13.2 Claims Handling Basics

The Claims Process

A claim is the policyholder's demand that the insurer fulfil the promise in the policy. The claims process runs through several stages, and the insurer must handle each stage fairly and promptly:

Loss Adjuster and Loss Assessor

Two professionals are commonly encountered in claims, and IF1 expects you to keep them firmly apart:

• A loss adjuster is an independent claims specialist instructed by the insurer to investigate a claim on the insurer's behalf. The loss adjuster visits the loss site, assesses the cause and extent of damage, verifies the claim's validity, recommends a settlement figure, and may negotiate with the insured. Despite being paid by the insurer, the loss adjuster must act independently and impartially — reaching a fair view of the loss, not simply the lowest figure. Loss adjusters are commonly used for larger or more complex property and commercial claims.
• A loss assessor is instructed by and acts for the policyholder. The assessor represents the insured's interests, helps prepare the claim, and negotiates with the insurer or the insurer's loss adjuster. A loss assessor is typically paid by the insured, often as a percentage of the settlement.

Quick Answer: Loss adjuster = acts for the insurer, investigates the claim. Loss assessor = acts for the policyholder, helps present and negotiate the claim.

Verifying the Claim

Before settling, the insurer must verify the claim falls within the policy. This involves four tests drawn from the principles covered earlier in the guide:

1. Proximate cause. The loss must be caused by an insured peril. Where two causes combine, the proximate cause — the effective, dominant cause — must be an insured peril and not an excluded one. A fire caused by an insured peril is covered; a fire caused by an excluded act of war is not.
2. Coverage. The peril must be within the policy's insuring clause, and no exclusion must apply. The sum insured must not be exceeded.
3. Conditions met. The insured must have complied with policy conditions — prompt notification, cooperation with the insurer, provision of proof of loss, and compliance with warranties and conditions precedent.
4. No breach. There must be no breach of warranty, condition or duty of disclosure that would allow the insurer to avoid the policy or decline the claim.

Settlement

Once verified, the claim is settled. Settlement may take several forms, all tied back to the principle of indemnity (Chapter 8 — the insured should be restored to the position immediately before the loss, no more and no less):

• Cash settlement — a money payment for the amount of the loss, common for total losses and smaller claims.
• Repair — the insurer arranges for the damaged property to be repaired, common for motor and home buildings claims.
• Replacement — the insurer provides a new equivalent item, common for contents claims where repair is uneconomic.
• Reinstatement — the insurer pays to restore the damaged property to a condition equivalent to its pre-loss state, subject to the reinstatement conditions in the policy.

For indemnity policies, settlement is based on the value of the loss at the time it occurred. For reinstatement or new-for-old policies, settlement is based on the cost of replacement as new, subject to any reinstrement conditions and sum insured limits.

Reserving

Reserving is the insurer's process of setting aside an estimated amount to meet the ultimate cost of a claim. A reserve is set when the claim is notified and updated as the claim develops. Reserves matter for two reasons: they ensure the insurer holds sufficient funds to pay the claim, and they feed into the insurer's solvency and reporting under the Solvency UK regime (Chapter 10). Under-reserving threatens the insurer's solvency; over-reserving ties up capital unproductively.

Conduct Obligations During Claims

Claims handling is heavily regulated. The principal obligations are:

• ICOBS claims-handling rules. The FCA's Insurance Conduct of Business Sourcebook (ICOBS) (Chapter 11) requires insurers to handle claims fairly and promptly, to provide claimants with clear information about the process, to investigate claims properly, and to pay claims promptly once liability and the amount have been agreed. ICOBS 8 sets the detailed rules.
• Consumer Duty. The FCA's Consumer Duty (in force since 31 July 2023) requires firms to deliver good outcomes for retail customers. In claims, this means a claims process that delivers fair value, products and services that meet customers' needs, and communication that customers can understand. Dragging out a claim, lowballing a settlement, or using jargon the customer cannot follow would breach the Duty's good-outcomes requirement.
• Treating customers fairly (TCF). The long-standing FCA principle that runs through all conduct rules, including claims.

Fraud and the Insurer's Response

Insurance fraud ranges from opportunistic exaggeration to organised criminal claims. The insurer's responses include:

• Repudiation. Where fraud is established, the insurer may repudiate the claim — refuse to pay it — and may also avoid the policy from inception under the doctrine of utmost good faith (Chapter 7).
• The Insurance Fraud Bureau (IFB). The IFB is a not-for-profit organisation funded by the UK insurance industry. It gathers and analyses data to detect organised and opportunistic fraud, operates the CUE (Claims and Underwriting Exchange) and Insurance Fraud Enforcement Department (IFED) links, and supports insurers and the police in fraud investigation.
• Claims-under-investigation procedures. Where the insurer has reasonable grounds to suspect fraud, it may invoke a claims-under-investigation procedure — telling the claimant the claim is being investigated under the fraud provisions of the policy, and that payment is withheld while the investigation continues.
• Reservation of rights. Where cover is uncertain — for example, because liability or a condition is in dispute — the insurer may write to the insured reserving its rights to decline the claim if the investigation establishes that cover does not apply. Reservation of rights avoids the insurer being deemed to have waived its right to decline by handling the claim.

Subrogation and Salvage at the Claim Stage

Two of the principles covered in Chapter 8 reappear at claim stage:

• Subrogation — once the insurer has paid the claim, it steps into the insured's shoes and may pursue any third party responsible for the loss (for example, suing a negligent builder who caused a fire). The insured must not prejudice the insurer's subrogation rights.
• Salvage — the insurer may take title to damaged property after paying a total loss and sell it to recover part of the settlement. Salvage is common in motor and marine claims.

Worked Scenario

A homeowner notifies her buildings insurer that a burst pipe has flooded her kitchen, damaging units, flooring and electrical wiring. The insurer acknowledges within 24 hours, appoints a loss adjuster to inspect, and asks the insured for photographs and a plumber's report. The loss adjuster confirms the proximate cause (escape of water from a burst pipe) is an insured peril, that the policy conditions (prompt notification, cooperation) have been met, and that there is no breach of warranty. The insurer reserves £18,000 and settles by repair — arranging its approved contractor to replace the units, flooring and wiring. Because the leak originated in a faulty fitting supplied by a plumber the insured had used, the insurer's subrogation team later pursues that plumber for the cost of the settlement. Throughout, the insurer keeps the insured informed in plain English, complying with ICOBS and the Consumer Duty's good-outcomes requirement.

Key Takeaways

• The claims process runs from notification, through acknowledgement and investigation, to settlement, with the insurer verifying proximate cause, coverage, conditions and absence of breach.
• A loss adjuster is independent and investigates on behalf of the insurer; a loss assessor acts for the policyholder.
• Settlement may be by cash, repair, replacement or reinstatement, governed by the principle of indemnity and the policy wording.
• The FCA's ICOBS rules and the Consumer Duty require fair, prompt claims handling that delivers good outcomes for retail customers.
• Insurers combat claims fraud through repudiation, the Insurance Fraud Bureau, claims-under-investigation procedures, and reservation of rights where cover is uncertain.