Insurance exists because people worry about misfortune and recognize that risk is an inherent part of life. When an individual or business purchases an insurance policy, they receive a promise: a promise that the insurer will provide financial protection (indemnify) if specified property suffers loss or damage due to a chance event (fortuitous event). In its truest sense, the handling of a claim is the tangible fulfilment of this insurance promise.  
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For property and pecuniary insurance, the guiding principle behind this promise is indemnity. The goal of indemnity is to restore the insured back to the same financial position they occupied immediately before the loss occurred. Because claims are the point at which the insurance promise is tested, the way a claim is handled significantly shapes how most individuals perceive the value and reliability of their insurance. Efficient, fair, and clear claims administration is therefore fundamental not only to fulfilling the insurer's obligation but also to maintaining trust and demonstrating the true worth of the insurance product.

Scope: Property and Pecuniary Insurance Claims

Property, whether owned by individuals or businesses, is constantly exposed to various risks that can cause loss or damage. These include perils such as fire, lightning, storms, floods, theft, and accidents. The decision to insure against these risks often depends on the owner's attitude towards risk.  

This article focuses specifically on the administration of claims related to property and pecuniary insurance policies. Examples of such policies include:  

• Fire and special perils insurance  
• Burglary insurance  
• All risks insurance  
• Money insurance  
• Goods-in-transit insurance  
• Fidelity guarantee insurance  
• Business interruption insurance 
• Credit insurance  
• Legal expenses insurance.
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While underwriting these classes of insurance involves its complexities, the primary focus here is on the process and principles involved once a claim arises under one of these policies.
  

Determining Claim Validity

A fundamental aspect of claims administration is determining whether a submitted claim is valid under the terms of the insurance policy. Insurance companies act as custodians of the insurance funds contributed by all policyholders. Therefore, claims staff must act judiciously, ensuring that payments are made only for valid claims while always upholding the core obligation of indemnity.  
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The responsibility, or onus, for proving that a loss occurred and that it falls within the scope of the policy rests squarely with the insured. To establish a potentially valid claim, the insured must demonstrate the circumstances of the loss, particularly concerning the cause. This involves considering:  

- Proximate Cause: The dominant or effective cause of the loss.

- Insured Peril: Whether the proximate cause was a peril explicitly covered by the policy.

- Uninsured Peril: Whether the cause was a peril not mentioned in the policy (and therefore not covered).

- Exempted/Excluded Peril: Whether the cause was a peril specifically excluded by the policy wording.

For a claim to be considered valid, several key characteristics must generally be present:  

• The insurance cover must have been in force at the time of the loss, with the premium duly paid.
• The person or entity making the claim must be the insured named in the policy schedule.
• The event (peril) that caused the loss or damage must be one that is covered under the policy terms.
• The insured must have taken reasonable steps to minimize the extent of the loss after the event occurred.
• All policy conditions and warranties must have been complied with, and no policy exceptions should apply to the circumstances. 
• The amount being claimed, representing the value of the loss or damage, must be reasonable.

If these conditions are not met, the claim may be considered invalid.

The Insured's Duties Following a Loss

When a loss occurs, the insured has certain responsibilities to fulfil. These duties can be categorized as either implied or express (written).
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A. Implied Duties

These are responsibilities generally expected of an insured party, even if not explicitly listed in the policy document for every situation:

• Take Reasonable Precautions: Act prudently to prevent the loss from worsening.  
• Prevent Loss Spread: Take necessary steps to stop the damage or loss from spreading further.  
• Do Not Hinder the Insurer: Cooperate and avoid obstructing the insurer's investigation into the claim.  

B. Express Duties

These duties are explicitly stated in the policy document, usually within the claims conditions section. Failure to comply with these express duties can be a breach of the policy conditions and may give the insurer grounds to repudiate (reject) the claim. Common express duties include:  

• Prompt Notification: Inform the insurer (or their representative, like an agent or broker) about the loss as soon as reasonably possible.  
• Police Involvement: Notify the police authority promptly if the loss involves theft, malicious damage, or other criminal acts, where appropriate.  
• Prevent Further Damage: Take reasonable actions to protect the damaged property from sustaining additional damage.  
• Provide Proof and Details: Submit a formal claim in writing, providing full details and evidence (proof) of the loss or damage sustained.  

Adherence to these duties is crucial for the smooth processing of a claim.

