Loss or Claim Adjustment
Insurance is important because it provides indemnification to the insured for their losses. However, an insurance company will not just pay money to the insured because of a filed claim. Otherwise, they could lose money through fraud or exaggerated claims. Moreover, insurance companies realize that the prompt, fair, and courteous payment of claims is a great way to retain customers and to be competitive in the insurance market. Hence, insurance companies have special people that investigate claimed losses. For life insurance companies, they are referred to as claim representatives or benefit representatives. In product liability and other insurance, they are called claims adjustors, claims auditors, loss adjusters, or just adjusters. The process of settling or denying a claim is referred to as a claim settlement or a loss adjustment. Loss adjustment is most important property insurance, where losses are usually partial and the amount may be hard to determine. Life insurance, on the other hand, rarely involves loss adjustment, since the full policy amount is paid when the insured has died. However, an investigation may be conducted if the insured died soon after buying the policy.
Claim Settlement Objectives
The objectives of any claim settlement is to verify the loss and that it was covered by the policy; to pay the claim promptly and fairly; and, in some cases, to provide personal assistance to the insured. Investigations are necessary to prevent fraud and to reduce exaggerated claims: in essence, to verify the amount of the loss. Fair and prompt payment is required because that is the function of insurance. If insurance companies could wiggle their way out of most payments, people would not buy insurance, since they could never be sure that they would be paid. Additionally, because insurance serves an important function in any society, states have laws prohibiting unfair claims practices, including: refusing any claim without an adequate investigation; not paying promptly and fairly when liability is clear; routinely underpaying claims, forcing many of the insured to file lawsuits to recover the underpayments. An insurance company that loses many of these underpayment lawsuits is good evidence that the insurance company is routinely underpaying its claims.
Adjusters investigate losses by determining the liability of the insurance company and the amount of the payment. Because the amount of claims is often not great enough to justify sending a special investigator, insurance companies often give agents draft authority, allowing them to issue payments up to a specified amount. The advantage of having the agent settle the claim is that it's fast, minimizes adjustment expenses, and enhances the policyowner's goodwill.
In geographic areas where insurance companies have many claims, adjusters are usually employees of the insurance companies. In areas of fewer claims, an insurance company will often use an independent adjuster or an adjustment bureau. Adjustment bureaus were originally owned by multiple insurance companies to investigate fire losses in distant areas. Because adjustment bureaus represented multiple insurance companies, many more areas will have sufficient claims to make loss adjustments cost-effective. Nowadays, most adjustment bureaus are independent companies who simply sell their services to insurance companies. Adjustment bureaus are also used when a large number of claims are filed at the same time, such as after a hurricane or an earthquake. Note, however, that employees of adjustment bureaus work as agents of the insurance company that hired them, and as such, represents their interests.
In many cases, losses will occur in places where it is not economically feasible for either the insurance company or an adjustment bureau to investigate. In such cases, an independent adjuster will be hired to investigate the loss. Independent adjusters bill the insurance companies for each loss adjustment. An independent adjuster with special technical skills or knowledge may also be used if the investigation of the claim requires such, and the insurance company does not employ such person.
In some cases, especially when a lot of money is at stake, the insured, usually a business, may hire a public adjuster, who is usually paid a percentage of the settlement — usually 10% — reached with the insurance company. Public adjusters are used when claims are complex or to settle a dispute with the insurance company over the amount of the claim. The public adjuster investigates and quantifies the loss and presents evidence of that loss to the insurance company, negotiating with the insurance company to maximize payment to the insured, which will also maximize the public adjuster's own compensation, if it is based on a contingent fee. The National Association of Public Insurance Adjusters provides 2 certifications that public adjusters can use to market their services: Certified Professional Public Adjuster (CPPA) and the Senior Professional Public Adjuster (SPPA). A thorough examination must be passed to obtain either of these certifications, to give businesses looking for a public adjuster some confidence in selecting a competent individual. The CPPA requires a minimum of 5 years of professional experience, while the SPPA requires at least 10 years of experience.
When presented with a claim, the insurance company either pays the claim or denies it. Most claims are paid, but a few will be denied, either because the loss did not occur or because it is not covered by the policy. A loss may not be covered because it was excluded, the policy lapsed, the loss was not within the scope of the insurance agreement, or the insured violated a policy condition.
