Claims adjustment

Claims Adjustment

What Is Claims Adjustment?

Claims adjustment is the process by which an insurance company evaluates a reported loss to determine its liability and the amount of coverage payable under an insurance policy. This critical function falls under insurance operations, serving as the mechanism through which insurers fulfill their promise of indemnification to a policyholder following a covered event. The process involves investigation, evaluation of damages, negotiation, and ultimately, settlement of the claim.

History and Origin

The roots of claims adjustment trace back to the establishment of modern insurance systems in the 17th century, particularly with the rise of maritime insurance in London. As commerce expanded, merchants required experts to assess damage to goods during transport, laying the groundwork for the modern insurance claims adjuster role¹⁹. In the United States, early insurance companies, such as the Philadelphia Contributorship co-founded by Benjamin Franklin in 1752, began to formalize the process of evaluating losses. As the insurance industry matured and policies grew more intricate, the need for specialized professionals to interpret complex policy language and negotiate claims on behalf of policyholders became evident¹⁸. This evolution led to the development of professional standards and ethical guidelines, with organizations like the National Association of Insurance Commissioners (NAIC) playing a role in standardizing practices. Technological advancements, from early computer systems in the mid-20th century to digital platforms today, have continually streamlined documentation and improved the efficiency of claims adjustment¹⁷.

Key Takeaways

• Claims adjustment is the process insurers use to investigate and determine the validity and value of an insurance claim.
• It involves assessing the damage, verifying policy coverage, and calculating the appropriate payout.
• Insurance adjusters, who perform this role, can be employed by the insurer (staff adjusters), work independently (independent adjusters), or represent the policyholder (public adjusters).
• The goal of claims adjustment is to achieve a fair settlement in accordance with the terms of the insurance contract.
• The accuracy of claims adjustment is vital for both the financial health of insurance companies and the equitable treatment of policyholders.

Interpreting the Claims Adjustment

Interpreting the outcome of claims adjustment involves understanding the adjuster's findings regarding the covered loss and the resulting settlement offer. The adjuster's role is to determine if the loss is covered under the insurance contract, assess the extent of the damage, and calculate the financial responsibility of the insurer¹⁶,¹⁵. For example, in property insurance claims, the adjuster will evaluate the physical damage, consider depreciation, and estimate repair or replacement costs. Policyholders should review the adjuster's report carefully to ensure all damages are accounted for and the valuation aligns with their understanding of the loss and their policy's terms. The final settlement amount reflects the adjuster's interpretation of the policy's terms and conditions and the actual cash value or replacement cost, as specified.

Hypothetical Example

Imagine Sarah owns a small business, "Green Thumb Landscaping," and has a commercial general liability policy. One day, a piece of her company's equipment, a small excavator, malfunctions and causes significant damage to a client's newly installed irrigation system. The client files a claim for the cost of repairing the irrigation system.

Sarah immediately notifies her insurance company. The insurer assigns a claims adjuster to the case.

1. Investigation: The claims adjuster visits the client's property to inspect the damaged irrigation system. They also review Sarah's policy to confirm that equipment malfunction and subsequent property damage are covered perils under her casualty insurance policy.
2. Information Gathering: The adjuster interviews Sarah, the client, and any witnesses to gather details about the incident. They might request maintenance records for the excavator and obtain estimates for the irrigation system repairs.
3. Damage Assessment: After reviewing the estimates, the adjuster determines the fair and reasonable cost to repair or replace the damaged sections of the irrigation system. They factor in the age of the system and applicable depreciation if the policy specifies actual cash value rather than replacement cost.
4. Determination: The adjuster concludes that the damage is covered by Sarah's policy and that the estimated repair cost is reasonable.
5. Settlement Offer: The insurance company then issues a settlement offer to the client for the agreed-upon amount, minus any applicable deductible from Sarah's policy.

Through this claims adjustment process, the insurer assesses the validity of the claim and determines the appropriate payout to the affected party.

Practical Applications

Claims adjustment is integral to the functioning of the entire insurance industry, impacting everything from individual policyholders to large-scale disaster recovery. In personal finance, it's how homeowners receive funds for repairs after a fire or storm, or how individuals get medical bills covered after an accident (though adjusters are less common for health claims)¹⁴. For businesses, claims adjustment facilitates recovery from business interruption or property damage.

