CLAIMS EVALUATION

CLAIMS EVALUATION

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INTRODUCTION TO THE CLAIMS EVALUATION COURSE

Welcome to the course on Claims Evaluation. 

The goal of this course is to provide you, the insurance adjuster or insurance agent, with relevant and adequate knowledge on claims evaluation issues. You should be able to comprehend the fundamentals of claims evaluation by the end of this Claims Evaluation course, which include, but are not limited to, its definition, its purpose, when it is implemented, how it is effected, who effects it, and the concepts underpinning it. 

Please keep in mind that the materials of this course are just intended to provide general information and an overview of the course. Due to the dynamic character of the law, which is constantly growing and differs from jurisdiction to jurisdiction, the course will not be able to cover all of the elements related to claims evaluation. As a result, you are encouraged to augment your knowledge with further materials on the subject. 

The following is a list of the course’s topics and objectives: 

1. Definition and types of Claims
2. Definition of Claims Evaluation
3. Valuation Clause
4. When is the Claims Evaluation conducted and who conducts the Claims Evaluation?
5. Process of Claim Evaluation
6. Claim reserve
7. Evaluating Liability vs Evaluating Damages
8. Distinction between the various types of Adjusters
9. Additional stakeholders in the Claim Evaluation process
10. Benefits of claim evaluation
11. Distinction between Insurance Appraisal and Claims Evaluation
12. Wrongful denial of claims and underpayments
13. Claims Evaluation Software
14. Fraud detection and prevention

Definition of Claims Evaluation

What is a Claim

When a policyholder submits a formal request to an insurance company for coverage or compensation for a covered loss or policy event, the request is known as an insurance claim.

Insurance claims fall under two (2) main categories;

1. First Party Claims
2. Third Party Claims.

First Party Claims

First Party Insurance involves a Contract between the Insurer and the Policy Holder and creates a fiduciary relationship

In First Party Claims, a policy holder makes a claim directly against their own Insurance Company seeking compensation based on their policy’s terms and conditions.

Third Party Claims

Third Party Claims are brought by a third party (a person other than the policy holder) alleging losses and damages caused by the policy holder to a 3^rd party or their property.

Common examples of third party claims include;

1. General commercial liability coverage.
2. Homeowner’s liability coverage for personal injury caused by the policyholder.
3. Insurance coverage for liability under an auto policy.
4. Umbrella insurance policies.
5. Animal liability insurance.
6. Commercial auto liability coverage.
7. Product liability insurance.
8. Professional or public liability insurance.
9. Liability insurance for directors or officers of a company.

In Third Party Claims, the claimant files a claim against the insured party and not the insurance company itself. 

The Insurer does not have a contract with the third party and does not owe a fiduciary duty to the third party/claimant. Instead the Insurer owes this fiduciary duty to the policy holder to handle the claim in good faith.

The claimant or their lawyer sends a letter called a Stowers demand to the insurer.  The letter proposes to settle claims against the policy holder for an amount within their policy limits upon the determination of liability of the policy holder. In this case, the value of the claim has to have exceeded the limits of the insured’s policy.

Each State regulates their own insurance industry including the areas of claims evaluation, with each state formulating its own set of statutes and rules

The claim evaluation procedure entails three key stages: ​ investigation, evaluation,​and settlement (disposition).​ The Adjuster will create an adequate reserve, assess the loss to determine how much should be paid on the claim, and satisfy the claim after researching it and determining that it is covered, either in full or in part.

The term “insurance valuation” refers to a provision in many insurance policies that stipulates the amount of money that will be paid to the insured in the case of occurrence of a covered loss.

It basically sets out the grounds upon which a claim will be paid, as well as the amount that will be paid. A claim payout is essentially determined by the provisions of this part of the policy.

To avoid the risk of underpayment of the appropriate amount, it is critical that the adjuster use the relevant provision while appraising a claim.

Insurance companies and their adjusters place reliance on what are known as ‘claims manuals’(Also referred to as Guidelines, Standard Operating Procedures, Handbook, Claims’ Professionals’ Guide, Claims Guidelines, Best Practices) to guide them in the process of  handling insurance claims and set minimum performance requirements.

If an insurance company does not have a claims manual and/or does not follow the proper procedure as outlined in the guidelines, they may find themselves in serious trouble. Clients can allege that the insurer acted in bad faith by failing to fairly, timely, or adequately evaluate their claim through the absence of a claims manual or a failure to follow the prescribed procedure.

Claims manuals can cover a wide range of insurance coverage areas such as automobile claims, general liability claims, equipment breakdown claims, property claims just to name a few.  

A good claims manual needs to:

1. Be updated, reviewed and vetted regularly to reflect current practices and standards.
2. Be available in electronic format so that adjusters can access it online.
3. Be very clearly that the manual is simply a guide and not a book of rules to be followed mechanically or blindly, regardless of the case.

It is necessary to evaluate claims in order to determine the monetary value of the claims and what is covered by the insurance policy. The Insured will desire the highest amount of money that may be recovered under the Claim, while the Insurer will want to pay as little money as possible under the Claims process. 

In Claims Evaluation, one may need to factor in whether there is a deductible or a self-insured retention (SIR). Where there is a deductible policy, the Insurer pays for the Insured’s losses and then gets reimbursed by the Insured up to the deductible amount. In the case of a SIR, it requires the policyholder to bear a portion of a covered loss before the Insurer’s obligations are triggered; the Insurer’s duties, including the responsibility to defend, do not begin until the insured has spent a specific amount on defense or indemnity costs.

