Claims Administration for Insurance Professionals and Loss Adjusters

An insurance policy is a promise: if insured property suffers loss or damage from a chance event, the insurer will indemnify the insured. Handling a claim is the point at which that promise is kept or broken, and it is where most policyholders form their view of what their insurance is worth.

This article covers property and pecuniary insurance claims: how validity is decided, the insured's duties, the route from notification to settlement, the conditions that affect the amount paid, recoveries, and the documents usually needed.

Indemnity and the classes of insurance covered

For property and pecuniary insurance, the guiding principle is indemnity. The aim is to put the insured back in the same financial position they were in immediately before the loss, no better and no worse.

The principles below apply to claims under policies such as:

• Fire and special perils
• Burglary
• All risks
• Money
• Goods in transit
• Fidelity guarantee
• Business interruption
• Credit
• Legal expenses

Deciding whether a claim is valid

Insurers hold a fund built from the premiums of all their policyholders. Claims staff must therefore pay valid claims in full while making sure that invalid claims are not paid.

The burden of proving that a loss happened, and that it falls within the policy, rests with the insured. The central question is the cause of the loss:

• Proximate cause: the dominant or effective cause of the loss.
• Insured peril: whether that cause is a peril the policy covers.
• Uninsured peril: a cause the policy does not mention, and so does not cover.
• Excluded peril: a cause the policy wording specifically excludes.

A claim will generally be valid only if all of the following apply:

• The cover was in force at the time of the loss and the premium had been paid.
• The claimant is the insured named in the policy schedule.
• The loss was caused by a peril the policy covers.
• The insured took reasonable steps to limit the loss after the event.
• All policy conditions and warranties were complied with, and no exception applies.
• The amount claimed is a reasonable measure of the loss.

The insured's duties after a loss

Implied duties

These apply whether or not the policy spells them out. The insured must act prudently to stop the loss getting worse, take steps to prevent damage spreading, and cooperate with the insurer's investigation rather than obstruct it.

Express duties

These are written into the policy, usually in the claims conditions. Breaching them may entitle the insurer to repudiate the claim. The usual express duties are to:

• Notify the insurer, or its agent or broker, as soon as reasonably possible.
• Report theft, malicious damage and other criminal acts to the police promptly.
• Protect the damaged property from further damage.
• Submit a written claim with full details and evidence of the loss.

Meeting these duties promptly makes the rest of the claim much easier to handle and removes an avoidable ground for dispute.

From notification to settlement

Submitting the claim

After notification, the insured submits a formal claim with evidence. Depending on the loss, this may include purchase receipts, repair estimates or valuations, photographs of the damage or scene, and the insurer's completed claim form.

Investigation

Smaller and straightforward claims are usually investigated, negotiated and settled by the insurer's own claims staff. Larger or more complicated claims are normally passed to a loss adjuster.

The loss adjuster's role

Loss adjusters are independent, professionally qualified specialists in claims. Although usually appointed and paid by the insurer, they must act impartially. Their work is to:

• Investigate the circumstances of the loss.
• Assess the extent of the loss or damage.
• Negotiate the claim with the insured.
• Protect the insurer's interests throughout.

The adjuster then reports to the insurer with findings and a recommendation on what settlement, if any, should be made.

The insurer's decision

The insurer studies the report to decide whether liability attaches under the policy and, if it does, what offer to make.

Offer and discharge

If the insured accepts the insurer's offer, they sign a discharge form confirming acceptance in return for payment, which concludes the claim.

Settlement, recoveries and reserves

Methods of settlement

• Payment of money: the most common method for property and pecuniary claims, and usually the simplest way to indemnify.
• Payment for repairs: the insurer reviews the estimates and pays the agreed cost directly to the repairer.
• Replacement: the insurer replaces the lost or damaged item with a similar one. This is common in glass insurance.
• Reinstatement: the insurer rebuilds the property. Choosing reinstatement makes the insurer responsible for the full cost of rebuilding, even if it exceeds the sum insured, so insurers rarely choose it.

Conditions that affect the amount paid

• Contribution: where the insured has more than one policy covering the same property against the same peril, the insurers share the claim in proportion to the cover each provides.
• Average: where the sum insured is less than the actual value of the property at the time of loss, the claim is reduced in proportion. Property insured for half its value will receive half of any assessed loss.
• Subrogation: once the claim is paid, the insurer can step into the insured's shoes and pursue any third party legally responsible for the loss, in the insured's name. This right can be exercised before or after payment.
• Arbitration: where the insurer has admitted liability but the parties disagree on the amount, an independent arbitrator decides the figure.

How insurers recover claim costs

An insurer may recover some or all of a paid claim through:

• Contribution: claiming a proportionate share from other insurers who covered the same risk and were liable for the same loss.
• Subrogation: pursuing the third party who caused or contributed to the loss.
• Co-insurers: where a large risk is shared under a co-insurance arrangement and the lead insurer settles the whole claim, recovering the other co-insurers' shares.
• Reinsurance: recovering the reinsured proportion of the claim from reinsurers.
• Salvage: after paying for a total loss, taking ownership of what remains. Selling damaged goods or scrap reduces the net cost of the claim.

Provisions for future claims

The Insurance Act 2003 requires insurers writing property and pecuniary business to keep adequate provisions so that they can meet future claims even if events turn against them.

• Outstanding claims provision: the estimated total needed to settle all claims reported but unsettled at the end of the financial year, plus an additional amount, set as a percentage of that estimate (for example 10 per cent), for claims incurred but not reported.
• Contingency reserve: funds held against unexpected swings in claims experience, typically built up each year from a percentage of premium or of net profit, whichever is greater.

Documents insurers usually ask for

The insured must document the claim at their own expense. The documents needed depend on the loss and the policy, but the purpose is always to show that the claim is genuine. Typical requirements are below. The lists are not exhaustive.

Fire

• Completed claim form
• Fire service report, where applicable
• Repair estimates
• Purchase invoices or receipts for damaged items
• Sworn affidavit, if required
• Photographs of the scene and damage
• Stocktaking reports, for business stock

Burglary

• Completed claim form
• Police investigation report
• Purchase invoices or receipts for stolen items
• Repair quotations for damage to the premises
• Stock records and stocktaking reports from before and after the loss, where applicable
• Photographs of the scene and damage

Goods in transit

• Completed claim form
• Police report, where theft or malicious damage is involved
• Delivery voucher or consignment note
• Supplier's invoice
• Driver's statement
• Photographs of the damage
• Correspondence and agreements between consignee and transporter

Money

• Completed claim form
• Police investigation report
• Bank statements and sales receipts
• Internal auditors' report
• Cashier's statement

Fidelity guarantee

• Completed claim or loss report form
• Police investigation report
• Internal auditors' report
• Insured's statement of the loss
• Evidence of the insured's ownership of the cash or assets taken

All risks

• Completed claim form
• Police report, where theft is involved
• Photographs of the scene and damage
• Purchase invoices or receipts
• Affidavit, if required
• Claimant's statement of the loss

Key points for insurers, brokers and claims managers

• The insured must prove the loss and show that its proximate cause is an insured peril.
• Breach of express duties such as prompt notification can give grounds to repudiate. Brokers should remind clients of these duties before a loss, not after.
• Check average early. Underinsurance reduces the claim in proportion, and it is better raised at the start than at settlement.
• Identify recovery routes, including subrogation, contribution and salvage, at the start of the claim, while evidence is still available.
• Ask for the right documents from the outset. A complete file is the quickest route to settlement.
• Handle every claim with honesty and professionalism. Claims are where the value of insurance is tested, and where the industry earns or loses trust.