Insurance Practice and Claims Handling
Insurance practice and claims handling tests the operational life of a policy: how a loss is notified, validated, quantified, reserved and settled, and where the line falls between indemnifying the insured and protecting the insurer's recovery rights. Expect questions that give a loss figure plus policy conditions and ask for the settlement amount, or that test the sequence of duties after a loss.
Notification and duties
- The insured must notify promptly as the policy requires, mitigate the loss, preserve salvage and evidence, provide proof of loss, and avoid admissions or negotiations with third parties.
- The insurer acknowledges, appoints a loss adjuster or TPA where needed, investigates, applies proximate cause, and reserves rights in writing where cover is unclear.
- Cover is declined only on a stated ground: excluded peril, breach of condition, non-disclosure, or fraud under s.12 Insurance Act 2015.
Quantifying the indemnity
- Basis of settlement: reinstatement for buildings, market value for vehicles, new-for-old or indemnity for contents, with betterment disallowed and salvage credited.
- Average (co-insurance) applies only where the condition exists: claim × sum insured ÷ value at risk.
- Deductibles and excesses are applied in the order the wording states - normally after average.
Recovery and apportionment
- Subrogation arises on payment; the insured must not prejudice it by settling with a third party.
- Contribution applies between insurers covering the same insured, interest and peril, by equal shares or independent liability.
- The Third Parties (Rights against Insurers) Act 2010 lets a claimant step into the insolvent insured's shoes.
Worked example
A commercial property policy has a £400,000 sum insured, an average condition and a £500 excess. At the time of loss the value at risk is £500,000 and the loss is £100,000. Average gives 400,000 ÷ 500,000 = 80%, so £100,000 × 80% = £80,000, less the £500 excess = £79,500 payable. Without an average condition the full £99,500 would be due, subject to any inner limits.
Traps that cost marks
- Applying average where the policy contains no average condition.
- Deducting the excess before applying average.
- Confusing subrogation (against a third party) with contribution (between insurers).
- Treating a reservation-of-rights letter as a declinature.
- Overlooking that a fraudulent claim allows recovery of earlier payments and termination with notice.