The Insurer should act in good faith while conducting the Claims Evaluation. In Travelers Ins. Co. v. Lesher, the Court stated that deferred payment based on incomplete or late investigations, oppressive claims adjuster behavior aimed at reducing legitimately payable amounts, and a variety of other tactics may violate the implied covenant because they frustrate the insured’s right to receive the contract’s benefits in prompt compensation for losses.  As held in Gruenberg and Gray v. Zurich Insurance Co, the duty of an insurance firm to operate in good faith toward its insureds entails not withholding benefits that are due under a policy in an unreasonable manner. When an insurance company refuses to pay for a loss that is covered by the policy without good reason, it is acting in bad faith.

Valuation Clause 

Insurance companies have a Valuation Clause that specifies the amount of money the policyholder will receive from the insurance provider if a covered event occurs.  In the case of a loss for an insured property, this provision specifies a predetermined amount to be paid. A valuation clause might use a variety of approaches, such as agreed value, replacement cost, stated amount, or actual cash value. The most common is the actual cash value, which means that the amount paid for a claim is equivalent to the insured’s item worth. An insurer will look at the item’s current market cost and depreciation to calculate the actual cash value.

The replacement cost is the cost of repairing or replacing a property to the same or comparable quality as the original. These costs are subject to vary as market prices fluctuate. Replacement cost coverage does not take into account the property’s depreciation. The maximum worth of an item placed on the property by the policyholder at the time of writing the contract is referred to as the stated value amount, which is frequently found in automotive coverage. If you sell the property, this is the price you’ll ask a buyer to pay. However, most stated value policies include a provision that allows the insurer to pay the lesser of the stated value or the actual cash value in the event of a loss. 

An agreed value policy will specify the worth of a property being insured through an agreed amount. The agreed-upon value can be a reasonable market value or any other amount that both the insurer and the insured agree on. A market value provision is a component of a policy that determines the market value of insured asset rather than the actual or replacement cost.

When anything is insured for less than its true replacement value, under-insurance occurs, resulting in insufficient insurance coverage. If the Insured is underinsured and needs to file a claim, the Insurer may terminate the policy and reimburse any premiums paid. Any money paid out for earlier claims may be recovered by an Insurer in rare instances. The Insured may also be eligible for a reduced claim payout. ‘Average clauses’ are common in insurance plans, and they allow the Insurer to decrease its exposure for a claim by applying a proportionate settlement, or ‘apply average’; the underinsured amount will be used to settle the claim. 

When is the Claims Evaluation conducted and who conducts the Claims Evaluation?

Process of Claim Evaluation

The first step an insurance company takes after a claim has been lodged (first or third party claim) with it is to assign an adjuster to the claim.

The adjuster will then be expected to open a claim file and collect the necessary and relevant information depending on the type of claim and the coverage. This may entail processes like visits to the site of damage, interviewing of the Claimant and any witnesses available, review of police reports, consultations with appropriate experts on various aspects of the case and any other steps that may be necessary to undertake investigation of the claim.

After receiving all the necessary information and evidence necessary to make an informed decision, the adjuster will then be expected to prepare a report for the insurance company giving details about all the facts of the claim and making a recommendation of the amount of compensation, if any, that the Insurer should give to settle the claim.

The adjuster is also the individual responsible for analyzing the policy to establish if there are parts of the claim made that are not covered under the policy and for which the Insurer should not bear any responsibility. 

Adjusters handle claims depending on the insurance company they are working for and its policies and claims manual. Some Insurers will permit their adjusters to pay out small claims expeditiously under express settlement process or through an online claims process.

Claim Evaluation can also be defined as;

A process undertaken by Claims Adjusters, Appraisers, Investigators, and Examiners. It is conducted after an insured makes a claim. The Claims Adjusters, Appraisers, Investigators, and Examiners conduct due diligence on the Claim to establish: its existence, and genuineness, the Insurer’s liability if any, the amount of damages to be paid by the Insurer under the Claim, if any, make any payments that need to be made under the Claim, conduct negotiations and other activities related to or similar to the aforenamed.

Adjusters examine claims for property damage or personal injury to determine how much the Insurer should pay. They conduct due diligence on the subject property or person related to the Claim, interview relevant parties, peruse relevant documents and consult relevant professionals such as doctors and lawyers to assess the Claim. Adjusters compile data on the Claim such as photographs and statements then submit the data to Claim Examiners. A claim is approved by the Examiner and then negotiated and settled by the Adjuster. It is the Claim Adjuster’s responsibility to defend the Insurer’s position where conflict emerges on the approval or rejection of a Claim or the amount paid under the Claim; they should work together with other persons who are defending the Insurer.

There are instances when the Claim Adjusters are hired by a Claimant (public Adjusters). A Claimant may hire their own Claim Adjusters where they want independent finding from that of the Insurer. While working for the Claimant, the Claim Adjuster’s purpose is to ensure that they attain the highest possible settlement for the Claimant in comparison to when they work for the Insurer where they strive to have the Insurer pay as little settlement as possible. The Claim Adjuster gets a cut of the settlement. 

Appraisers estimate an item’s cost or value. They assess damages on the item and the resulting costs. They then forward their results to the Claim Adjuster who then includes the estimated resulting costs of the damages to the settlement. Insurance Investigators investigate claims where the Insurer suspects an illegality has been committed.

