A small claim, for example, minor storm damage on fire policy, could be settled on submission of a claim
form and two quotations for repairs.
On the other hand, a large fire loss on commercial premises may require the appointment of an
independent loss adjuster to carry out the investigation. The live of investigation depends on the type of
policy involved and the circumstances in each case.
In this section, we will examine
Why it is important to interpret policy wording carefully
The role of specilists, and
The problem of fraud
After completing this section you should be capable of analysing and resolving insurance claims by:
Deciding on the need for further information or investigation
Assisting relevant parties
Analysing information to decide for or against liability in accordance with the policy and
Completing the acceptance or rejection decision
Informing the claimant of the decision
Completing the relevant documentation
With complex claims there may be a need to collect more information or to further investigation the
circumstance of the loss so that the liability and cost related to the claim can be established.
Source of Information
In trying to establish liability and an accurate estimate for the cost of a claim, there are many sources of
information that can be called upon to provide input. These include:
The customer and any third parties who may have caused or sustained damage as a
consequence of the event
The policy wording
The loss adjuster
Any other specialists appointed by the claims officer or the loss adjuster, and
Trades people, repairers, suppliers
A loss adjuster will:
Inspect the damage
Organize all the necessary trades people to provide estimates for that part of the work that they
will eventually undertake
Make contact with the insurers preferred supplier for materials and replacement items
Call for other specialists to provide reports on aspects of the event, including suspected fraud.
The claims officer or the insurer’s lawyer would probably appoint these specialists.
Interpreting the policy
Interpreting policy wording is very important in establishing the acceptability of a claim, and as part of
the cost estimation. Most disputes arise out of the differing interpretations of policy wording:
Covered or not ?
One example of policy wording that, in the past, has led to disputes is the use of the term Current
Market Value. Invariably, customers read this mean the price they would expect to pay for an equivalent
Insurers, however, do not include the additional costs of warranties and profit margins in their
interpretation of Current market value.
There is obvious discrepancy between what the customer expects and what the insurer is willing to pay.
In accordance with the Codes precription for clear language in all documents, there has been a lot of
hard work done to improve policy wording. Some companies now use Agreed Value instead of Current
market Value so that there can be no confusion.
Another area of policy that can be contentious is that of Exclusion in home policies. As you have read in
the Beacons’case, wooden fances are usually excluded from cover. Damage caused by flood is another
CASE STUDY – WATER DAMAGE
In a recent case involving flooding in a large central Victoria city, some policyholders found that they
were granted cover while others were not.
Water damage caused by flood is usually excluded, whereas damage caused by storm water is usually
The definitions related to water damage used in most policies are :
Flood, which is excluded, is caused by rising water likes creek bursting its bank
Storm Damage is caused by water falling from ther sky, and it includes water not contained by
the storm water system
When specilist hydrologists were called in, they found that much of the damage to houses had been
caused by the local council’s failure to prepare for flood – many of the storm water drains were blocked
– and in some parts of the city this is what declared as the cause of damage.
Those policyholders whose houses were damaged because of blocked drains, accornding to the
hydrologists, received compensation. House in other parts of the city, which were damaged by water
directly from the creek according to the hydrologists dod not receive any compensation.
Insurer then sought to recover costs from the local council for damage that was deemed to be due to
the blocked storm water drains
POLICY WORDING AND COST ESTIMATES
There are several clauses that might appear in a policy that will affect the ultimate value of a loss. These
Deductibles or special terms
Underinsurance is where a customer fails to insure a particular risk for its full replacement value, and in
so doing, creates a false economy in relation to the premium saved. Underinsurance is very prevalent in
homeowners policies and in some cases has led to financial hardship for the insured where the house
and contents have been lost to a fire or some other natural disaster
If a customer is under –insured , they are considered responsible for part of the risk - as co-insurers. Co
insurance clause normally appear in fire, and construction policies. Each policy contains its own
‘averaging’ formula for reducing the amount of the claim if there is under insurance
A claim officer cannot rectify the problem of under insurance because when a claim is made, it is too
late to advise the client that they are not adequately insured. The damage has been done!
There are several reasons why a certain risks are under-insured and they are :
The client is unaware of the real value of the asset to be insured and simply guesses at the value
Clients do not realise that inflation has changed the repalcement cost of their assets and the
sum insured should always be for repalcement value rather than the original purchase price
Clients take out as much insurance as they can afford and in many cases this means that certain
assets are under insured
Some clients take the view that they are immune from disaster and don’t need to insure their
assets for thei full value because if their house is damage by fire, it won’t be totally destroyed.