There are 4 main steps in processing a claim, which may vary, depending on the type of insurance: notice of loss, investigation, proof of loss, and payment or denial of claim.
- The 1st step in the claim, naturally enough, is to give notice to the insurance company that the loss has occurred. Most insurance contracts require that the insured notify the company either immediately or as soon as possible, so that evidence can be preserved for the investigation. Additionally, the insurance contract may require that the insured also take other steps to gather or preserve evidence of the loss, such as gathering the names and contact information of everyone involved in an accident.
- An investigation determines whether there was a loss covered by the policy, whether policy conditions were met both before and after the loss event, and the amount of the loss. A loss will only be covered by a policy if it occurred within the policy period, if the loss was caused by a covered peril, and it satisfies the other conditions of the insurance contract. Whether the policy was in effect when the loss occurred will be especially important if the insurance was just purchased or if it lapsed.
- In the 3rd step, the insured may be required to file a proof of loss within a specified time, which is a sworn statement that the loss occurred, the circumstances of the loss, whether any other insurance covered the loss, and the amount of the loss.
- The final step is for the insurance company to either pay or deny the claim.
Reservation of Rights
Sometimes, whether to pay or deny a claim is not clear. Such may be the case when the insurance contract excludes intentional losses, but whether the insured intentionally caused the loss is not self-evident, and the insurance company must await a court decision regarding the intentionality. However, the insurance company will often pay for the legal defense of the insured, because not doing so may incur a larger liability on the insurance company if it is found that the insured did not act intentionally. Therefore, the insurer may go ahead and start paying for the defense of the insured, but will give adequate notice to the insured of its reservation of rights, indicating that the insurer is not certain that the loss is covered, and that coverage may be denied if later evidence or a court judgment supports the denial of coverage. Without the notice of its reservation of rights, the insurer may be found by the court to have acted in bad faith if it started paying the legal defense of the insured, but later stopped payment, or sought to recoup its payment.
To be legally enforceable, a reservation of rights letter must actually use the words â€œreservation of rightsâ€ and will typically have the following provisions:
- identification of:
- the policy at issue
- the relevant policy provisions and any terms, conditions, or exclusions that may bar coverage
- the relevant parts of the complaint
- the claims that may not be covered, and
- a clear explanation of:
- the insurer's basis for denying coverage
- how the defense will be conducted, and
- give notice:
- that the insured has the right to hire his own defense counsel
- that the insurer has the right to withdraw from the defense and the right to assert other defenses that may become apparent during the investigation or the court process.
- of conflicts of interest between the insurer and the insured
Appealing a Claim Settlement or Denial
Naturally, the insured will be unhappy if the claim is denied or if the amount is deemed insufficient to cover the loss. Especially in regard to value, the magnitude of the loss will be subject to interpretation. An insurance company wants to satisfy the customer, but it must also keep its payments for claims at a minimum to be able to charge a competitive price for its insurance. Moreover, state laws generally require fair payments. The insurance contract may stipulate a procedure for resolving a payment dispute. For instance, a homeowners insurance policy may require that both the insured and the insurer obtain independent appraisals of the property. If the appraisals differ by a wide margin, then the appraisers can select an umpire, who will determine which of the 2 appraisals are most accurate. If the appraisers cannot agree on an umpire, then a court will appoint one.
A customer who is unhappy about an insurance settlement has several options. If the claim is not paid because the loss event was deemed not covered by the policy, then the insured can appeal to the state insurance department. If the settlement is deemed inefficient, then, because most insurance contracts stipulate compulsory arbitration, the insured will have to go to arbitration or to court to contest the amount. The insured can also file a complaint with the state insurance department, using forms provided by their website. The websites of the state insurance departments of all states can be found at the website of the National Association of Insurance Commissioners (NAIC).
Investigating the Insurance Company
The NAIC provides the Consumer Information Source that allows consumers to investigate insurance companies, including the number and types of complaints against specific insurance companies, enforcement actions, and key financial statements. Additionally, consumers can also file an online complaint. The NAIC also provides aggregate consumer complaint reports for most common complaints sorted by type of insurance, by reason for complaint, and by disposition.