The Claims Process: From Notification to Offer

Once the insured has notified the insurer of a loss and fulfilled their initial duties, a structured claims process begins, moving from investigation through to a potential settlement offer.
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A. Claim Submission and Initial Proof

Following notification, the insured must formally submit their claim, providing evidence to prove its validity. This documentary proof can take various forms, depending on the nature of the claim, such as:  

• Purchase receipts for damaged or stolen items. 
• Repair estimates or professional valuations.  
• Photographs of the damage or the scene of the incident.  
• A fully completed claim form provided by the insurer. 
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B. Claims Investigation

The insurer will then investigate the claim. The approach often depends on the claim's complexity and value:

• ‍ In-House Investigation: Straightforward and smaller claims are commonly investigated, negotiated, and settled directly by the insurer's internal claims staff. ‍
• Loss Adjuster Appointment: For larger or more complicated claims, insurers typically appoint a loss adjuster.  

C. The Role of the Loss Adjuster

Loss adjusters are independent, professionally qualified individuals or firms with specialized skills in handling insurance claims. Although usually employed and paid by the insurer, their role requires them to act impartially. They have the capacity and expertise to:  

• Investigate the circumstances of the incident leading to the claim.  
• Assess the extent of the property loss or damage.  
• Negotiate with the insured regarding the claim details and potential settlement.  
• Ensure the insurer's interests are preserved throughout the process.  
• Ultimately, the loss adjuster prepares a detailed report for the insurer, commenting on their findings and recommending what settlement, if any, should apply. 
  
  

D. Insurer's Review and Decision

The loss adjuster's report serves as a crucial guide for the insurer. The insurer will carefully study the report to:  

• Determine whether liability attaches under the policy based on the facts presented.  
• Decide on the appropriate course of action and formulate a settlement offer in light of the report's findings and recommendations.  

E. Offer and Discharge

Once the insurer has decided on liability and the settlement amount, they will communicate their offer to the insured. If the insured accepts the offer, they will typically be required to sign or execute a discharge form. This document formally confirms acceptance of the settlement in exchange for the payment (e.g., settlement cheque), effectively concluding the claim.

VI. Methods of Claims Settlement

Once a claim has been notified, investigated, validated, and agreed upon, the final stage is the settlement itself. All parties have carried out their respective duties, and the insurer must now fulfil their obligation under the contract. Insurers can settle accepted claims in several ways:  
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A. Payment of Money

This is a very common method, particularly for property and pecuniary insurances. The insurer makes a cash payment, usually via cheque, directly to the insured. This is often the simplest way to provide indemnity.  
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B. Payment for Repairs

Instead of direct payment to the insured, the insurer can opt to pay for the cost of repairing the damaged property. They will typically review repair estimates and then pay the agreed cost directly to the repairer.  
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C. Replacement

In some cases, the insurer may arrange to replace the damaged or lost item with a similar one. This method is common in specific classes like glass insurance.  
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D. Reinstatement

Reinstatement typically refers to the physical rebuilding of property, such as a building, following extensive damage. However, opting for reinstatement means the insurer accepts responsibility for the full cost of rebuilding, even if it ultimately exceeds the policy's sum insured. Because of this potential for costs to exceed the sum insured, insurers seldom choose this course of action.
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Key Policy Conditions Impacting Settlement Amount

Beyond the method of settlement, several standard policy conditions can significantly affect the final amount paid out in a claim. Understanding how these operate is crucial for both insurers and insureds. Key conditions include:  
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- Contribution: This condition applies if the insured holds more than one policy covering the same property against the same peril with different insurers. If a valid claim occurs, the insurers will share the cost of the claim proportionally based on the cover each provided. 

- Average: The condition of average comes into play if the property is underinsured at the time of loss – meaning the sum insured on the policy is less than the actual value of the property. If average applies, the claim payout will be reduced proportionally. For example, if a property worth £200,000 is only insured for £100,000 (50% of its value), the insurer will only pay 50% of any assessed loss. 

- Subrogation: This condition gives the insurer the right, after paying a claim, to step into the shoes of the insured and pursue recovery from any third party legally responsible for causing the loss. This right can be enforced in the insured's name, either before or after the claim payment is made. 

- Arbitration: An arbitration clause is often included to handle disputes specifically about the amount (quantum) to be paid in settlement of a claim, provided that the insurer has already admitted liability under the policy. An independent arbitrator is appointed to resolve the disagreement regarding the settlement figure. 

Insurer's Recovery Mechanisms

After an insurer has settled and paid a claim, there are several mechanisms available through which they may be able to recover some or all of those costs. These recovery methods help to minimize the overall cost of claims for the insurer. Key methods include:  

- Contribution: As mentioned previously in the context of policy conditions, contribution also serves as a recovery mechanism. An insurer that has paid a claim in full is entitled to seek proportionate reimbursement from other insurers who also covered the same risk and were liable for the same loss. 

- Subrogation: This is the insurer's right to pursue recovery from any third party who caused or contributed to the loss or damage for which the insurer has paid a claim. The insurer essentially takes over the insured's right to seek damages from the responsible party. 

- Co-insurer Recovery: In large risks insured under a co-insurance arrangement (where multiple insurers share the risk directly), if the lead underwriter settles the full amount of the claim, they are entitled to recover the appropriate shares from the other co-insurers involved. 

