 U.S. Dist. LEXIS 17021 (C.D. Cal. 2002).

2. Exercise of Discretion and Independent Judgment

The final issue is whether an adjuster's primary duty includes work that requires the exercise of discretion
and independent judgment. The regulations provide that this involves the "comparison and evaluation of
possible courses of conduct," with the authority to "make an independent choice, free from immediate
direction or supervision [] with regard to matters of significance." 29 C.F.R. § 541.207(a). Such authority is
distinguished from the use of skill in applying standardized or well-established techniques and
procedures. § 541.207(c). Moreover, discretion must exist with regard to matters of consequence. §
541.207(d). The employee is not, however, required to have final unlimited authority, with a complete
absence of review. Rather, the decisions "may consist of recommendations for action rather than the
actual taking of action. The fact that an employee's decision may be subject to review and that upon
occasion the decisions are revised or reversed after review does not mean that the employee is not
exercising discretion and independent judgment within the meaning of the regulations ..." § 541.207(e)(1).

In prior letters relating to claims adjusters, we have indicated that this component requires a close review
of the facts, because it is the criterion that is most likely to cause claims adjusters to fail to qualify for
exemption. The facts you presented demonstrate that the employees have complete discretion and
independent judgment with regard to all claims within their established authority. They make all relevant
decisions regarding coverage and liability, and they negotiate with full authority to attempt to achieve a
settlement. Some of the adjusters have quite limited levels of authority, as low as $3,000. However, even
those adjusters make recommendations to their supervisors on the appropriate value of much larger
claims, which are frequently accepted. Moreover, after the supervisor approves a particular settlement
value on a larger claim, the adjusters proceed with the same independence as they do on claims within
their authority and determine the most appropriate method for resolving the claim within that approved
amount. Even on such large claims, if negotiations fail, the adjusters continue to be responsible for
handling the claim, and they work with counsel to represent the company in any litigation that ensues.

We believe that these facts demonstrate that the adjusters exercise a great deal of discretion in deciding
how to handle all types of claims. See Palacio
, 2002 U.S. Dist. LEXIS 17021. They are not merely
pursuing a standardized format for resolving claims, but rather are using their own judgment about what
the facts show, who is liable, what a claim is worth, and how to handle the negotiations with either a
policyholder or a third-party claimant in order to achieve a successful resolution. Therefore, based upon
all of the facts you presented, we conclude that these claims adjusters satisfy the standard for exemption
as bona fide administrative employees.

This opinion is based exclusively on the facts and circumstances described in your request and is given
on the basis of your representation, explicit or implied, that you have provided a full and fair description of
all the facts and circumstances that would be pertinent to our consideration of the question presented.
Existence of any other factual or historical background not contained in your request might require a
different conclusion than the one expressed herein. You have also represented that this opinion is not
sought on behalf of a client or firm which is under investigation by the Wage and Hour Division, or which
is in litigation with respect to, or subject to the terms of any agreement or order applying, or requiring
compliance with, the provisions of the FLSA.

We trust that this information is responsive to your inquiry.

Sincerely,

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U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

Tammy D. McCutchen
Administrator

Note: * The actual name(s) was removed to preserve privacy.

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