Insurance Claims Basics

1. Insurance is a system for transferring risk from people and organizations to insurance companies, which reimburse those people and organizations for covered losses.
2. A person or organization can transfer the risk of fire, accident, injury, death, and many other losses by buying insurance. A person or organization who buys insurance is the "policyholder." A person who is covered by an insurance policy is an "insured."
3. A policyholder pays money, a premium, in exchange for a promise by the insurance company to pay for losses covered by the insurance policy.
4. An insurance policy is a contract which specifies the terms of the promise to pay for covered losses.
5. People buy insurance for protection, peace of mind, and security against calamity.

1. Insurance companies are in business to make a profit.
2. Insurance companies charge premiums to:


1. Pay administrative costs: Personnel, offices, business supplies, advertising, etc.;
2. Pay claims; and
3. Earn profit.


3. Insurance companies must hold a certain portion of premiums, i.e., unearned premium reserves, to pay for covered losses until the insurance coverage has been provided. The unearned premium reserve belongs to the policyholder.

1. The declarations page. This page specifies the policyholder, the people and property covered, the time period for which coverage exists, the premiums, and the limits of coverage;
2. The insuring agreement; a specific statement of the insurance company's promises regarding coverages;
3. Conditions; describe the insurance company's and the insured's rights and duties; and
4. Exclusions, which describe exceptions to coverage, i.e., people, things, or events the insurance policy does not cover.
5. Some policies have a definition section.

1. A claim is a request by an insured to the insurance company requesting payment for the loss.
2. The insurance company employs individuals to "adjust" claims. These individuals are called adjusters or claims representatives.
3. Claim representatives should regard insureds as customers because the insurer owes a contractual obligation to the insured. As professionals, claim representatives should use their position, knowledge, and expertise for their customer's benefit.

1. Determines whether the policy covers the loss. She does this by obtaining the facts of the loss and then comparing the facts with the coverage provided by the insurance policy.
2. Confirms or denies coverage to the insured.
3. Makes an initial determination of the amount of the loss and sets reserves. Reserves are the insurance company's best estimate of the amount of money it will eventually pay for a loss.
4. Investigates and evaluates the claim.
5. Pays the claim.

1. The law recognizes the need for special protection of insurance policyholders from their insurance companies because:
1. People buy insurance for protection, peace of mind, and security against calamity;
2. The protection from calamity and financial ruin that insurance is supposed to provide is so important to the insured and to society;
3. Policyholders rely on the insurance company's integrity;
4. Insureds are at a disadvantage because they have little if any experience in handling insurance matters;
5. On the other hand, the insurance company is wealthy, sophisticated, and very experienced; and
6. Experience has shown that some insurance companies use their financial strength, sophistication, and experience to cheat their customers. For example:


1. Utah Supreme Court Justice Durham wrote the following regarding State Farm: "First, State Farm repeatedly and deliberately deceived and cheated its customers.... For over two decades, State Farm ... rewarded those insurance adjusters who paid less than the market value for claims. Agents changed the contents of files, lied to customers, and committed other dishonest and fraudulent acts in order to meet financial goals. ... State Farm's fraudulent practices were consistently directed to persons - poor racial or ethnic minorities, women, and elderly individuals - who State Farm believed would be less likely to object or take legal action. Second, State Farm engaged in deliberate concealment and destruction of all documents related to this profit scheme. State Farm's own witnesses testified that documents were routinely destroyed so as to avoid their potential disclosure.... Third, State Farm has systematically harassed and intimidated opposing claimants, witnesses, and attorneys."



2. Nevada Supreme Court Justice Charles Springer wrote regarding Republic Insurance: "It is difficult to envision in the business world anything more repugnant than the picture of a group of corporate executives charged with the management of a giant insurance company sitting down to plan how the company can prosper by refusing to pay legitimate claims. Imagine: 'First, we will take every claim and reduce it to sixty-five percent of what we think the claim is actually worth. Then, by delay, harassment, and intimidation we will force claimants to accept an amount lower than sixty-five percent of the claim's true value if possible. This scheme will work particularly well in cases where claimants are short of money and must accept inadequate compensation in order to survive'."
2. Along with the profits obtained from insurance premiums, insurance companies must accept the responsibility to be fair and honest with their customers and follow the law.
3. The law requires an insured's company:
1. Be fair, open, and honest with the insured.
2. Inform the insured of all facts which might affect her rights or interests.
3. Avoid any conflict between its interests and its insured's interests.
4. Be loyal to the insured and her interests.
5. Promptly pay benefits that are not disputed.
6. Comply with the insured's reasonable requests.
7. Avoid misrepresenting or concealing facts to gain an advantage over its insured.
8. Fully and accurately disclose all pertinent benefits, coverages, or other provisions of the policy.
9. Reply within 20 working days after receipt of a communication from an insured which suggests a response is expected.
10. Adopt and implement reasonable standards for the prompt investigation and processing of claims.
11. Affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted.
12. Make a prompt and fair settlement after its duty to pay has become reasonably clear.
13. Inform its insured what coverage payments are made under.
14. Promptly explain why it denied an insured's claim.
15. Promptly explain its offer to settle or compromise an insured's claim.


