Congrats, you’ve made it to part 4 of the AINS series. Guess what? That means you’re at the halfway point! Are you bored of this yet? No? Great! We need your enthusiasm to get through this. Okay, here we go. Let’s learn about insurance claims! Wooo!
You’ll know by now that I’m going to start with a recap. The introduction to this series is in my previous post, where I tell you about the process of obtaining the Associate of Insurance (AINS) certification. The first step is to complete the AINS 101 course that covers the core basics of insurance. Last time, we went over How Does Underwriting Work? where we learned about what underwriters are and what they do. Now, we’ll go over what happens from the insurance side when an insured gets into some trouble and files a claim.
1. Walking Through the Claims Department
The claims function has two goals:
- To keep the insurance promise to its customers
- To support insurer’s profit goal
Before we delve further in, let’s go over some important vocabulary terms:
- Claim – A request by a person or business seeking compensation from an insurer for a loss
- Claimant – The party who makes the claim
- First party claim – Claimant makes claim against his or her own insurer
- Third party claim – Claimant makes claim against someone else’s insurer
- Claims representative – Person responsible for investigating, evaluating, and settling claims
The Claims Department Hierarchy
- Claims Manager
- Supervises and directs some activities
- Management team may include a claims vice president, assistant vice presidents, and claims managers.
- May be assigned to specific types of insurance, such as Worker’s Compensation or Auto Insurance.
- Responsibilities:
- Setting goals for closing claims
- Developing the professional skills of staff
- Establishing the claims procedures for the department
- Claims Supervisors
- Necessary for different line-of-business units or regional/geographic locations
- Responsibilities:
- Assist managers
- Review claim files
- Help determine strategies around business and staff development
- Claims Representatives – In charge of handling the claims the claims themselves. There are three types of claims representatives:
- Telephone – Investigate and evaluate claims based on telephone correspondence.
- Field – Work outside of office and handle claims that require scene of loss to be investigated. Holds in-person meetings with insureds, claimants, lawyers, and anyone else involved with the claim.
- Specialized – Found in larger organizations and specializes in one LOB or specializes in a particular state’s laws and regulations.
How Departments Help One Another
The claims department helps and is helped by many departments in the industry.
- Premium Auditing
- Can provide inventory values, contractors’ equipment lists, and other facts that are important to the claims function
- Claims info can benefit an auditor by verifying employment classifications
- Underwriting
- Claims personnel help underwriters by ensuring claims are paid fairly and according to policy
- Proper, consistent, and efficient claims handling enables underwriters to evaluate, select, and appropriately price loss exposures
- Marketing
- Claims Department provides Marketing Department with info about customer satisfaction, timeliness of settlements, and other variables that help market insurance products
- Marketing personnel recognize that other services the insurer performs for insured are forgotten quickly if insurer fails to perform well after a loss occurs
- Risk Control
- Needs claims experience info to direct resources and efforts to crucial areas of insured’s operation
- Can provide standards, technical advice, laboratory analyses, and other assistance to Claims Department when investigating and settling claims
- Claims Department relies on risk control for data that can support the loss adjusting process
2. The Claims Handling Process
The claims handling process generally follow these steps:
- Acknowledging a claim
- Identifying the policy
- Contacting the insured
- Investigating and documenting the claim
- Determining cause of loss and loss amount
- Concluding the claim
Acknowledging a Claim
After a loss is reported, the insurer creates a claim file and notifies the insured. A claims manager assigns the claim to a claims representative.
Identifying the Policy
The claims rep searches the organization’s database to identify the policy under which the insured’s claim was made. Then they will check the policy to determine whether the loss occurred during the policy period and whether the coverage applies to the loss. Once confirmed, they calculate a loss reserve to cover the severity of the loss.
Contacting the Insured
The claims rep will contact the insured or their representative, such as an adult guardian or lawyer, after reserves are set via through email or phone call. They may also schedule a meeting as part of the initial contact and coverage verification.
