Seminar on Insurance Issues given by Jared Stolz, Esq.

The insurance claims adjuster must always ascertain that the owner of the property is the person insured and that the person insured has an interest the property.  Failure to do so could result in payment to the wrong person. 

The Declarations Page:

The declaration page tells the adjuster the name of the insured(s), the effective dates of insurance, the policy limits, the location of the property, the different policy forms applicable, the identities of morgagees and others with an interest, whether the policy is new or a renewal, and deductibles and/or coinsurance provisions applicable.  The adjuster must read all of the words in the policy, keeping in mind the information, description, and limitations shown in the declarations.

What is a “direct physical loss”?

A simple rule for determination of “direct physical loss” – was the property damaged in some way?  Is the answer is “Yes”, there is a direct physical loss.

Processing  A Claim

The first person an insured meets with when he or she suffers a loss is the adjuster (or a Public Adjuster).  The claims adjuster will help the insured prove the loss to the insurer and get the indemnity promised by the insurer.  The adjuster will investigate the loss, interpret the policy wording, and apply the policy wording to the facts discovered in the investigation.

  1.  Property
  2.  Read the Policy

To understand a first party property policy of insurance the adjuster must read and analyze the policy in a logical and thorough manner.  The adjuster must know what coverage is available to the insured, the limits of the policy, and the exclusions, conditions, and endorsements attached. 

  •  Read the Loss Notice

The loss notice is one of the most important documents the adjuster will see.  It is the starting point of all claims.  It tells the adjuster:

  1.  When the loss occurred
  2. The type of coverage the insured has
  3. The type of Loss
  4. The insured’s name, address, and telephone number
  5. The agent’s name and address
  6. The location of the loss
  7. Who to contact and how to contact him or her; and
  8. Whether there is anything to which the adjuster should give special attention.
  9.  Meet With the Insured and Witnesses

Once the adjuster has completed this basic preparation, he or she should arrange to meet or have another adjuster meet with the insured and witnesses.  The adjuster should explain to the insured that the policy required the insured to prove his or her loss to the insurer.  The insurer, in order to provide the best service possible and to act in good faith to its insureds, hires the adjusters to help the insured prove his or her loss.  The adjuster can not prove the loss for the insured, he or she is only present to help the insured.  To act in good faith the adjuster must not do, or fail to do, anything that will deprive the insured of the benefits of the policy of insurance.

If applicable, obtain a Recorded Statement with regards to the cause of the loss.  The adjuster needs to have answers to the most important questions: who, what, where, why, when and how, with regard to the policy and the loss.

  •  Establish the Amount of the Loss and Claim
  •  The Scope of Loss

To aid the insured in his or her obligation to prove the loss, the adjuster must, on the first visit, establish the insured’s exact scope of loss.  This means that the adjuster and the insured (or PA) must walk through the insured’s house or business and agree to exactly what was damaged and destroyed as a result of the peril insured against.

The adjuster can get this agreement orally with a tape recorder or write it down on paper.  The scope of loss must be detailed.  Descriptions, including room dimensions; materials, like moldings, flooring, wall coverings, and fixtures; and information about special features, openings, casements, detailing moldings, and other architectural features must be part of the scope of loss.  The scope of loss must be complete.

The adjuster must never:

  1.  Take a quick look around and ask the insured to fill out a property loss form at his convenience
  2. Leave the insured with blank forms, except for supplemental items learned of after the initial scope was completed
  3. Take a partial scope and attempt to do the rest later
  4. Rely on the expertise of the insured’s public adjuster; or
  5. Rely on a contractor to establish the scope

     The adjuster must walk through the entire scene of the loss with the insured and obtain an agreed scope of loss.  He or she must advise the insured that the adjuster will be retaining experts in the valuation and repair of the type of property that is involved.  These experts will bid on the repair and replacement from the agreed scope.  The adjuster must present the insured with a copy of the agreed scope, and inform him that he may, if he wishes, obtain similar opinions based on the same agreed scope.

