9.2 Claim Settlement, Reinstatement of Sum Insured and the Insurer's Rights

9.2 Claim Settlement, Reinstatement of Sum Insured and the Insurer's Rights

Quick Summary: Once a claim is accepted, the insurer chooses how to settle it: by cash, repair, replacement or reinstatement. A claim usually reduces the sum insured for the rest of the period until it is reinstated. After paying, the insurer may exercise subrogation, contribution and salvage rights. Goodwill ex gratia payments sit outside the policy.

Methods of Settlement

Section 5.1 explains how indemnity is measured. In the claims stage, the policy usually gives the insurer the option of how to settle:

The insured cannot insist on a particular method if the policy gives the insurer the choice. Equally, the insurer must act fairly. GIA's Code of Practice commits member insurers to handle claims "fairly and promptly" and to pay within 10 business days once a settlement is agreed and the documents are received.

Claims Conditions That Reduce the Amount Paid

Before paying, the insurer applies the policy's limiting provisions (Section 5.1):

• the sum insured or limit of liability;
• inner limits, such as a single-article limit in a householder's policy;
• average, where the property is under-insured; and
• the excess or deductible, or a franchise.

A worked example for property under-insured and subject to an excess: value at risk S$500,000, sum insured S$350,000, loss S$100,000 and excess S$5,000. Average reduces the loss to 350,000 ÷ 500,000 × 100,000 = S$70,000, and the excess reduces it to S$65,000.

Reinstatement of the Sum Insured

A claim usually uses up part of the cover. Under a typical reinstatement of sum insured condition in a property policy:

• the sum insured is reduced by the amount of the loss from the date of the loss for the rest of the period of insurance; and
• the insured can ask the insurer to reinstate the original sum insured, usually for an additional premium calculated pro rata for the unexpired period.

Some policies reinstate automatically, with or without extra premium. The intermediary should make sure the client understands this, because a business that has had a large partial loss may be seriously under-insured if a second loss happens in the same year. Average could then also reduce the second claim.

The Insurer's Rights After a Claim

1. Subrogation

Having indemnified the insured, the insurer takes over the insured's rights against anyone legally responsible for the loss (Section 5.2). The insured must not prejudice these rights, for example by admitting liability or settling with the wrongdoer without consent.

2. Contribution

Where another insurer also covers the same loss, the paying insurer can recover a rateable share from it (Section 5.3).

3. Salvage

When an insurer pays for a total loss, it becomes entitled to what is left of the property, such as a written-off vehicle or damaged stock, and can sell it to reduce the cost of the claim. Otherwise the insured would receive the full value and keep the salvage, which is more than an indemnity.

4. No Abandonment Without Consent

Outside marine insurance, the insured has no right to abandon damaged property to the insurer and demand a total-loss payment. The insurer can refuse to take over the property and settle on the actual damage. In marine insurance, notice of abandonment is part of claiming a constructive total loss, and the insurer may accept or decline it.

Ex Gratia Payments

An ex gratia payment is made as a favour, without admitting legal liability, often to keep goodwill with a valued client. Because it is not made under the policy:

• it gives the insurer no right of subrogation; and
• the insured may keep any amount recovered from a third party for that loss.

Completing the Settlement

• Discharge voucher: for many claims the insured signs a discharge (release) confirming acceptance of the settlement in full and final satisfaction of the claim.
• Loss payees: where a bank or other financier has an interest, for example a mortgagee under a fire policy or a hire-purchase company under a motor policy, the policy names it as loss payee, and the settlement is paid or endorsed accordingly.
• Records: the insurer updates the claims register, and for motor policies the claim affects the No-Claim Discount according to the outcome of its investigation.