THE INSTITUTE OF FINANCE MANAGEMENT

[IFM]
FACULTY OF INSURANCE AND SOCIAL PROTECTION

DEPARTMENT OF INSURANCE

SUBJECT: INSURANCE CLAIMS PROCEDURES

SUBJECT CODE: IRD 05202

PROGRAMME: TCIRM 1

COURSE INSTRUCTOR: MR. MAKAME, H.

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Sub-Enabling Outcomes:

3.2.1 Explain the documents and supporting evidence required when notifying claim
3.2.2 Explain the insured duties after loss
3.2.3 Describe the policy conditions relating to claims
3.2.4 Explain alternative dispute resolution
3.2.5 Explain different ways of settling claims
3.2.6 Explain the principle of proximate cause and average clause
3.2.7 Identify various means of claims recovery open to insurers
3.2.8 Detect fraudulent claims
3.2.9 Explain the roles of claims manager and department
3.2.10 Explain the roles of loss adjusters, loss assessors and solicitors, disaster recovery
companies and surveyors

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Delivery Methodologies

The teaching methodologies include practical problems solving, group discussion, group
presentations, and lectures.

Learning Materials
 Text Books
 Hand outs and Power Point Presentations
 Case studies
 Internet Resources

Assessment Method

The candidate has to prove that he or she is competent. The module will be assessed through
formative assessment (continuous assessment) and summative assessment (end of semester
examination). The continuous assessment comprises 40% and the end of semester examination
comprises 60%.

References
1. Chartered Insurance Institute, (2009), Claim Management, London
2. Goldrein, I., (2008), Personal Injury Major Claims Handlings, Butterworth
3. Walmsley, R.M (2008), Subrogation And Contributions In Insurance Practice,
Witherby
4. Jones, J.R (2008); Claims Practices; Insurance Institute Of America

5. Munkman (2007), Damages For Persona, Injury and Death, Butterworth

6. Hoopes, D. (2006), the Claim Environment, Insurance Institute of America

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KEY TERMS DEFINED:

A claim: is a formal request/demand to be reimbursed or compensated filed by the insured or

A claimant: is a person who lodge a claim, usually denotes that person hasn’t filed a lawsuit.
Upon filling a lawsuit, they would be a plaintiff.

Loss: is an unintentional disappearance or decline in value resulting from a contingency.

Claim expenses: Are the expenses associated with adjusting the claim such as costs associated
with litigation procedures, lawyers, independent loss investigators/adjusters, witnesses/collection
of evidence etc.

Loss adjuster/investigator: The one who investigates the loss and determines the extent of
coverage. He is working on behalf of the insurer from the start to finish

Loss assessors: Are the experts who are dealing with insurance claims. They are appointed by an
insured to prepare and negotiate the claim on their behalf. The fees are paid by the insured and
the cost do not form part of the insured’s claim.

Log time: Refers to time from the date of loss event to the time that claims are reported to the
claim intake centre.

Claims management: Carrying out of the entire claims process from notification to review of
performance, with a particular emphasis upon the monitoring of claims expenses, legal costs and
claim settlement.

Claim handling: The actual day to day handling of the various stages of the claim process.
Hence, the process of claims management includes that of claims handling.

ADVANTAGES OF CLAIMS MANAGEMENT DISCIPLINE:

1. Reserves to maximize capital efficiency

2. Control fraud

3. Identify opportunities for subrogation, contribution and salvage

4. Reveal extent of cover

5. Cover understanding by the claims department or underwriters

6. Show ability of the loss adjuster, claims and underwriters

7. Increasing underwriting information

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8. Reduce penalties resulting from unexpected claims disputes

9. Answer policy condition questions

10. Indicate the extent or amount of reinsurance required

11. Creates good public image and a competitive edge

12. Assist loss assessors or adjusters to perform their tasks efficiently.

CHALLENGES IN CLAIMS MANAGEMENT:

1. Fraud

2. Lack of loss assessment or adjustment skills

3. Technology advancement and matching gap

4. Business risks and management procedures hindering efficiency

5. Forecasting, predictive analysis problems(inconsistency/inaccuracy)

6. Claims disputes

7. Motivation or attraction of corruption

8. Timely or promptness of the service

TYPES OF CLAIMS

1. Bulk claims:

These are small claims which can be handled from the desktop like minor personal injury, loss of
luggage and loss of credit cards.