OI also presents problems, this time for the insurer. If certain assets are over insured, it could result in
excessive payouts being made by the insurer to settle claims. Insurers are very conscious of values and
go to great lengths to ensure that clients do not over insure. Motor vechile insurers experience great
difficulties when cars are over insured given the strong relationship between over insurance insured
given the strong relationship between over –insurance and fradulant claims
Deductibles or special terms
If an item is subject to a deductible or special limit, or if the policy has been varied to embrace special
terms or limitations, or if the policy has been endorsed to include special perils, these facts must be
clearly recorded on the claim folder. Otherwise, errors and misunderstandings can occur. These may
hinder a mutually agreeable adjustment of any loss
Whether the claim is large or small, part of the risk may be reinsured. There are several types of
reinsurance that may apply, depending on the level of protection purchased by your company, for
example, facultative and catastrophe reinsurance.
One type of reinsurance is called faculatative and it applies to losses over a pre-determined level on a
particular policy. If we imagine a claim for $1 million building destroyed by fire, it could be better that
the insurer provides the first $500k of cover and the remaining $500k is provided by the reinsurer.
Catastrophe reinsurance is another common form of cover purchased by insurers and applies to all
claims coming from a particular event such as as an earthquake of a bushfire. In these circumstances the
total cost of all ciams associated with the event has to be established before a claim can be made on the
reinsurers. Again, the insurer would always be liable for the first amount of the total cost with the
reinsurer being liable for all costs over the aggregate of the insurers liability.
A contract of reinsurance is a private matter between the insurer and the reinsurer company. The
insured is not party to this contrcat and is not informed of this arrangement.
More detailed information on INS 701
The matter of subrogation must be considered when dealing with any general claim. If the event which
occurred, and which is the subject of a claim, arose out of the negligence of a third party, the insurer has
the right to stand in the place of the insured and to recover its loss from the negligent party –this is
subrogation. This right arises after the insured has been fully indemnified, up to the limit of the
indemnity under the policy.
The Insurance Contracts Act qualifies an insurer’s right of subrogation. You should familirise yourself
with the provision of Section_______ and ____ of the Insurance act.
Loss adjusters or assessors are usually appointed where there is any possibility of a subrogation
recovery. Any delay in dealing with this could weaken a case for recovery. If an immediate investigation
is made, a sketch drawn, photographs taken (preferably by independedn specilists) and statement
recorded, if possible in the form of statutory declarations, and faulty parts identified, ticketed and
preserved, the information thus obtained can provide via evidence should any subsequest recovery
claim be litigated.
READ A ppendic 2 : Interpretating the policy for more information about terms and concepts contained
in policy wordings
CASE STUDY – MR & MRS BECON
After recording the Becons Claim for damage that was caused by the neighbours tree falling on their
garage and house, the nest step for the claims officer was to strike an estimate for the cost of repairs.
Based on his experinece and knowledge of this particular claim, he added $20k to the claim reserve.
His next action was to arrange for a loss adjuster to attend the premises and prepapre a detailed report
of the damage, the likely cost of repairs to the garage and the house and recovery prospects.
Mr Becon was asked to take his car to a crash repairer favoured by Progressive Insuranceand get
quotation, and subject to an assessment, the repairs would be authorised as soon as possible.
The appointed loss adjuster arrives at the house the following day and commenced to write his report
by listing down all the visible damage to the garage, the house and the bike. He also observed that the
remainder of the neighbor’s tree was rotten and he was concerned that further damage could result to
both properties if the tree wasn’t attended to.
The loss adjuster contacted a local surgeon to come and inspect the tree and provide an expert report
for the insurance company. In addition he called upon the services of roof-tiller, a plasterer, an
electrician and a painter to provide detailed estimates of the time and costs involved in fixing Mr and
Mrs Becon’s home
The recovery of claims costs from negligent third parties is a vital ingredients in total cost control and is
unfortunately sometimes overlooked by many claims officer. A recovery action is available to an insurer
in any situation where liability for the claim can be shared or apportioned to a 3rd party. This
apportionment can be demonstrated by way of a few simple examples:
In motor vehicle accidents, particularly at intersections and in shopping centre carparks, there is almost
always some fault attributable to both drivers. Where fault can be apportioned, the claim officer should
negotiate the percentage of blame that is attributable to the 3rd party with the 3rd party insurer and seek
recovery of the appropriate cost.