The Claims Examiner’s duty is to examine submitted claims to ensure that the Claimants and Adjusters followed proper procedures and at times in addition to reviewing new applications to ensure that the persons are insurable per the Insurer’s policies. They may help Adjusters with complex or increased claims. They look at whether the costs of the damages to persons or property is reasonable then make a decision whether to accept or deny the Claim’s payment or refer the claim to an investigator.

TYPES OF ADJUSTERS ENGAGED BY INSURANCE COMPANIES

When it comes to adjusters, Insurance companies have two options, either an in-house adjuster or an independent adjuster.

In-House Adjuster	Independent Adjuster
1. Contract Contract of ServiceThe relationship between the adjuster and the Insurance Company is an employee-employer relationship and is known as a contract of service	Contract for serviceThe relationship between the adjuster and the Insurance Company is that of an independent contractor.Employment legislation does not apply to the independent adjuster.
2.ControlThe Insurance Company has total control over the work of the In-House adjuster. This entails directing on things like the place and hours of work and the precise manner in which said work is to be done.In most cases the Insurance Company restricts the Insurer to working exclusively for that one employer and non other.	An independent Adjuster works under little to no supervision from the Insurance Company.They get to determine their place of work, hours of work, and the manner in which they will perform their work.The Insurer simply gives them a job and a timeline within which to deliver and the Independent Adjuster determines for themselves how they will undertake the task satisfactorily within the assigned duration.
3. Integration into the Insurer’s core businessThey form part of the Insurer’s business and the Insurance Company is responsible for providing the necessary material and equipment for the performance of the Adjuster’s functions.They are also subject to the Insurer’s rules and regulations in the work place	They are independent and distinct from the business and are only subject to the terms of their contract.They are responsible for the acquisition of the tools of work and this duty is not imposed upon the Insurance Company unless otherwise stated
4.Mode of PaymentPayment is at regular intervals determined by law and is mostly on a monthly basis.Adjusters have a specific salary.	Payment is determined by the Contract entered into between the Adjuster and the Insurer and is often at irregular intervals.ie. payment per each job completed or percentage of completion of a job.Adjusters submit invoices for their work.
5. Benefits and statutory deductionsInsurance Company is obligated to make statutory payments  and statutory deductions for the Adjuster.The Company is also responsible for withholding taxes such as income tax.	Adjuster is responsible for remitting their own taxes based on the payments received for their services.The Insurance Company is not responsible for making statutory deductions and conferring other benefits upon the adjuster that would ordinarily be conferred on an employee.
6. Liability for wrongful actsThe Insurance Company is liable for the wrongful acts of the Adjuster if the acts are committed in the course of employment.This is known as vicarious liability.	The Insurance Company is not liable in general for the negligence and other wrongful acts committed by the Adjuster.The Adjuster will be held liable for their wrongful acts.
7.TrainingThe Insurance Company will be required to issue some sort of training surrounding their job duties to the Adjuster in order to enable him smoothly transition into the Company.	Independent adjusters bring specialized expertise to a project or task. The Insurer is not responsible for providing them with training.

The Insurance Company must also consider several factors in determining if it will rely upon an In-House Adjuster or an Independent Adjuster. Some of the key factors to consider include the duration of the task, the resources available and the type of work.

For example, where the task will take a short period and requires a number of people with different qualifications, then it is only advisable to hire an independent contractor. However if the work to be done shall last for a long period of time and shall require only one form of qualification, it would be better to hire an employee.

Another way of classifying Adjusters would be based on the nature of the work they do. We have field adjusters and Inside adjusters.

Field Adjusters operate outside the claim office and spend most of their time visiting the scene of loss, investigating damages and interviewing witnesses. Essentially, they are responsible for coordinating loss appraisal.

Inside adjusters adjust claims from within the claims office. They do not go out to the field.  Inside claim adjusters are most preferable where claims have expenses which are well known or for claims that require very little to no investigation.

OTHER INDIVIDUALS INVOLVED IN THE CLAIMS EVALUATION 

The structure and authority usually differs between Insurance Companies with regard to the Claims evaluation department but there are some classes of staff that tend to be more frequently than not present such as;

1. Vice President of Claims

 They are a vital member of the management team in Insurance Companies. The Vice President  of Claims  may have one or more assistant Vice President’s working under him who are responsible for certain insurance lines.

2. Claim Managers

They are below the top executive level and are often in charge of claim files and the general administration and supervision of the claims department.

3. Supervisors

 Claims department within an Insurance Company can be divided into subdivisions based on factors such as type of coverage or geographic location just to name a few. The Claims supervisor is usually responsible for the day to day running of the unit’s functions. The supervisor might have certain levels of settlement or denial authority

4. Public Adjusters

Unlike the typical adjuster who works with or under the Insurance Company, this adjuster represents policyholders in property claims cases against insurers. They are employed by the Policy holders and assist them in preparing verification of loss, negotiating values to be paid and preparing settlement documents. 

5. Material Damage Appraisers

 They are responsible for the inspection of the damage and if the same is repairable, they give an estimate of the repair cost.

The appraiser assists the adjuster in determination of the value or cost of replacement of an item and in disposing of salvage.

6. Others

These are other people involved in the Claims evaluation process and include: Reconstruction Experts, Private Investigators, Accountants, Health and Rehabilitation Experts, Medical Cost Containment Consultants, Professional Engineers, Support Personnel.