                             Photograph the Scene

                             To substantiate the agreed scope, the adjuster must photograph the scene – both the

                             Damaged and undamaged portions of the property – that is the subject of the loss.  The                                     adjuster must take a complete photographic and written inventory of the loss scene.    

                             The adjuster must take photographs of everything damaged, any possible source of

                             Ignition of a fire, or any other peril that may have caused the damage and those things

Not damaged.  If the scene is extensive, the adjuster should consider hiring a professional to do a video inventory of the loss location.  If the list of contents is excessive, the adjuster should consider the services of a salvor to inventory and price

Each item of inventory, whether damaged or not.

Contact Authorities

Contact must be made with the official investigating officers, either police or fire arson investigators.  Personal contact is necessary to gain more than cursory information from a report.  The prudent adjuster cultivates a relationship with official investigators.  If the adjuster shows an interest in their work and an inclination to help, the investigator will more readily share information with the adjuster.  The adjuster who demands information from a police or arson investigator will invariably be met with a refusal to comment.  The adjuster should collect as many investigation reports as are available and may purchase photographs taken by the official agency.  When an arson fire happens, both the arson unit and the local police force will be on hand and both will be taking pictures.

On a large fire loss, a cause and origin expert should be brought in immediately to investigate.

Determine Values

The adjuster should obtain from the insured any photographs, videotapes, or motion pictures the insured or its employees may have made of the loss.  The adjuster must determine the actual cash value of all the property insured.  If a replacement cost value endorsement applies, the adjuster must also determine the full cost to repair or rplace the items with like, kind and quality. 

Additional Living Expenses

If additional living expenses are involved, the adjuster must instruct the insured that the coverage is for “additional” expenses incurred over normal expenses.  Therefore, the adjuster must obtain the amounts of the insured’s normal expenses for:  mortgage payments, electricity, gas, water, trash pick up, gardening, laundry, food, eating out, entertainment, travel, dry cleaning, property taxes, and any other continuing usual household expenses.

Other Considerations

The adjuster must confirm that the co-insurance, or reporting provisions have not been violated.  He or she obtains authority to agree with the insured as to the amount of the loss and obtains from the insured a signed Proof of Loss of property, executed before a notary, under oath, or signed under penalty of perjury.

The adjust should obtain a subrogation agreement since almost every loss has a potential for subrogation, and then issue a settlement draft in the amount agreed in the proof of loss.

The adjuster concludes with recommendations for the pursuit of subrogation if applicable.

If the loss is extensive, the adjuster may need to hire a salvor to perform a complete inventory for the insurer.  If a structure is involved a construction consultant or contractor could be retained to advise the adjuster and, for a fee, to prepare a detailed scope for the benefit of the adjuster and the insured.

There should be agreement with the insured as to what was left after the loss and what work needs to be done.  If the adjuster does not have an agreed scope of loss at the beginning of an adjustment the loss will, invariably, be larger when it is finally put together by the insured or the PA.  AN AGREED UPON SCOPE BETWEEN THE ADJUSTER AND THE INSURED IS CRITICAL.

With regard to personal property, the adjuster will help the insured obtain verification of the values of the property and descriptions.  The adjuster will develop sources that can establish values of certain classes of personal property.  The can be accomplished by way of retail catalogs, and/or internet.  The adjuster can also find jewelers, furriers, art dealers, computer stores, and the like who will take to adjusters on the telephone about values. 

With the aid of the insured, the adjuster must prepare as part of the agreed scope, a list of all the damaged or destroyed personal property showing its description, age, cost, fair market value, actual cash value, or depreciated value.

Duties of the Adjuster

The adjuster provides the service promised by the insurance company.  The adjuster is the living embodiment of the insurance company:  this is the person the insured meets when he faces a loss and needs help.  It is the adjuster, and the help he or she fives the insured, that is the essence of the promise made by the insurer when the policy is issued.  Without this service insurance becomes meaningless.