Even if the ratio of blame is as little as 80/20, this still mean a considerable saving to your company.
Furthermore, if this apportionment is achieved on all similar claims, the saving over a 12 month period
will be substantial.
When domestic appliances are damage as a consequence of a power surge, insurers have the right to
seek recovery of their claim costs from an electricity distributor/supplier. These actions are not always
easy given that the power surge may have come as a result of a car accident with a power pole, an
electrical storm, or a fault in the distribution network. Where there is evidence of a failure of duty of
care by the electricity suppliers, a recovery action should be pursued by the insurer
Fire damage can also have recovery aspects associated with the claims, particularly if damage caused to
a building is a consequence of a fire in an adjoining building. Once the fire investigators determine the
cause of the damage, a recovery action possible against the 3rd party and their insurer.
Bush fires can also have recovery potential. The most notable case in this area was associated with the
Ash Wednesday bush fire where some costs were ultimately recovered from the State Electricity
Commission of Victoria [Aust] because some of the fires were proven to have been caused by faulty
As you can see from these examples, recovery of claim costs is available in a wide variety of situations.
Recovery actions are most often successful when negotiated directly with the 3rd party insurer, as this
will bring a positive result much more quickly than proceeding through the Courts.
In circumstances where a negligent 3rd party is not insured, as often happens in motor vehicle accidents,
a Court judgment is often required to establish an installment payment plan for the recovery of the
Costs associated with legal liability are harder to ascertain given that the Court determines many such
cases. An experienced claims officer would always consult the insurer’s legal advisers to establish an
estimate of likely damages for all matters that will be contested in Court as well as for the legal cost of
The role of specialists
In every field of endeavor, there is an increasing tendency to use the service of specialists. An insurance
claims officer, however knowledgeable, competent or industrious, cannot expect to have the wide range
of skills necessary to investigate and report on all claims, except of course the very small ones. The most
important specialists used by insurance companies are loss adjusters and assessors.
Some very large companies do employ their own assessors to evaluate claims. However, even large
insurance companies appoint independent loss adjusters to investigate, assess and report upon
contentious claims, large claims, or claims under policies which are co-insured with other companies.
CASE STUDY – ABC BODY REPAIRS
From the information gathered so far about the fire at ABC BR, the claims officer formed an opinion that
there would be a significant damages bill for water and smoke damage and that a specialist loss adjuster
should be appointed as soon as possible to investigate the cause of the fire, the costs of restitution and
any potential for recovery.
Robin Gibbon & Co. received written instructions via facsimile from PI an hour after Adi had reported
the claim. They immediately scheduled one of their experienced consultants to attend the premises of
ABCBR to prepare a preliminary report as to the cause of fire. They also contacted the Metropolitan Fire
Brigade to request a copy of their Incident Report of the fire, which should provide valuable information
as to the status of locks on gates and doors upon their arrival at the scene. The Fire Brigade report
would also give the exact time that the alarm was triggered and their opinion as to the cause of the fire.
Back at PI, the claims officer was in the process of working up the estimate for the claim. Based on the
information to hand and his previous experience with claims of this type, the initial estimate input to the
computer system had the following components:
Building $ 50,000
Inventory $ 30,000
Public Liability $ 20,000
Customer Vehicle $ 30,000
Until more was known about the cause of the fire, the claims officer assumed that all policy conditions
had been met and that the damage to customers’ vehicles would be covered under the Public Liability
and Customer Vehicle section of the policy.
The loss adjuster had arranged a time to see Adi at ABC BR the day after the claim was reported. Before
making a thorough inspection of the premises, he asked Adi to complete a PI claim form and to record
details of all circumstances surrounding the fire.
It appeared that the fire had started in the 4 WD because:
The 4 WD had been totally consumed by the fire
Most of the other fire damage was to tools and equipments around the particular vehicle
Damage to the other four cars was mainly on the side facing the 4WD. It consisted of scorched
paint surface and some minor plastic melting
Above the 4WD there was severe scorching on the ceiling
A closer inspection of the vehicle convinced the loss adjuster that he needed some specialist help. He
requested the services of Matt Rainer, a forensic engineer, and was given approval by the claims officer.