BENEFITS OF CLAIM EVALUATION

1. Performance of Insurance Company  Contractual duties

The Insurer and the Policy Holder enter into a contract by way of an insurance policy whereby the Policy holder undertakes to pay the insurance premiums and in turn the Insurer undertakes to compensate the Policy holder for any losses and damage they may incur upon the occurrence of the insured event.

Claim evaluation provides the Insurer with the means to fulfill their end of the contract by providing expeditious, fair, and equitable service in either settling first-party claims covered under the policy or compensating third parties for losses caused by the insured under covered under their policy.

2. Supports the Insurance Company’s growth and  profit goals

An effective claim evaluation process should allow the Insurance Company to guarantee that covered losses are fairly reimbursed while wrongful settling of fraudulent of uncovered claims is avoided.

Overcompensation of claims will not only increase the cost of insurance but also result in massive losses for the Insurance Company. That is why the process of claims evaluation is absolutely crucial in the Insurance Industry.

Unpaid claims that fall under the contract and ought to be eligible for payment can result in discontent policyholders, litigation and or regulatory sanctions. An Insurance Company that has a reputation of refusing meritorious claims can also ruin its reputation and in turn damage its effectiveness.

3. Aids in new policy formulation

Through an analysis of the claims being lodged with the Insurance Company, the Insurer is able to identify and craft policies to serve new areas that emerge and lack coverage which have been identified as a result of the Claims evaluation process. This will enable the Insurer to better meet the needs of policyholders.

Claim reserve

A claims reserve is a fund that an insurance company sets aside to pay policyholders who have filed or are expected to file genuine claims under their policies. A claims reserve is money put aside for unsettled (RBNS) or unreported claims (IBNR) which are harder to estimate. The balance sheet reserve is another name for the claims reserve. A percentage of the premium payments paid by policyholders throughout the term of their insurance contracts is used to fund the claims reserve. Because the amounts liable on any specific claim are not known until settlement, the outstanding claims reserve is an estimate of the amounts payable estimated by the Claim Adjuster. The sum of the estimated settlement amount plus any expenditures incurred by the insurer during the settlement procedure is the entire amount of monies set aside for a claim. 

Claim adjusters determine the final value of a claim during the reserving procedure. 

To do so, they apply what they’ve learned from previous instances, as well as the settlements they’ve reached in similar cases, to their reserve estimation. 

Insurance companies use a variety of reserve methods that are fundamental in nature. These include:

• Chain-Ladder Method
• Expected Loss Ratio (ELR) Method
• Bornhuetter–Ferguson Method
• Projected Case Estimate Method

The Chain Ladder Method (CLM) is a method for estimating the claims reserve required in an insurance company’s financial statement. By extending existing claims history into the future, Insurers use the chain ladder approach to estimate the amount of reserves needed to cover expected future claims. As a result, CLM is only effective when past loss patterns are expected to repeat in the future. Using run-off triangles of paid losses and incurred losses, which represent the sum of paid losses and case reserves, the chain ladder approach produces incurred but not reported (IBNR) loss estimates. Loss development factors (LDFs) or link ratios are age-to-age factors that describe the ratio of loss amounts from one valuation date to the next. They are used to capture loss growth trends across time. These variables are used to forecast where the final amount of losses will be. 

The Expected Loss Ratio (ELR) approach is a method for calculating the expected number of claims compared to earned premiums. When data is scarce, untrustworthy, or unavailable, this strategy is applied. Multiply earned premiums by the expected loss ratio, then remove paid losses to arrive at the expected loss ratio. Government rules may, however, mandate the minimum levels of loss reserves required. Insurers set aside a percentage of premiums from policies to cover future claims; the amount they set aside is determined by the Expected Loss Ratio (ELR). Due to the fact that it does not take into account real paid losses, it is typically beneficial in the early phases of forecasting; but this also makes it becomes less accurate and hence less effective. 

The Bornhuetter-Ferguson, also known as the Bornhuetter-Ferguson method, calculates losses that have been incurred but not yet reported (IBNR) for a policy year. Bornhuetter and Ferguson, two actuaries, developed this technique, which they initially presented in 1975. It is a combination of the Chain Ladder Method (CLM) and Expected Loss Ratio (ELR) mentioned above. There are two algebraically equivalent ways for determining the amount of loss that follow the Bornhuetter-Ferguson strategy. In the first method, undeveloped reported (or paid) losses are multiplied by an estimated percent unreported before being added to anticipated losses (based on an a priori loss ratio). Using a chain-ladder methodology and a loss development factor, reported (or paid) losses are first developed to ultimate in the second calculating method. The chain-ladder ultimate is then multiplied by a reported percent estimate. Finally, anticipated losses are multiplied by a percentage of unreported losses then added. 

The Projected Case Estimate Method (PCE) is a technique that uses case estimates to forecast future payments. The case estimate is an estimate of unsettled claims that have been reported. Two triangles are used in the PCE model; a triangle with a payment and a case estimate.  Payment triangles reflect the amount paid for a claim. Case estimate is the money set aside in the reserves account for future payments likely to be paid for a claim. Its disadvantages include: when choosing a loss ratio, judgment is required, and it is difficult to account for intrinsic variations in the loss ratio. 

To arrive at claim reserving figures, actuarial judgment is used after assessing the findings of the methodologies indicated above. Best practice reserve setting means reviewing the set of facts being gathered at any given time and establishing a reserve consistent with the best judgment available to at the time. There is no one-size-fits-all frequency or pattern as new relevant facts emerge. 