The property adjuster has a duty to:

  • Help the insured prove the loss to the insurer;
  • Help the insured understand the terms and conditions of the policy; and
  • Conduct a thorough investigation to determine if a third person is responsible for the loss so that subrogation can be instituted to recover, in addition to the money paid by the insurer, the deductible or other non-covered portions of the loss.

The adjuster must also understand the methods of construction of buildings of all types, and labor and material costs in his or her geographical area, in order to fulfill his or her duties.

The Public Adjuster

Public adjuster is a person who, for compensation, acts on behalf of or aids in any manner, and insured in negotiating for or effecting the settlement of a claim or claims for loss or damage under any policy of insurance covering real or personal property.  

The contract the PA has the insured sign appoints the PA as the agent of the insured for the purpose of making the claim and gives the PA a lien against the proceeds.  The basic common law of the United States allows an agent to act for a principal.  The PA therefore acts as agent for the insured, the principal under the PA contract.  The PA, by assignment steps into the shoes of the insured.  As the assignee of the insured the PA is entitled to be treated with the same good faith the adjuster would give the insured.  The adjuster should meet the PA at the loss location as soon as possible after the loss, at which time they will both agree on the scope of the loss.  The PA should then be advised that the insurer expects the PA to present the insured’s sworn proof of loss within 60 days after the loss.

Reasonable extensions can be granted, but the PA should be made aware that the adjuster expects to close the file promptly and will not accept unseemly delays.  If the PA is unwilling, or unable, to prove the loss within a reasonable time, counsel may be retained for the purpose of examination under oath of the insured and for the purpose of making formal demands on the insured and the PA for documents that support the loss.

Common Mistakes and Omissions to Avoid

  1.  Establish a Complete Scope of Loss

The scope of loss is an agreement between the property adjuster and the insured concerning the general scope of damage caused by the fire or other casualty.  Without a complete and agreed upon scope of loss the adjuster would enter the adjustment blind, negotiations would be difficult, and the time needed to conclude the adjustment would increase.  The scope of loss, created and agreed to as soon as possible after the loss is discovered, is necessary to limit the rights and obligations of both the insured and the insurer.  It is a truism that the more time that passes after a loss and before an agreed scope of loss is reached, the larger the final claim settlement.

  1. Calculate Actual Cash Value

If the policy provides for replacement cost less depreciation cost, the adjuster must compute the actual cash value because almost all replacement cost policies require actual reconstruction before replacement cost can be paid.  Paying replacement cost before actual reconstruction is complete places an unbearable burden on the insured who will be sorely tempted to perpetrate a fraud.  Paying the actual cash value early allows the insured to fund the rebuilding so he or she can collect the full replacement when it is due.

If the policy only provides limits up to the actual cash value, the adjuster must take depreciation into account or otherwise compute an actual cash value loss.  Actual Cash Value is the replacement cost less physical depreciation.

  1. Do Not Confuse Theft or Mysterious Disappearance with “Lost,” “Missing”, or “Mislaid”

Although theft and mysterious disappearance are often named perils, merely mislaying or losing something is not a covered peril.  The adjuster must establish the efficient proximate cause of the loss.

  1. Determine if Coverage Has Been Suspended

Coverage for vandalism is suspended by vacancy or unoccupancy in many policies.  Coverage can also be suspended for various other reasons including a lapse in coverage due to temporary cancellation for non-payment, or the temporary failure of a warranted security device.  The adjuster, as an investigator, must determine facts, regardless of the size of the loss.  Failure to do so is a breach of duty of the adjuster to the insurer and the insured.

  • Properly Interpret Coverage

If an exclusion applies it should be applied to both large and small losses.  In small losses adjusters sometimes ignore policy conditions and exclusions.  If the exclusion is not applied, the excluded loss that is paid may come back as a large loss a month later and the insured can rightfully claim a waiver of the exclusion.