4. The law prohibits an insurance company from:
1. Refusing to settle with an insured on the basis that responsibility for payment should be assumed by others, except as provided by policy provisions.
2. Forcing an insured to file a lawsuit to recover amounts due by offering substantially less than the value of the claim.
3. Attempting to settle an insured's claim for less than a reasonable person would have believed he was entitled by reading written or printed advertising material accompanying or made part of the insurance application.
4. Attempting to settle an insured's claim on the basis of an application which was altered without the insured's knowledge or consent.
5. Delaying the investigation or payment of an insured's claim by requiring the insured or the insured's physician to submit a preliminary claim report, and then requiring the submission of proof of loss forms which contain substantially the same information.
6. Failing to settle an insured's claim promptly, after its duty to pay has become reasonably clear under one portion of the insurance policy, in order to influence settlement under another portion of the policy.
7. Advising an insured not to talk to a lawyer.
8. Misleading an insured concerning any time limit within which a lawsuit must be filed.
9. Treating an insured differently because of her age, sex, race, national origin, or level of education.
10. Placing its interests above the insured's interests.

1. If an insured's company violates the law she has a right to sue.
2. In addition to the insurance benefits an insured is entitled to, her insurance company may have to pay for stress, attorney's fees, and other harm it caused by treating her unfairly or dishonestly. These are called "compensatory damages," and they are paid in addition to payment for the insured loss.
3. An insured may have a right to have the insurance company pay her an amount to punish its wrongful conduct, if:
1. It gave her false information;
2. Knowingly ignored her rights subjecting her to cruel and unjust hardship;
3. Intentionally harms her; or
4. Obnoxiously disregarded her rights.

These are called "punitive damages," and they are assessed in addition to the insured loss and compensatory damages.

1. Health insurance: A 59 year old man suffered a stroke. His wife requested $9,600 in benefits under his health insurance policy. The insurance company denied the claim immediately, without conducting any investigation, although it claimed in a letter to the wife that the claim had been given "careful consideration." The wife submitted the claim three more times. The company failed to obtain accurate and complete medical records, conducted no independent investigation, and failed to fairly evaluate the medical evidence it possessed. The company continued to deny the claim by clinging to a restrictive definition of "accident" as used in its policy. The company tried to convince the couple that the company had diligently sought to validate and honor their claim, but could not do so because the event upon which the claim was based was not covered by the policy. The man and wife sued for bad faith and were awarded their policy benefits, $200,000 in compensatory damages, and $6,000,000 in punitive damages.



2. Disability insurance: A woman bought long-term disability insurance. She was injured, had multiple surgeries, and was unable to work. She applied for long-term disability benefits. The insurance company did not investigate but denied the claim. The woman sued and was awarded $27,000 in benefits, $100,000 for emotional distress, and $16,500,000 in punitive damages.



3. Homeowners insurance: A homeowner returned from a weekend trip to a home that had been extensively damaged by vandals and thieves. His insurance company refused to pay the total cost of new furniture, and said it would pay only sixty-five percent of the cost of reupholstery because the homeowner lacked ownership documentation - even though there was no question of ownership. A company adjuster said it was customary for the company to begin negotiations at a reduced figure, leaving it to the policyholder to argue for more. The insurance company did not pay any amount for four months which created financial difficulties and resulted in the homeowner's divorce. The company interviewed the homeowner's neighbors, and asked questions about his wife's alleged extramarital activities and possible involvement in the burglary. The company finally paid $7,238. The homeowner sued for bad faith and was awarded $401,000 in compensatory damages and $22,500,000 in punitive damages. The punitive award was reduced to $5,000,000 on appeal.



4. Property insurance: A boat owner made a claim after his boat sank. His insurance company accused him of intentionally sinking the boat and caused insurance fraud criminal charges to be filed against him. He was acquitted and sued his company for bad faith. He was awarded $350,000 compensatory damages and $5,000,000 in punitive damages.



5. Automobile insurance: A husband and wife were injured by a car. The negligent person did not have enough insurance to pay for all of the harm, so the couple made a claim against their automobile under insurance coverage. Their insurance company required them to submit to a medical examination. The company paid the couple their policy limits, but did not pay approximately $4,000 for the exams it required. The doctor who performed the exams sued the couple, and the couple sued their company for bad faith. They were awarded $150,000 in compensatory damages and $1,000,000 in punitive damages. The punitive award was reduced to $250,000 on appeal.