DISTINCTION BETWEEN INSURANCE APPRAISAL AND CLAIMS EVALUATION

It is very easy to be confused and sometimes mistakenly interchange the two terms, that is insurance appraisal and claims evaluation. 

This is because both terms come into play after a policy holder has made a claim seeking compensation from an Insurance Company upon the occurrence of an insured event. It is therefore critical that a clear distinction be made between these two terms.

Claims evaluation has been defined above as the process of deciding whether or not an Insurer is obligated to pay a Claim and if so how much they ought to pay as compensation in order to have acted in a fair and equitable manner as required by the Contracts entered into with the policy holders through the policies.

An insurance appraisal however comes in at a later stage where after the claim evaluation has been conducted by the Insurer and it is determined that indeed the claim is covered under the policy holders policy and compensation has been paid as deemed appropriate by the Insurer, the Policy Holder challenges the fairness and equitableness of the compensation.

The policyholder disagrees with the insurance company on the amount of a compensation deserved.

Unlike the Claims Evaluation process that is initiated/undertaken by the Insurance Company, an Insurance Appraisal is initiated by the Policyholder.

Investigation of the claim and estimation of the value of the loss in case of an insurance appraisal is undertaken by an Appraiser while in cases of claim evaluation, the same is undertaken by the Adjuster.

Also, unlike in Claim evaluations where in most cases only the Insurance Company gets to appoint an adjuster, in case of Insurance appraisal, both parties appoint their own competent appraisers. The Parties also choose an appraisal umpire, who must be disinterested and impartial.

The individual appraisers then make determinations on the loss and submit their findings to the appraisal umpire. The umpire then looks at both the reports and makes a final determination as per their discretion and as they deem just and fair in the case.

Both Parties can then agree to that amount or if one of the Parties still feels disgruntled by the Appraisal umpire’s determination, they can proceed to file an appeal in the appropriate Courts of law.

The advantages of using an appraisal as opposed to filling a law suit are; expediency, relatively low cost, it is less adversarial, no firm procedure and parties are free to agree on rules to be used in settling the dispute.

Evaluating Liability vs Evaluating Damages

1. Liability

Liabilities are legally enforceable obligations that must be paid to another person or entity as soon as they are incurred by that other person. Generally speaking, the legal concept of liability is concerned with whether the defendant owed the plaintiff a duty or responsibility. In order to establish liability, a plaintiff must first establish the existence of a professional or other responsibility that they are owed by the defendant.

When determining liability, adjusters must take into consideration the following factors:

• What obligations were owed to whom?
• What were the duties that were violated? Who or what is responsible and to what extent?
• The significance of each of the assigned responsibilities
• The impact location

To determine the outcome, there are only three possible scenarios: either the insured party was at fault, someone else was at fault, or there was a shared fault between two or more parties. If one has an accurate liability assessment, they have a better chance of receiving an appropriate settlement as a result of adequate liability apportionment. 

2. Damages

Damages are the monetary penalties imposed by the law for a breach of duty or right.  Damages are typically divided into three categories: compensatory, punitive, and nominal. Punitive damages are intended to punish wrongdoers while compensatory damages are intended to compensate the injured party. The types of damages that can be awarded are dictated by general principles, for example, punitive damages are only available for intentional, malicious, or reckless contract breaches. If a court determines that monetary damages will not be sufficient compensation for the injured party, the court may order specific performance of the contract. The majority of civil litigation is intended to recover damages, and damages are frequently sought under contract and tort law. 

Contractual parties can seek damages under three categories, which may or may not be combined, when one party fails to perform: 

• Restitution of goods, services, or money given to the breaching party.
• Remuneration as if the contract was fully performed (this includes profits anticipated on the contract.
• Reliance, which compensates him for costs or liabilities incurred in reliance on the contract’s performance. Reliance damages are limited to consequences that the parties could have anticipated when they contracted. 

The measure of compensation in tort law is usually the monetary value of any losses or injuries due to the natural and proximate resulting of a wrongful act. It’s not always clear what losses or injuries are “natural and proximate.” In a personal injury case, the injured party should be put in the position he would have been in if the injury had not occurred while the goal of a damages remedy in a contract breach is to put the injured party in the position he would have been in if the contract had been performed. Aside from direct compensation for loss, other damages may be recovered such as attorney fees and interests. 

It is important to distinguish between two types of interest accruing on an award: injury-related interest and payment-related interest. The injury-related interest is made before judgment while the payment-related injury is made after judgment. Interest on the first part may be awarded from the time of injury to when the claim was made or when the award was made by the court while it may also be made from the time of entering the award to when the payment is actually made to the Claimant. The court will only award an interest rate of their choosing where such interest rate is not included in the contract, in law or implied from trade usage.

In ExxonMobil Oil Corp. v. TIG Ins. Co. despite the panel’s previous rejection to award interest, a federal court added prejudgment interest for the period before and after an arbitration verdict.

TIG owed Exxon the whole $25 million policy limit, according to the arbitration panel. Exxon requested that the panel award over $6 million in prejudgment interest beginning on the date of the breach. The panel refused, claiming that it was not permitted to award prejudgment interest under the arbitration agreement. Exxon then requested that the panel’s award be confirmed and that TIG be ordered to pay prejudgment interest. That request was granted by the court. The court determined that it could assess the question of interest from the date of the breach until the panel’s award because the panel decided it lacked jurisdiction to do so. While the parties’ contract’s arbitration provision prohibited the panel from awarding prejudgment interest, that provision did not prevent the court from doing so. The court reasoned that refusing to impose interest would empower parties such as insurers to illegally withhold payment with no repercussions. 

