Insurance claims handling
IF7 examines how a general insurance claim moves from first notification to final payment, and the legal principles that decide whether, and how much, is paid. Questions target the claims lifecycle, indemnity and its limits, causation, recoveries, fraud and the regulatory standards in ICOBS 8.
The claims lifecycle
Notification, acknowledgement, cover validation (policy in force, peril insured, conditions met, correct insured), investigation (loss adjusters for large or complex losses; the insured may appoint its own loss assessor; engineers, medical or forensic experts), liability and quantum assessment, reserving, negotiation, payment, recoveries and closure. Reserve early and review often: case reserves plus IBNR make up incurred loss.
Principles that decide the outcome
- Indemnity puts the insured in the same financial position, no better; new-for-old is the exception.
- Proximate cause is the dominant, effective cause, not simply the last event.
- Average: where the sum insured is under the value at risk the settlement is reduced proportionately, often only once a stated threshold (e.g. 85%) is breached.
- Fraud: under s.12 Insurance Act 2015 the insurer may refuse the whole claim, recover sums paid, terminate the contract from the fraud and keep the premium.
- Late payment: the Enterprise Act 2016 allows damages for breach of the implied term to pay within a reasonable time; proceedings within one year of the last payment.
- Limitation: six years in contract; three years for personal injury.
- Complaints: final response within eight weeks, then the Financial Ombudsman Service, which the customer must approach within six months.
- Salvage and subrogation belong to the insurer once indemnity is paid; contribution applies where two policies cover the same interest, peril and loss.
Worked example
A fire destroys stock. Sum insured £400,000; value at risk £500,000; loss £100,000; excess £1,000; 85% average condition. The sum insured is 80% of value, so average applies: £100,000 x 400,000 / 500,000 = £80,000. The excess is then deducted once, giving £79,000. Deducting the excess first would wrongly produce £79,200. Salvage sold for £5,000 cuts the net outlay to £74,000.
Traps
Reversing the order of average and excess; treating the excess as reducing the sum insured; paying new-for-old where a reinstatement policy requires the property to be rebuilt; confusing the loss adjuster (insurer's agent) with the loss assessor (insured's agent); ignoring the insured's duty not to prejudice subrogation; assuming late notification defeats a claim without proof of prejudice.