In the wake of major events, the role of claims adjustment becomes even more pronounced. For instance, after Hurricane Katrina in 2005, which resulted in over $40 billion in insured losses, thousands of adjusters were deployed across affected states to assess damage and disburse funds¹³,¹². This massive undertaking demonstrated the critical role adjusters play in economic recovery following catastrophe risk events. The National Association of Insurance Commissioners (NAIC) plays a significant role in setting standards for adjuster licensing and reciprocity across states, ensuring a baseline of professionalism and facilitating the deployment of adjusters, especially during widespread disasters¹¹,¹⁰. The National Insurance Producer Registry (NIPR), an affiliate of the NAIC, further streamlines the licensing process for adjusters and other insurance professionals⁹.

Limitations and Criticisms

Despite its essential role, claims adjustment can face limitations and criticisms. A primary concern is the potential for conflicts of interest, especially when adjusters employed directly by the insurer prioritize the company's financial interests over the policyholder's full recovery⁸. This can lead to underpayments or prolonged claim processes. Policyholders may feel disadvantaged in negotiating with experienced adjusters who are trained to evaluate claims efficiently and, from the policyholder's perspective, potentially minimize payouts⁷.

Another criticism revolves around the complexity of some insurance policies, which can make it difficult for policyholders to fully understand their rights and obligations and challenge an adjuster's assessment. The claims process can be particularly challenging during large-scale disasters, where a surge in claims can overwhelm resources and lead to delays, inconsistencies, or disputes. For example, during the aftermath of Hurricane Katrina, issues arose regarding the formula used to calculate grants, leading to inequities and even discrimination lawsuits, where the pre-Katrina home value rather than repair cost influenced payouts⁶. While some legislative efforts, such as the Competitive Health Insurance Reform Act of 2020, have aimed to increase federal antitrust oversight in certain insurance sectors previously exempt, highlighting ongoing scrutiny of industry practices, most claims adjustment falls under state regulation⁵,⁴.

Claims Adjustment vs. Insurance Underwriting

Claims adjustment and insurance underwriting are two distinct but interconnected processes within the insurance lifecycle. Claims adjustment occurs after a loss event, focusing on investigating, evaluating, and settling claims based on an existing insurance policy. Its primary goal is to determine the insurer's financial responsibility and pay out valid claims.

In contrast, insurance underwriting takes place before a policy is issued. Underwriters assess the risk associated with an applicant and determine whether to offer coverage, at what insurance premium, and with what terms. Their goal is to ensure the insurer takes on profitable risks and maintains a balanced risk portfolio. While claims adjustment deals with the realization of risk, underwriting deals with the assessment and acceptance of risk. Both functions are crucial for the financial viability of an insurance company and are supported by principles of actuarial science and fraud detection.

FAQs

1. Who is an insurance adjuster?

An insurance adjuster is a professional who investigates insurance claims, inspects damaged property, interviews witnesses, and reviews documentation to determine the extent of loss and the amount an insurance company should pay under a policy³,².

2. Are there different types of claims adjusters?

Yes, there are typically three main types:

• Staff adjusters are direct employees of an insurance company and handle claims for that specific insurer.
• Independent adjusters are self-employed contractors hired by various insurance companies, often brought in during periods of high claim volume, such as after natural disasters.
• Public adjusters are independent professionals hired by policyholders to represent their interests in negotiating a claim settlement with the insurance company¹.

3. What should I do when an adjuster investigates my claim?

When an adjuster investigates your claim, provide all necessary documentation, such as repair estimates, medical records, and police reports. Be honest and cooperative, but also understand that the adjuster represents the insurance company's interests. It is advisable to thoroughly review your policy document and keep detailed records of all communications and expenses related to your claim.

4. Can I dispute a claims adjustment decision?

Yes, if you disagree with a claims adjustment decision, you have the right to dispute it. This can involve providing additional documentation, seeking a second opinion, or filing a formal complaint with your state's department of insurance. In some cases, alternative dispute resolution methods like mediation or arbitration might be pursued.