2. Complex claims:

Usually for large sums of money and often involve many classes of insurance and often more
than one party. Professional assistance and site visits are normal for these claims. Example; large
fire claims, pollution, employers’ liability.

3. Latent claims:

Any loss where the occurrence/trigger of loss event and the manifestation of damage or injury
are significantly different in time. Examples of latent claims: Asbestos, pollution, Tobacco,
Noise induced hearing loss, concrete cancer etc.

THE INSURED DUTIES AFTER LOSS:

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1) Prompt notification to the insurer, agent or broker
2) Notify the police in case of loss by theft
3) Complete the claim form honestly and to the best of your knowledge
4) Protect the property from further damage. If repairs to the property are required you must:
a) Make reasonable and necessary repairs to protect the property; and
b) Keep an accurate record of repair expenses
5) Cooperate with the insurer in the investigation of a claim;
6) Prepare an inventory of damaged personal property showing the quantity, description, actual
cash value and amount of loss. Attach all bills, receipts and related documents that justify
the figures in the inventory;
7) As often as the insurer will reasonably require:
a) Show the damaged property
b) Provide them with records and documents they request and permit them to make
copies.
Note: Failure of the insured to perform these duties can potentially reduce or even negate
insurance coverage that would otherwise be available.

GENERAL OBLIGATIONS TO INSURER:

Insurer must:

1) Respond promptly

2) Give reasonable guidance

3) Handle claims fairly and promptly

4) Tell claimant how claims is progressing

5) Explain why the claim is not payable

6) Settle claims promptly

7) Handle complains fairly and promptly

GENERAL PROCEDURES FOR CLAIMS NOTIFICATION:

i. Claims review
ii. Claims investigation
iii. Claims negotiation

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Claims process:

 An insured event leading to notification of loss

 Collection of required documents

 Presentation of the claims application to an intermediary or the insurer

 Claims assessment or investigation or adjustment

 Claims decisions:

i. Pay a claim: acceptance of the liability or claim

ii. Negotiation: the offer of the lower amount than that claimed or an offer to
enter into negotiations with the claimant with no amount initially named.
(The liability is accepted by the insurer and the quantum of the claim is the
only point of dispute).

iii. Reject or repudiate: liability is not accepted by the insurer. In the case of
both negotiation and rejection, the full reasons for the decision MUST be
stated. This enables the insured to challenge the decision of the insurer if
the reasons given are flawed. These are areas where insurance disputes can
arise.

 Claim settlement

 Claims recovery: once a claim has been settled; insurer may seek the way out to get back
a part or all of his money he incurred in settling a certain insurance claim. Insurer may
recover such expenses through;

Subrogation: where the damage on the insured object was caused by a negligent third
party, then insurer has the rights to claim the same amount he paid to his insured.

Contribution: This occurs when more than one policy is covering the same peril, same
insurable interest etc. that means for any loss, every policy will be liable, hence insurers
will have to share the losses proportionally. But once a single insurer pays the whole
amount equivalent to what the insured has suffered, and then other insurers will have to
reimburse their fellow insurer the amount equivalent to what they would have paid to
insured person.

Reinsurance: This is the secondary risk transfer between the reinsurer and
reinsured/reinsurance companies. Therefore, reinsurer becomes liable when the
transferred risk from the reinsured matures.

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 Salvage operations (Apply before co-insurance and reinsurance recovery)

 Review of the whole performance

At last insurer or claims handler will have to evaluate the whole process from when the claims
were reported to time when he recovered the claims costs from different sources of claims
recovery like subrogation, contribution, reinsurance and salvage.