Matt’s task was to determine the precise cause of the fire and report to the loss adjuster and PI within 3
days. Once his report was available, the claims officer could make more informed decision about the
admissibility of the claim, and together with the loss adjuster’s report, a more informed decision about
the estimate of costs.
While the loss adjuster and Matt Rainer were completing their investigations, Adi Bedetta had engaged
an electrician to inspect, isolate and repair all the necessary wiring on the premises. A contractor was
also on the job repairing the front gate and the new roller-door was being installed. Ado’s staffs were
cleaning down work bays, inspecting and checking equipment and generally assisting the loss adjuster
with his task of compiling a list of damages for Progressive Insurance.
Not surprisingly, Adi also contracted the owners of all the damage vehicles, the most difficult with the
car dealer, who now owned a totally destroyed 4 WD. Adi did his best to reassure all the car owners that
he was working as quickly as he could in conjunction with the insurance company to ascertain what was
covered and what was not. Needless to say, all the owners indicated that they held ABC BR liable for the
repairs to their vehicles. All the 3rd party contact details were forwarded to the claims officer at PI.
Some days later, the claims officer received the Incident Report from the Fire brigade, which confirmed
that the 4WD was the most likely cause of the fire. No other evidence was discovered in electrical
switchboards or machinery circuits. There was also no evidence of the fire been having deliberately set,
or accelerant used.
The loss adjuster’s report also arrived on the same day, giving details of all the costs associated with the
restoration of the building, tools and equipment. The one area of additional cost recommended by
Robin Gibbons & Co. was to paint the concrete walls in the workshop, because the porous nature of the
building material did not allow them to clean.
There was also part of the report dedicated to the cause of the fire and the ramification associated with
the negligence on the Public Liability section of the policy. The report also noted that the value of the 4
WD was $40k and the cost of repair to the other four vehicles would be $10k. Cover provided under the
Customer Vehicles section of the policy was limited to $30k.
Recovery opportunities were also dealt with. This part of the report was focused on aspects of
negligence, all of which would be decided once the actual cause of the fire was known.
Matt Rainers report finally a week after the fire at ABC BR. IN summary, the fire was caused as a
consequence of water entering the ignition switch of the 4 WD when it was put through the carwash
prior to being delivered to Adi. The subsequent corrosion formed a short circuit and the cables between
the battery and the starter motor overheated and ignited. The fire quickly spread to the flammable
liquids in the engine bay and soon the whole vehicle was alight.
The impact of Matts report was that there was no negligence on the part of ABC BR and so PI Insurance
would not required to provide indemnity under the liability section of the policy.
Duties of loss adjuster and assessors
Loss Adjusters and Assessors, although appointed and remunerated by their principals, (the insurer or
underwriters), regard themselves as independent. It is their responsibility to:
Thorough investigate the circumstances surrounding a claim
Establish the amount/value of the loss, and
Submit reports which will enable the insurers to determine the amount payable and in some
cases, if the claim is admissible.
The assessor or adjuster can make recommendations to his or her principal but, unless otherwise
authorized, has no power to settle losses or decline liability
The assessor or adjuster is in many respects a knowledgeable, impartial third party, whose main
objective is to achieve a just and amicable settlement between claimant and insurer. This calls for tact
In the course of their investigations, the company or a loss adjuster may require the services of other
specialists, who are usually appointed by the claims officer or company solicitor.
Many loss adjusters, in addition to the special skills that the profession demands, hold degrees in
accountancy, commerce, economics, law or engineering. However, no one can be expected to be an
expert in every field. Insurance companies often need the services of other specialists, for example:
In the course of enquiries, an adjuster will frequently encounter circumstance that leads him or her to
suspect that a claim is fraudulent.
In such cases the insurer may appoint a private investigator to make detailed enquiries. Private
investigator, who must be licensed, might follow claimants, take photographs and sometimes videotape
their activities, take written statements and make investigations as to the background and previous
history of the person involved. The claims handler dictates the exact type of work. The type of work
dependent on the type of claim and the circumstance of the loss.
It is necessary to use people such as investigators or private enquiry agents to obtain evidence that
might enable an insurer to repudiate bogus claims. This is obviously in the interest of other
policyholders as well as the insurance company.
Accountants have always played a very important role in a loss adjusting and have become virtually
indispensable so far as consequential loss (business interruptions) and stock claims are concerned.
Their ability to read and interpret financial accounts enables them to accurately quantified a loss and to
detect inconsistencies with standard practice or industry trends.
