CLAIMS: WHAT YOU NEED TO KNOW AND INSURANCE COMPANIES DON’T WANT TO TELL YOU…
By : John E Heil, AAI
When losses occur, insurance companies are expected to respond in a professional manner to rapidly settle the resulting claim or claims. Claims are the major cost component of insurance premiums and are the reason businesses purchase insurance. Depending on the type of insurance, claim costs generally represent between 50 and 90 percent of the premium dollar.
What Are Claim Reserves And Why Are They Important
Liability insurance claim costs include not only the amount actually paid on claims but also an estimation for what will be paid on pending open claims (those claims that have not been closed through settlement or litigation). This estimate which is made by the claims adjuster is called a case reserve. The total amount of case reserves is included in incurred losses (paid claims and case reserves). Incurred losses are given to competing insurers quoting on the your account, used to calculate workers compensation experience rating modifiers, and used in calculating premiums under standard retrospective rating plans (as opposed to paid loss retrospective rating plans). Therefore, these estimated case reserves have a substantial effect on premiums and any “over reserving” by the insurer will cause undeserved, often unrecoverable, premium increases. Premium costs can be controlled by monitoring and negotiation reserves.
The Claims Adjusting Process
When your company suffers a loss, a claim is made to the insurance company. Except for very small claims, in which agents are sometimes given settlement authority by insurers, a claims adjuster is assigned to the case by the insurer. The adjuster may be an employee of the insurer, or the insurer may contract with an outside company to perform this service. Either way, the adjuster’s primary allegiance is to the insurer.
The job of the adjuster is to investigate the loss and compare the facts of the case to the terms of the insurance policy. If the adjuster determines that the policy does not cover the loss, the claim is denied. If the adjuster determines that the loss is covered, the adjuster will negotiate with the insured to settle a property claim or with the claimant to settle a liability or workers compensation claim. In the case of potentially severe liability or workers compensation claims, the adjuster may retain a law firm to investigate, defend and/or settle.
The agent/broker will usually work with you to present the claim to your insurer. However, the agent or broker ordinarily cannot commit the insurer to a particular response. Likewise, the underwriter who negotiated the insurance policy does not normally become involved in the claims adjusting process
Because claim costs are such a large percentage of the insurance premium, they should be monitored, evaluated, and managed. In property insurance, claim recoveries are also negotiable with the insurer, and your goal when presenting your case to the insurance company is to maximize a recovery following a loss. Since paid claims in workers compensation and liability insurance will directly affect premium costs in the future, you should monitor the loss adjustment activity of the insurance company to ensure that only legitimate claims are paid, that unpaid claims are not being over reserved, and that claim costs are accurately recorded.
Four Ways To Help Manage Your Claims
1. Request Advance Payment of Property Claims
Insurance covering physical damage to property (buildings, contents and inventory) will indemnify you for the costs incurred in repairing or replacing damaged or destroyed property. Usually, insurance companies wait until the property has been repaired or replaced and then reimburse the insured for the costs incurred. However, following a major loss you can ask the insurance company to provide an advance payment. Most reputable insurance companies provide an advance of 75 to 80 percent of the expected loss. These funds are then available for you to use in repairing or replacing the property, and the insured, rather the insurer, will benefit from investment income on the funds during the period of restoration or repair.
2. Retain Public Adjusters for Large Property Losses
Public adjusters assist an insured in preparing proofs of loss and in negotiating with insurance company adjusters. Generally, the public adjuster’s compensation will be based upon a per diem fee or a percentage of the final loss recovery. A skilled public adjuster will almost always recoup far more from the insurer than is spent on the fees charged.
If your business suffers a large property loss, strongly consider retaining a reputable public adjuster to represent you in negotiations with the insurance company. This is particularly true if the loss involves a business interruption claim, the adjustment of which requires specialized expertise that public adjusters offer.
3. Know The Name And Telephone Number Of A Restoration Company
When property damage occurs, you’ll call your agent or broker to report the claim. If it’s severe enough you may call the police or fire department. But after the damage is done and it’s been reported to the authorities and insurance company, what do you do next? Call a Restoration Company to clean up the debris and repair the damage. Often these companies will work directly with your insurance company to get approval for repairs, bill your insurance company for their work and send you a bill for your deductible. You can find them in the yellow pages under Fire and Water Restoration Services.
4. Maintain Loss Records
Many business managers make the mistake of not demanding periodic (monthly, quarterly, semiannually or annually) loss reports (a.k.a. loss experience, claims experience, loss exhibits, loss runs, loss data, claims data, etc) from their workers compensation, auto and general liability insurers. This information is invaluable in analyzing safety and loss control programs, in verifying the accuracy of experience rating and retrospective rating calculations and in obtaining insurance quotations from competing insurance companies. The last use of this data, of course, is one reason why insurers are often reluctant to provide it to an insured. Obviously, it may also be used when negotiating premium costs with the current insurance company or a prospective insurer.
In addition to providing insurance loss data for the current policy year, the insurance company should be asked to provide updated, currently valued loss reports for each of the past 5 years on an annual basis. In other words, you should request 2003 loss data not only in 2003 but also in 2004, 2005, 2006, 2007 and 2008. The total dollars of losses will be different in each of these years as open claims are settled for either more or less than originally reserved in 2003. When negotiating with the current insurer or attempting to place coverage with another insurer, it will be important to have the most up-to-date information possible.
In addition, obtaining this information on an annual basis will allow you to review the reserving practices of your insurance company. If the total dollar losses for individual years continually decline as claims mature, this indicates that the insurance company is consistently over reserving open claims. Since experience rating formulas and some retrospective rating formulas include reserves on open claims in their calculations, this practice causes overpayment of premiums which might otherwise never be refunded to the insured. If such over reserving practices are discovered, it may be possible to negotiate lower case reserves which will reduce experience modifiers and/or increase retrospective rating returns.
Claims are an unfortunate, but necessary part of the insurance business. Nobody likes them, but they should not turn in to unnecessary anxiety and frustration. Open communication is the grease that’ll get you and your adjuster to a closed claim.