CLAIMS SETTLEMENT:
This refers to the financial payment of a sum of money to the insured, repairs and/or replacement
of the damaged subject matter.

Claims settlement follows on from the establishment of liability under the policy as well as the
quantum (the amount payable by the insurer).

It should be noted that quantum does not arise unless liability is established or admitted. The
insured should then sign the loss agreement form (AOL) or the discharge Voucher (DV). While
the AOL is used for partial loss claims, the DV is used for total loss and third parties claims.

Ex Gratia Payment:

These are payments made “out of grace” when there is no contractual obligation to pay the
claim. An insurer may consider paying a claim on Ex gratia basis under the following
circumstances:

 Where there is a genuine oversight by the insured

 Where hardship would be created

 To avoid contesting liability in court

 To preserve good business relationship

Note: Ex gratia payments are made on a “without Prejudice” basis, hence do not become
precedents.

Overpayment of Claims:

Within the claims handling process, there is the scope of paying more than the justified claim by
the details and circumstances of the loss.

This potential overpayment is referred to in insurance circles as “leakage”.

Categories of Leakages:

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  Soft leakage: leakage which is relatively difficult to identify such as failure to negotiate
an adjustment for wear and tear.
 Hard leakage: leakage which is relatively easy to identify such as failure to apply an
excess or deductible.

Salvage disposal:

Salvage is considered in any situation where property has been damaged and the full value paid
to the insured but there is still a residual value which should be recovered to mitigate Insurer’s
loss.

 Salvage realization should be set against a certain agreed loss value.

Warning note!!

A claims manager and claims handler/staff should divorce themselves from salvage!

SOURCES OF DISPUTES AND RESOLUTION OPTIONS:

Sources:

1. The insurer may argue that the contract term/condition was breached
2. The insurer may argue that the cause of loss is not covered
3. The amount of settlement may rise disagreement (quantum dispute)

Sometimes it is not possible to settle claims amicably, and in such cases, a form of dispute
resolution must be sought.

Basic dispute resolutions:

1. Discussion between the parties alone (Negotiation)

2. Alternative dispute resolutions (ADR)

3. Litigation (The last resort)

Discussion between the parties; this means that insurers and claimants discusses their
differences and settle them without involving any other party or a third party.

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Litigation; this is way of settling claims disputes based upon a reasoned decision itself based
upon fact and law. Judge is selected without intervention of the parties and rarely has expertise
for the given area of the dispute.

Alternative Dispute Resolution; this means any form of dispute resolution which is not
litigation. It is based upon non confrontation and a meeting of minds.

WAYS OF PROVIDING INDEMNITY/INDEMNITY OPTION:

a. Cash payment

The settlement of claims for certain types of insurance always involves the payment of money or
using a banker’s cheques. These types include money insurance, fidelity guarantee, business
interruption and liability policies. In the case of liability insurance, payment is made to the
wronged party, not to the insured.

b. Repair

Repair means to restore something that is broken or damaged or torn to good condition. In
insurance business, insurer may opt to repair the damaged item if insurer sees that the repairing
cost is likely or will be less than the cost of replacing another item or the amount insurer will be
entitled to pay in cash to a claimant. Therefore, insurer may provide indemnity in this way at a
lower cost than insured might achieve, because of the negotiation power of a large organization.
The most common example is in motor insurance.

c. Replacement

Replacement is the act of replacing the first thing/item which is either old or broken or damaged
with a newer or better one. The most example of replacement as a means of providing indemnity
is glass insurance. It is also used as a means of settling household property losses. Other
situations in which insurers may opt for replacement are Car write-offs where the car is less than
a year old; or less relating to items of jewelry if the insurer can obtain a worthwhile discount
from a jeweler.

d. Reinstatement

Reinstatement refers to the process of returning something to its previous position or status. In
insurance, this means that insurer agrees to restore a building (piece of machinery) that has been
damaged by an insured peril. However, this is not popular option with insurers.

Reinstatement would apply only to buildings (and occasionally machinery) and is concerned
with bringing the property back to its pre-loss condition.

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