Accumulated cigarette burns to furniture or fixtures are not a “fire” loss.  Poor housekeeping or maintenance is not “fire” nor is it “vandalism”.  Insurance is designed to protect against the unusual, unexpected, and accidental loss.  Multiple cigarette burns, usually caused by carelessly setting cigarettes down on pieces of furniture are not fortuitous losses but rather losses that were expected from the standpoint of the insured.

  • Apply the Deductible

Premiums are computed based upon the fact that the first few dollars of a loss will be paid by the insured.  If the adjuster fails to acknowledge the deductible and apply it to the final loss, the purpose of the deductible is lost.  Deductibles were created to avoid paying for small losses and as a means to keep premiums low.

  • Determine the Purpose for Which the Property is Used

“Business or Professional” property cannot be claimed under personal coverages, over the policy limit listed in the policy.  Regardless of the size of the loss, the adjuster must inquire as to the purpose for which the property is used.  Failure to inquire could provide a windfall to an insured for which he or she did not pay a premium.

  • Apply the Co-insurance Clause, if Applicable

Most first party commercial property policies contain co-insurance that require an insured to maintain insurance equal to the value of the subject property.  If the insured fails to do so he or she becomes co-insurer with the insurance company based on the proportion the true value bears to the amount of insurance.  The failure of the insured to pay an appropriate premium is unjust to the insurer if the co-insurance clause is not property applies.  If a loss is small, the temptation to close the file quickly could cause the adjuster to fail to determine the values at risk and therefore fail to detect that the insured has not complied with the co-insurance clause.  This failure could be very expensive to both the insured and the insurer in the event of a later large loss since the insured could then claim that the insurer waived its right to apply the co-insurance clause.

  1. Leased Property

The adjuster must establish obligation with respect to improvements and betterments to leased property.  Every lease of real property should include a provision that determines who has the ownership of, and takes the risk of loss with regard to, improvement and betterments placed by the tenant.  The adjuster must determine if there is other coverage referred to in the lease provision or if some party other than the insured has agreed to accept the risk of loss.  The adjuster must establish these obligations on every adjustment, regardless of the amount of the loss.

  • Prior Losses

The adjuster must ask the insured about prior losses.  Almost every application or insurance inquires about prior losses or claims.  If the adjuster does not ask, the adjuster will never learn whether the insured truthfully responded to the questions posed at the application stage of the insurance.  If the insurer has prior losses and concealed this information from the insurer, a defense to the entire claim may exist.  If the adjuster does not ask, a material misrepresentation that may have been sufficient to support a recission of the policy, or to declare the policy void.

If, at a later date, a second claim is presented, the insurer can be found to have waived its right to rescind or declare void because it know, or should have known, of the defense at the time the first claims was adjusted.  Losses can occur without a claim being filed.  Insured’s are not obligated to inform their insurer about all the losses, whether they resulted in a claim or not.

  • Previous Unrepaired Damage

The adjuster must determine whether the claim is for previous, unrepaired damage.  The adjuster must investigate to find out if there is charred wood behind new drywall, grass growing in cracks, accumulations of dust where the television allegedly stood before it was stolen, etc. that reveal old damage or losses that precede the effective of the policy.

  • Determine if the Insured Reported the Theft to the Police

Failure or refusal by the insured to report a theft loss to the police is a breach of a policy condition that would deprive the insurer of its rights of subrogation.  It would also deprive the insurer of it s salvage rights if the policy recover the stolen property and they have no record of the articles or to whom they should be returned.  The insured may not have reported to the policy to avoid prosecution for filing a false police report.  The most prevalent fraudulent claims are small claims.  A small fraudulent claim can be defeated if the adjuster insists that the insured fulfill the policy requirement and report the loss to the police.