Investigating and Documenting the Claim
The rep must verify that the claim is legitimate by interviewing and investigating the scene. They can also determine whether the payments can be recovered by another party, such as another driver or insurer, known as subrogation. The rep then documents the claim based on the type of loss and gathers documents related to the claim.
Determining Cause of Loss and Loss Amount
If claim is covered by the policy, the rep will calculate the amount of loss based on validation figures recorded in their documentation and any policy deductibles that apply.
Concluding the Claim
The rep will prepare a loss statement and settle the claim with the policyholder, claimant, or representative. Claims are not covered by the policy will be denied and the denial documentation will be included in the file. The rep will then complete and file closing reports to properly document the claim to enable insurers to track loss payments and claims handling practices, of which may be used as defense in the case of a lawsuit.
3. Understanding Property Insurance Claims
There are concerns unique to property insurance claims. A claims representative should ask themselves four questions:
- Does the insured have an insurable interest in the property?
- Insurable interest is when a person has an interest in the item being insured and would suffer loss if the property was damaged.
- Insurance contracts cannot be valid if the person does not have insurable interest. For instance, you cannot get an insurance on your neighbor’s house just because you want to.
- Is the damaged property covered by the policy?
- Most insurance exclude losses to certain types of property.
- Is the cause of loss covered by the policy?
- When the cause of loss is less obvious, such as flooding after a hurricane, disputes may occur as flooding isn’t covered by most policies.
- Do any additional coverages, endorsements, or coverage limitations apply?
- Additional coverages and limitations modify the basic coverage provided.
Valuation Methods
Three methods can be used to determine the value of property that was damaged by a covered cause of loss.
- Actual cash value – This value factors depreciation, which is a reduction in value due to physical wear and tear, into the replacement cost. E.g. an item 40% into its lifespan will have its value reduced by 40%.
- Replacement cost basis – This method does not consider depreciation, but focuses on initial cost paid for an item.
- Agreed value – This method insures property that is difficult to value, such as fine arts and collections. Stated value often based on an appraisal, the amount of which is stated in the policy declarations.
Subrogation and Salvage Rights
Subrogation and salvage rights are two factors that can affect an insurer’s costs for a property claim.
- Subrogation – Process through which an insurer can recover an amount if paid as a loss from another party, one of which either caused the loss or insured the party who caused it.
- Salvage rights – Allow insurer to take possession of the insured property for which it has paid a total loss. E.g. Insurer that paid a total loss for a house that burned down can salvage its copper piping and other leftovers.
Special Considerations for Property Catastrophe Claims
Insurers that cover catastrophic events must be prepared to handle claims from many insureds through careful preparation and detailed contingency plans that are regularly maintained and updated. They must account for power loss, transportation interruptions, and material scarcity.
4. Understanding Liability Insurance Claims
While the process of liability claims handling is similar to that of property claims, it is often more complex for three main reasons:
- Claimant is often a third party who has been injured or whose property has been damaged by the insured.
- Bodily injury may be involved, of which determining an amount can be complex especially if death is involved.
- Added difficulty of determining whether insured is legally responsible for the damage that has occurred.
- If coverage applies, insurers often prefer to settle claims outside of court due to the time, expense, and uncertainty involved in a lawsuit.
Types of Damages in Liability Claims Lawsuits
There are two types of damages awarded in legal liability cases:
- Compensatory damages – Reimburse a victim for actual harm.
- Special damages – Covers specific losses, such as medical bills and loss wages.
- General damages – Covers losses that do not have a specific economic value, such as pain and suffering, disfigurement, etc. Loss payment is usually determined by similar past cases.
- Punitive damages – Awarded to punish a defendant for reckless, malicious, or deceitful acts. If a third party’s insurer calculates a damages estimate that is too low, the party who suffered loss may refuse and sue the company, leading to the company being subject to punitive damages, which do not need to correspond with compensatory damages.
5. Conclusion
Thanks for reading my guide on claims handling! Next up, we will be going over How Do Insurers Reach Customers?