- Reinsurance Recovery: Insurers often transfer portions of their risks to reinsurers. Following the payment of a claim, the direct insurer is entitled to recover the reinsured proportion of that claim from their reinsurer(s). 

- Salvage: When an insurer pays for the total loss of an insured item, they are generally entitled to take ownership of whatever remains (the salvage). This right arises from subrogation principles relating to the subject of the insurance once the claim is settled. If the insurer can dispose of the salvage property (e.g., sell damaged goods or scrap), the income realized serves as a recovery, helping to reduce the net cost of the claim.

Financial Prudence: Reserves and Provisions

Regulatory requirements, such as those outlined in legislation like the Insurance Act 2003, mandate that insurers underwriting property and pecuniary insurance maintain adequate financial provisions for future claim payments. These reserves act as contingency measures to ensure the company can meet its obligations, even considering future events that might adversely affect its operations. Key provisions include:  
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- Outstanding Claims Provision: Insurers must establish a provision representing the total estimated amount required to settle all claims that have been reported but are still outstanding at the end of the financial year. Crucially, this provision must also include an additional amount, often stipulated as a percentage (e.g., 10 percent) of the outstanding claims estimate, specifically for claims Incurred But Not Reported (IBNR). This IBNR component accounts for losses that have occurred but have not yet been reported to the insurer by the year's end.  
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- Contingency Reserves: Beyond provisions for specific claims, insurers must also maintain contingency reserves. These reserves are designed to cover unexpected fluctuations and variations in claims experience compared to statistical estimates. Regulations regularly specify how these are funded, for instance, by allocating a percentage of the total premium earned or a percentage of net profit (whichever is greater) each year.  
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Maintaining these provisions and reserves is essential for the financial stability and solvency of the insurance company.

Essential Claims Documentation (Examples by Policy Type)

A. General Requirement

Following notification, the insured (or their agent) is responsible for documenting the claim. This documentation must be provided at the insured's own expense. The specific documents required will depend on the nature of the loss or damage and the type of insurance policy under which the claim is made. The core purpose of this documentation is to substantiate the claim and demonstrate that it is genuine.  

B. Examples by Policy Type

Below are typical documents required for claims under common types of property and pecuniary insurance policies:

• Fire Insurance :
  
  • Completed claim form.  
  • Fire brigade report (if applicable).  
  • Estimates for repairs.  
  • Purchase invoices or receipts for damaged items.  
  • Sworn affidavit (if required).  
  • Photographs of the scene/damage.  
  • Stocktaking reports (if relevant, e.g., for business stock). 
    
    
• Burglary Insurance :
  
  • Completed claim form.  
  • Police investigation report.  
  • Purchase invoices or receipts for stolen items.  
  • Repair quotations for damaged premises (e.g., forced entry points).  
  • Stock records for stolen items (if applicable).  
  • Stocktaking reports before and after the loss (if applicable).  
  • Photographs of the scene/damage. 
    
    
• Goods in Transit Insurance :
  
  • Completed claim form.  
  • Police investigation report (if theft/malicious damage involved).  
  • Delivery voucher/consignment note.  
  • Supplier invoice for the goods.  
  • Driver's statement regarding the loss.  
  • Photographs of damage (if applicable).  
  • Copies of correspondence/agreements between the consignee and transporter.
    
    
• Money Insurance 
  
  • Completed claim form.  
  • Police investigation report.  
  • Bank statements.  
  • Sales receipts.  
  • Internal auditors' report.  
  • Cashier's statement report.
    
    
• Fidelity Guarantee Insurance :
  
  • Completed claim/loss report form.  
  • Police investigation report.  
  • Internal auditors' report.  
  • Insured's statement detailing the loss.  
  • Evidence of the insured's ownership of the stolen cash/assets. 
    
    
• All Risks Insurance :
  
  • Completed claim form.  
  • Police report (if theft is involved).  
  • Photographs of the scene/damage.  
  • Purchase invoices or receipts for the damaged or stolen property.  
  • Affidavit (if required).  
  • Claimant's statement detailing the loss.  

This list is not exhaustive, and insurers may request additional information based on the specific circumstances of the claim.

Conclusion: Upholding Industry Integrity

Claims administration and settlement represent the most sensitive aspect of any insurance company's operations. It is at the point of claim that the true value of the insurance product is tested and perceived by the policyholder.  
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While the image of the insurance industry has improved, there is always room for enhancement. Collectively, insurance professionals have a responsibility to continually build trust and redeem the industry's image.

This requires consistent hard work, humility, and, above all, honesty in all dealings, particularly when handling claims. By approaching claims administration with professionalism and integrity, we fulfil our contractual obligations and reinforce the fundamental role insurance plays in providing security and peace of mind.