  • Secure Salvage

Every policy of insurance includes an equitable right of salvage, even if it is not written.  The insurer, by paying the insured for the loss of the insured’s property, becomes the equitable owner of that property and should be able to sell it to reduce the amount of the net claim paid.  Allowing the insured to reap the benefit of the salvage provides the insured with a windfall for which he or she has not paid the premium.  Protection of the salvage is extremely important in the adjuster of a large loss.  Salvage recovery can reduce the total amount of the loss considerably.

  • Identify Subrogation

The adjuster who is so involved in the adjustment of a loss that he or she fails to identify subrogation possibilities is costing the insurer money.  Subrogation possibilities in almost every loss if the adjuster has an inquisitive mind.  Small subrogation claims are easier to collect than large ones and can make a considerable difference to the insurer.  Consider that subrogation collected on only 100 $1,000 claims will generate $100,000 for the company.

  • Complete a Thorough Investigation

There is no excuse, regardless of the size of the loss, for failing to complete a thorough investigation.  Most insurance frauds are small and consist of inflation of the depreciation or value of the item that is the subject of the claim.  It is not unusual for a black and white television to be reported stolen as a color television so the insured can obtain the extra dollars necessary to pay the deductible amount.  Thorough investigation may discover this inflated claim.  A thorough investigation will also make it possible for the adjuster to pay the honest insured every dollar of indemnity to which the insured is entitled.

  • Do Not Over-or-Under Investigate

Adjusters tend to over-investigate small claims and, when faced with a large, complex claim, try to make it simple by not completing a thorough investigation.  If the claim is large, and an engineer, fire cause expert, private investigator, and attorney are needed to assist the adjuster in completing the investigation, they should be retained.  However, it may not be necessary to retain a private investigator and an expert to investigate a $1,000 claim.  An under-investigated large loss may save money on the expense side but will usually cost more on the indemnity side.  An adjuster should not spend the same amount of time investigating a $1,000 claim as a $100,000 claim.  Claims judgment includes a reasonable use of the time available.  Regardless of the size of the claim, a thorough investigation is required.  However, it takes less time to thoroughly investigate a small claim.

  • Exercise Claims Judgment

The adjuster must determine if the facts recited by the insured as repeated in the adjuster’s report are credible.  The adjuster must evaluate the insured to determine if his or her demeanor (like body language) coupled with the statements of fact are believable.  If the statements of the insured do not appear credible or the physical evidence does not support the insured’s rendition of the facts, a thorough investigation will either prove or disprove the insured’s statements.  Every statement of fact should, if possible, be corroborated.  Some adjusters, when faced with what they consider a “small loss” will close the file quickly as possible and ignore incredible facts, overvalued property, or facts that would take the claim outside coverage.  Fraudulent claims or claims that are excluded are not necessarily large.

  • Provide Prompt Service

The insured required prompt service.  Failure to provide prompt service in a loss will make it impossible to complete a thorough investigation, to obtain a complete scope of loss, and to verify whether subrogation or salvage exists.  An insured with a small claim requires the same prompt service as an insured with a large claim.

  • Clarify the Final Details of the Loss

An adjuster must ensure that the payment draft or check is issued to proper parties.  Each named insured, mortgagee, or lien holder must be named on the draft or check.  The check must protect the interest of the insured’s public adjuster or attorney and the insured’s contractor.  Every person with an interest in the money paid to indemnify the insured should be named on the payment unless they specifically, and in writing, ask that they not be named.

The adjuster must obtain authorization from the insured to pay repairmen or to include their names on the settlement draft.  Repairmen are not parties to the insurance contract.  They can only be named on a settlement check or draft if the insured has signed an authorization asking the insurer to name them.

  • Establish Whether the Property was Over-or-Under-Insured

The adjuster is part of the underwriting function.  Since the adjuster sees the property at the time of the loss, he or she is the best source of information that an insurer has concerning the insured and the property. 