Computer fraud and embezzlement claims often call for an accountant’s expertise and many major loss
adjusting firms now include qualified accountants as member of their staff.
Engineers and Architects
The many public authorities, which now play some part on the planning and execution of building
projects, make it virtually mandatory to employ engineers and architects in every stage of major building
repair work. Even the exact restoration of damage property can no longer be undertaken without due
attention to the laws or regulations currently in force.
Similarly, in dealing with claims for sophisticated plant and machinery (which can so quickly be rendered
obsolete by advances in technology) the advice of engineering experts in the repair or replacement
procedure is often advisable.
Additionally, engineering advice may well be called for to determine whether all the damage included in
a claim is directly attributable to the claimed peril.
Most trained loss adjusters have a sound knowledge of values but sometimes disputes arise which could
lead to possible litigation. In such circumstances, employing qualified valuer is a desirable step.
Moreover, the importance of valuers cannot be overestimated when dealing with valuations of jewellery
or work of art.
Loss adjusters usually take photographs of scene relating to the claim that they are investigating,
whether it is fire, burglary, storm or other vent, because of the reliability of photographs. However,
when dealing with a material damage or liability claim, which is likely to involve litigation, the adjuster
should appoint an independent professional photographer. As in the other fields of expertise, the
professional photographer will produce a better result and will usually to accorded greater credibility in
a legal environment.
The specialists mentioned above are those most commonly used in claims work, but there are others.
Chemical engineers may be needed to determine the extent of damage to delicate equipment
by corrosive elements
Forensic scientists may be needed to examine specimens in laboratory conditions to determine
the cause of damage and its extent
Electrical and electronic experts may be needed to advise on the reparability of fine and delicate
Mining experts may be needed to examine the viability of re-opening or leaving permanently
closed an underground mine
Investigators, assessors and loss adjusters
Section 3.2 of The Code deals with the appointment of investigators, assessors and loss adjusters,
This Section requires that:
Insurers shall require investigators, assessors and loss adjuster acting on behalf of the insurer to :
o Operate in a professional manner
o Inform consumers of their status and the identity of the insurer for whom they are acting, and
o Comply with the law and this Code
Insurers should ensure that investigators, assessors and loss adjusters are not authorized by the
insurer to act in matters that do not match their expertise….
The company guidelines will detail company policy and procedures on working with assessors and loss
Claims officers will need to :
o Provide assessors and loss adjusters with accurate information before or during investigation
o Interpret their reports and recommendations before making decisions about claims
Ideally, adjusters should be provided with the following data at the time of their appointment:
o Name of the client or other interested parties to the contract
o Head office address
o Name of the party to be contacted and the telephone number
o Situation of the loss
o Name of the insureds delegated officer handling the claim
o Policy number
o Claim number
o Full details of the claim and the cover granted under the policy together with extensions, limits
and type of cover, that is, indemnity or reinstatement or replacements. If reinstatement,
whether the policy covers extra costs of reinstatement.
o If the insurance is written on a schedule basis, the name of the other insurance companies
involved and the proportion of the risk which they hold
If full information is provided, it speeds the claim process, makes the task of the loss adjuster much
easier and avoids unnecessary disputes with claimants.
In many cases, a loss adjuster or other specialist who called in to assess a claim is someone well known
to the insurer. From previous experience, the claims officer would have a level of confidence in the
estimates provided for repairs or replacement of building and property.
Nevertheless the claims officer should review any specialist reports that have been called for before
authorities are issued for the repairs or replacement of damage items.
It is also at this point in the management of a claim that proof of ownership is requested from their
customers. It is not uncommon in claims for theft or burglary for customers to claim for items that were
not owned by them or in their possession.
The claims officer has to ensure that the items being claimed for were in existence before the alleged
loss, and that the insured owned them. The most common form of proof required by insurers is a copy
of a receipt or invoice for the insured article.
This is of course is not always easy for the insured to supply, particularly if the insured article was
purchased some time ago and may have been purchased for cash.
Despite this, proof of purchase should be asked for and a reasonable decision reached as to the veracity
of the claim. If there is any doubt held by the claims officer, the claim should be referred to the company
The problem of fraud
Unfortunately, a significant percentage of all claims lodged are proven to be fraudulent. An even greater
number of fraudulent claims may go undetected by claims or investigation staff.
Fraud has been defined as ‘criminal deception, dishonest artifice or trick’. It is an act that is designed to
obtain unlawful gains, and it is punishable by law.