In Robinson v Harman, the Court stated “The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”

Sabella purchased a home built by Wisler and subsequently insured it with National Union Fire Insurance Co. of Pittsburg, Pennsylvania, in Sabella v. Wisler. The house’s sewer pipe began to leak at a spot near the house around 4 years after it was built, allowing the house’s sewer discharge to permeate the dirt near and below the foundation. The trial court determined that either the settling and consolidation of the poorly compacted fill material upon which the sewer pipe was laid, or the faulty closing of certain joints or a combination of all these reasons caused said sewer pipe to break and leak. While the National Union policy precluded risks such as subsidence and earth movement, it did not rule out the possibility of leaky pipe joints due to construction incompetence. The court determined that National Union was liable for the house damage since the immediate proximate cause of the loss was a sewer line break caused by the third-party contractor’s carelessness, rather than subsidence or earth movement.

Punitive Damages are a type of compensation that defies the earlier mentioned principle that the goal of damages is compensation rather than punishment. An individual or entity may be ordered to pay punitive damages, which are also known as exemplary or aggravated damages, in order to deter future violations. They aim to achieve two objectives: to punish the defendant while also reducing likelihood that the defendant or others will repeat the same behavior in the future (deterrence). 

Nominal Damages. They are awarded to plaintiffs who were right but did not suffer substantial harm. They are a little quantity of money paid to a plaintiff whose legal right has been formally infringed but who has failed to show that they are entitled to compensatory damages since no loss or harm has occurred. In contrast to compensatory damages, which are designed to recompense for injury, nominal damages are granted to honor the plaintiff’s legal victory. In the vast majority of cases, nominal damages are granted at one dollar; nevertheless, some jurisdictions hold that nominal damages might vary depending on the circumstances.

In Fisher v. Barker, for example, the court determined that the plaintiff was entitled to $100 in nominal damages. When Winston Churchill, sued the author, Louis Adamic for libel, for reporting that he was inebriated during a White House dinner, the jury agreed that Winston Churchill was correct, but they did not find any damage to Winston Churchill’s reputation, and thus awarded him 25 cents. 

Special Damages are expenses and losses incurred as a direct result of the defendant’s actions or inactions are compensated by special damages. Special damages are quantifiable, so the Claimant must be able to prove and present evidence of their losses.  The courts stress the importance of pledging and proving special damages. General Damages, they are non-pecuniary losses that cannot be quantified at the time of the trial.  These damages are not quantifiable and are assessed by the court based on similar precedents. 

Expectation Damages are a form of compensation awarded to the party harmed by a breach of contract for the loss of what was reasonably expected from the non-completed transaction. Expectation damages can only be recovered if they can be calculated with reasonable certainty failure to which only nominal damages will be recovered. Consequential damages. They compensate a claimant for non-contractual indirect losses and the loss must have been anticipated or communicated. 

In Hadley v Baxendale, the court held that under consequential damages, in the absence of foreseeability, damages are only recoverable where the innocent party alerted the breaching party prior to the breach, to their particular circumstances. 

Mitigating damages

When damages occur, the wronged party has a duty to mitigate the losses/ damages. Where they fail to mitigate the damages, through their actions or inactions, or they increase the loss or damage suffered, the court will take that into consideration when awarding damages. It is however the Defendant’s duty to show lack of mitigation by the Plaintiff.

For example. A person who gets injured in a car accident, would be said to have mitigated the loss/ damages by wearing a seatbelt failure to which they would be held to have contributed to the loss/damaged that they suffered in the accident thereby decreasing the amount payable by the Insurer, if any.

In Lombard North Central PLC v Automobile World (UK) Limited, the Court stated that “…it is well recognised that the duty to mitigate is not a demanding one. Ex hypothesi, it is the party in breach which has placed the other party in a difficult situation. The burden of proof is therefore on the party in breach to demonstrate a failure to mitigate. The other party only has to do what is reasonable in the circumstances.”

Awarding damages

Damages to a natural person may be awarded as economic and non-economic (non-pecuniary). Economic losses fall into three categories: loss of earnings (actual, expected and potential earnings), value of lost non-market work, and past, present, and future medical costs.

Actual earnings are based on what the Claimant was being paid before the damages occurred. Expected earnings is what the Claimant would have generally earned in their lifetime. Potential earnings are based on the Claimant’s abilities and potentialities. In evaluating the loss of earnings, it is often the case that the actual earnings are used to calculate the net present value of the person’s annual income until their expected retirement. This evaluation is not always sufficient hence reliance is often placed on the Claimant’s earning capability which considers their skills, knowledge, market and global conditions, and possibility of some jobs attainment.

Non-market work refers to unpaid labor that is similar to or identical to paid labor in a market society e.g house chores. In evaluating the damages payable, a calculation is done by multiplying the number of hours required to perform the tasks per year by the cost that would have been paid to a professional to perform those tasks. This yearly monetary value is now commonly used to determine the net present value of non-market work across the Claimant’s lifetime.