  • File Questionable Risk Reports

If the adjuster sees a serious danger of future losses when the property is inspected it is the adjuster’s duty to report what was observed to the underwriter so that the danger can be evaluated and avoided.  For example, an adjuster visiting an insured’s home concerning a water leak learns that the insured keeps five vicious dogs who attempted to remove the adjuster’s leg at the ankle.  A questionable risk report should be filed to advise the underwriter of the danger of liability claims in the future.  Likewise, if the adjuster is investigating a slip and fall on the insured’s property and sees that the roof is deteriorated and bound to leak in the next rain he or she should file a questionable risk report to advise the underwriters of the potential risk of future losses.

  • Obtain the Proof of Loss

The adjuster must advise the insured of his or her obligations under the policy, including the obligation to submit a sworn proof of loss within 60 days of the date of the loss.  The proof of loss is a key document that should be obtained and executed under oath by all insured on every loss.  A proof of loss is the sworn statement of the insured required by the conditions of the policy of insurance.  It sets forth the insured’s knowledge and belief as to the date, time, and cause of the loss; the encumbrances on the property, the persons with an interest in the property; the value of the property; the amount of loss; and the amount of claim.

Adjusting the Commercial Loss

The building and personal property coverage form is the simplest form available for use in insuring specified building and contents.  It insures the insured against the risks of loss to the building from the perils that the insured chooses from those specified in the causes of loss form.

The adjustment of a commercial loss is performed in the same manner as any other property loss.  The difference is one of tone rather than substance.  Adjusters who usually deal with a business entity, and its officers or employees, rather than an individual find claims handling is easier.  The adjuster has knowledge of the business and the people who operate the business.  Familiarity and a good working relationship over a period of months or years benefits both the insured and the insurer.

A fire can be devastating for a business if it is not rapidly put back to work after a loss.  The adjuster must recognize this fact and act quickly to complete a fair and thorough investigation.  To adjust the commercial property loss the adjuster must be familiar with the coverages.  An adjuster must always be absolutely certain which endorsement apply to the insured.  The adjuster reviews the loss notice and re-reviews the coverages to ascertain which coverages apply to the type of loss reported.  He or she makes immediate contact with the insured so that he or she may inspect the loss.

If there is a potential loss of earnings it is important to collect as much business documentation as possible so the history of the business can help to determine the amount of loss.  Loss of earnings vary greatly.  It is important that the terms and conditions are explained to the insured and that the adjuster should collect documents for analysis, possibly by a forensic account, including:

  • Four years of profit and loss statements and balance sheets
  • Bank account statements and canceled checks;

continue, leases, contracts, and any other relevant business documents; and

  • If business information is kept on computers, the software used and a backup copy on a disk.

Adjusting Condominium/Unit Owners Losses

When determining coverage on a unit owners policy, coverage is determined by reviewing the associations’ bylaws/master deed and referring to the unit description (unit owner) and the description of the common elements (associations’ responsibility).

At present time, a majority of Mercer’s association policies are written under the MMP107 (Single Entity Endorsement) or the MMP108 (Bare Walls Endorsement).  If the policy contains either one of these endorsements, then the endorsement over-rides the description of the common elements, when adjusting a Condominium Association policy.

Reservation of Rights/Non-Waiver Agreement

If, at any time in the investigation, it appears that the loss is suspicious, that the co-insurance clause may come into effect, that there may be a penalty under the reporting form, or that a condition or warranty in the policy may have been violated by the insured, the adjuster must immediately ask the insured to sign a non-waiver agreement.  This is a mutual agreement between the insured and the insurer that nothing done in the investigation of the claim will act to change the positions of the parties or waive any of the rights either party has under the contract.  If the insured refuses, the investigation must be stopped until the adjuster can deliver a reservation of rights letter to the insured.  The investigation continues pursuant to the reservation of rights.  The non-waiver agreement and the reservation of rights letter are equally effective for maintaining the status quo while the investigation is being conducted; however, the non-waiver is preferred because it is a mutual agreement between the insured and that insurer while the reservation of rights is a unilateral statement to the insurer.

Jared Elliott Stolz is an attorney in New Jersey, focusing on insurance law and litigation.

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