Non-economic damages try to compensate the emotional impact of a loss. They generally consider: physical and psychological suffering, loss of delight in life, and loss of consortium. To determine non-economic damages, expert witnesses typically use one of two methodologies. The first option is to rely on official tables that calculate a per diem monetary value for each of the three losses listed above. These tables consider biological factors that can affect the predicted value. In this scenario, calculating the present value of the overall non-economic damages over the Claimant’s lifetime is sufficient. The second method relies on a statistically significant sample of people accepting pain and loss in exchange for a certain sum of money. 

Damages are calculated using lost profits or lost business value in legal persons. Under loss of profits, what will be taken into consideration is the loss suffered due to the breach/damage based off the expected amount that would have been attained if the breach or damaged had not occurred. Lost profits may be calculated through the following methods: Before and After, Yardstick, and Company or Market Forecast Approach. 

The Before and After method compares the profitability of the plaintiff’s business performance before and after the defendant’s acts or omissions.  The Yardstick method compares the plaintiff’s profitability to another business activity that was not harmed by the defendant’s acts or omissions. The Company or Market Forecast Approach uses sales and market projections to assess how the company would have performed without the defendant’s acts or omissions.  

When a business is significantly or entirely destroyed, then there is loss of business value. The damages in this case might be assessed as the business’s value at the time it was entirely destroyed.  There are three methodologies, which are conceptually and practically identical to the three under the loss for profit. They are: the Discounted Net Cash Flow technique, Capital Market Approach, and Comparative Market Transaction Approach.

The Discounted Net Cash Flow technique calculates the value of a company based on the present value of future economic income to be generated by the company’s owners.  The Capital Market Approach calculates a company’s worth based on what rational capital market investors would pay to possess the subject company’s stock. The Comparative Market Transaction Approach calculates a company’s worth by comparing it to similar firms that have been purchased in a recent period of time. 

The actions or inactions of the person who owes one a duty must be sufficiently related to the injured person’s injuries for the law to regard the person to be legally responsible for the injured person’s injuries. Someone’s acts are not proximate if they are a distant source of your injury. If injury would not have occurred but for the actions of another, it is often assumed that proximate causation existed. 

Critique on damage evaluation

Payment of damages is meant to restore the Claimant to the position they were in prior to the loss/damage but this is not achievable in the vast majority of cases, there is also the assumption that non-market aspects of our lives can be turned into a monetary equivalent, and damages are frequently underestimated and sometimes based on personal discretion which may be faulty.

WRONGFUL DENIAL OF CLAIMS AND UNDERPAYMENTS

Wrongful Denial Of Claims

An Insurance Claim is held as having being denied where the Insurance Company refuses to settle the Claim by the Policy Holder.

Upon the determination not to settle a claim by the Insurance Company, they will issue the Policy Holder with an explanation of the same and the reasons for making the said determination.

An insurance claim can be denied because:

1. Where liability for an accident or property damage is unclear and cannot be determined. If is not clear which Party should bear liability or the Insurance company is of the opinion that liability should be borne by the other party, it will deny the claim.
2. Policy exclusion. If the event for which compensation is claimed against falls beyond the scope of the Insured’s policy, the Insurance Company will be within its rights to decline the claim.
3. Unpaid premiums. There could be a lapse of policy coverage due to failure by the Policy holder to pay their premiums in which case the Insurance Company can deny the claim.
4. Delayed notification. The Policy holder is under a duty to promptly notify their Insurance Company of the occurrence of an insured event. If the Insured unreasonably delays in notifying the Insurance Company of the same, the Insurer could cast doubt on the authenticity of the claim and deny it.
5. The policy had been voided, cancelled or had expired before occurrence of the event.
6. Rejection of claim as a result of insufficient documentation.
7. Duplicate claims.
8. Expiry of the statute of limitation. 

Failure to handle claims appropriately can lead to bad faith insurance claims against the insurer. The basis for this would be breach of the fiduciary relationship.

Some of the risks that come about as a result of losing a bad faith insurance claims suit include: ridiculously large amounts of compensation imposed by the Courts, attorney fees, court costs, interest accrued, damages.

Wrongful denial which can be described as occurring in the following instances:

1. The claim is denied without a valid reason being given.
2. Policy coverage was misrepresented to the Policy Holder during subscription.
3. Failure by Insurer to investigate the claim upon receiving timely notice and before denial of claim.
4. Insurance company is unresponsive or unwilling to listen to your version of the event before denying your claim.

Underpayments

Underpayments occur when an Insurance Company pays less than what would be considered as a fair and equitable amount as compensation in the event of occurrence of an insured event.

This may be caused by a failure by the adjuster to get an accurate idea of the damage or misinterpretation of the insurance policy. 

To remedy against Underpayments and Wrongful denial of Claims, it is essential that the following procedures be followed. These procedures should also be included in the Insurance Policy so as to bind the Policy Holder to also comply with them instead of running to Court at the first instance of suspicion of an underpayment or wrongful denial of claim. 

1. Careful perusal of the Insurance Policy

The amounts of compensation payable in the event of occurrence of an insured risk are often set out in the Insurance Policy which is the Contract between the Policy holder and the Insurance Company. A proper Insurance Policy must set out either directly the amount of compensation to be paid or set out the procedure to be used in calculating the same which may be provided for in the Insurance Companies by laws and procedures.

The Insurance Policy must be carefully proofread by both the Adjusters and the Policy holders to establish both the scope of coverage and the proper and reasonable amount of compensation to be paid in the event of occurrence of an insured risk.

2. Cross check the reimbursement rates

A comparison of the compensation rates between the Insurer and other Insurance   Companies for similar losses should be done whenever the same is possible in order to get an average of what would constitute fair compensation. This may however vary on a case by case basis and in some case might not be possible at all. For example, compensation to be paid in case of loss of employment through redundancy can have a comparison made between different Insurance Companies to determine the average as most factors can be similar, however, a similar comparison may not be possible in a case of a road accident as no two accidents are the same.

3. Flag discrepancies

The Insurance Company should have a system in place that allows for the flagging of discrepancies by both the Adjusters and the Policy Holders. The Adjusters should have peer review systems in place within the Company to minimize the chances of errors of underpayment and wrongful denial of claims. The Insurance Company should also have systems that allow Policy Holders to raise any concerns they may have at an early stage and put in place systems of addressing said concerns. This will also reduces instances of litigation in Court by disgruntled Policy holders.

4. Alternative Dispute Resolution

The Insurance Companies should always ensure that their Insurance Policies contain a dispute resolution clause that stipulates how disputes arising out of the Contract are to be dealt with. This will oblige the Parties to use these methods in the first instance before approaching the Court and a failure to do so will amount to a breach of a condition of the Contract. Some of the alternative dispute resolution mechanisms that can be included in the Contract include; arbitration, mediation, negotiation and conciliation.

Arbitration being the most preferred method of alternative dispute resolution as it is final and binding upon the parties. It allows the dispute to be settled expeditiously and with finality and avoids the contracted Court battles. It also helps avoid drawing negative publicity to the Insurance Company as arbitration proceedings are private and confidential unlike Court proceedings which are open to the public and media.

CLAIMS EVALUATION SOFTWARE

Typically, insurance adjusters have hundreds of case files to review. They just do not have enough time to thoroughly analyze each case in order to accurately estimate its worth. Evaluation software helps expedite the Claim Evaluation process and ensure that the Policy holders get prompt, fair and equitable compensation.

Claims evaluation software enable the Insurance Companies to handle the claims process using automated workflows, ensuring that all claim details are recorder in a centralized system. This aids with keeping of records for future use, timely updating of any developments in the case and allows for remote adjustment by the adjusters thus improving on their efficiency and that of the Insurance Company.

This software help insurance companies reduce claims management costs, minimize fraudulent claims and wrongful compensation and enhance customer experience.

Insurance claims management software can be acquired as a stand-alone solution or as part of a comprehensive insurance package.

A proper Claims Management Software should be able to:

1. Support claims and settlement workflows
2. Provide risk assessment to determine complexity of a claim and the odds of the same proceeding to litigation.
3. Data capture
4. Data analysis to identify potential fraudulent claims.
5. Organize and manage documents
6. Enable the user generate claim reports.
7. Code the data for security and confidentiality reasons.
8. Make provision for peer review.
9. Possess features that aid in the conduct of investigations.

Examples of claims management software include Pega Claims Management, Applied Epic, LexisNexis Carrier Discovery, A1 Tracker just to name a few.

Adjusters input value driver/data points into the software which are obtained after scanning the Insured’s documents and uploading them into the system. The Software then analyzes the data put into it and gives the adjuster a reasonable range of settlements that can be offered to the Insured. This is known as the fair value.

One of the challenges of the claims management software is that they lack the element of a human touch and a lack of discretionary power to make a fair determination as per the Adjusters judgment despite what the numbers say.

Claims management software also tend to generally analyze only general damages. There is also the risks that comes with technology such as hacking of the system, leaking of confidential information, virus that may corrupt the system and lead to massive losses of date and the danger of exploitation by staff and other third parties for personal gain and with malicious motives.

All this risks can be imposed upon the Insurance Company due to the strict liability rule and the rule of vicarious liability.

The strict liability can be under both civil and criminal law. 

Strict liability is a doctrine of law that dictates that a party will be held liable for their actions without the need of proof of their negligence or fault. The other party only needs to prove that the party being sued was responsible for the care of the item and that the alleged event occurred.

When a person who engages in extremely hazardous activities such as keeping wild animals, using explosives, or as in our case, utilizing a software with huge risks of adverse effects should anything go wrong may be held liable if another person is injured as a result of the activity or product mishap whether they were aware of it or not.

Vicarious Liability on the other hand is a principle of law that provides that an employer will be held equally responsible for the wrongful acts of their employees as long as the wrongful acts were committed in the course of that employee’s employment

FRAUD DETECTION AND PREVENTION

It is absolutely crucial for every Insurance Company to take steps to minimize or completely eliminate if possible cases of fraudulent claims.

Among some of the measures that they can take include:

1. Systematically create, implement and maintain procedures for detection and identification of fraud that are customized to that Insurance Company’s exposures and vulnerabilities.
2. Increase awareness of the Policy holders on the ramifications of making false statements throughout the claims filing phase in order to deter fraudulent activities. The punishments impose for fraudulent claims under the Insurance Policy should be very harsh such as forfeiture of all previously installments made. This notification could also be included in the claim form in order to further discourage the same.
3. Create a database where claims that are suspected of being fraudulent can be submitted to the appropriate authorities and notification of the existence of the same included in the claims form and insurance policy.
4. The personnel in charge of processing claims must be trained on how to analyze claim documents in order to discover falsifications and suspected fraud whenever the same arise.

Where the Insurance Company is of the opinion that an insurance claim lodged is fraudulent, the insurer shall;

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