A Video Explaining The Adjuster’s Obligation to the Insurer’s Underwriters

The Adjuster & Underwriting

Aug 12, 2021

The Adjuster Must Inform the Underwriter of Observed Hazards

Underwriters take information from adjusters, after a loss, to reevaluate the risk decision, to be certain they were not deceived and to better evaluate the risk taken so they can deal with future requests for renewal or increases in coverages fairly and in good faith.

Sometimes an insurer will ask an adjuster to perform a pre-risk inspection to determine if the risk is worthy before the underwriter makes the decision to accept a risk for insurance. Underwriters also use the services of inspection companies and engineers to inspect the property or the risk before making a decision to offer or refuse to offer insurance.

Usually, however, information from the adjuster is provided to help the underwriter determine whether to cancel, non-renew, or continue on the risk, or modify the policy and premium before agreeing to continue on the risk on the same terms and conditions or modify terms, conditions and premium amount.

If the adjuster develops facts, during a claims investigation, that the underwriter was deceived when the risk was accepted grounds may exist for the underwriter to make the decision in conjunction with the claims department, that the policy should be rescinded or declared void. With the assistance of the underwriter, who can establish facts misrepresented or concealed were material, the claims person will then seek the advice and counsel of a competent insurance coverage attorney before deciding how to deal with a claim when the policy was obtained by deception.

With knowledge of underwriting and the decision-making process used by underwriters the adjuster, when a claim is presented, can properly conduct the thorough investigation required by law. Without an understanding of the factors weighed by the underwriter the adjuster does not know what questions to ask when conducting the claims investigation.

Some of the most important factors considered by the underwriter before accepting or rejecting a risk for insurance, with which an adjuster should be familiar, are discussed below and deal with the hazards faced by property.

A hazard is a condition that creates or increase the chance of loss. There are three major types of hazards: physical hazard, moral hazard, and morale hazard [Estate of Mauro By and Through Mauro v. Borgess Medical Center, 137 F.3d 398 (6th Cir. 1998)]:

A physical hazard is a physical condition that increases the chance of loss. Examples of physical hazards are icy roads that increase the chance of an auto accident, defective wiring in a building that increases the chance of fire, and a defective lock on a door that increases the chance of theft.
Moral hazard is dishonesty or character defects in an individual that increase the frequency or severity of loss. Examples of moral hazard are faking an accident to collect insurance money or submitting a fraudulent claim.
Morale hazard is a failure to care for a property to give it a better opportunity of incurring a loss.

Moral Hazard

The moral hazard is the increase in uncertainty caused by personal acts of individuals. These acts may contribute to the probability or severity of loss. The individual creating the problem may be the policyholder or another person. In either case the chance of loss is increased. A moral hazard may be present in every line of insurance. No underwriter can ignore it without incurring an increased risk of substantial loss. The moral hazard is very difficult to detect and therefore very dangerous to the insurer.

The concept of “moral hazard” does not generally refer to risks created by the moral character of the insured. Rather, in the professional literature, moral hazard refers to the effect of insurance on the incentive of the insured person to prevent a loss. In economic studies of behavior, this incentive is regarded as being present for all individuals, and the focus of analysis is identifying attributes of insurance contracts that might restore the insured’s incentive prevent losses. [Fair Housing Opportunities of Northwest Ohio v. American Family Mutual Ins. Co., 684 F. Supp.2d 964 (N.D. W.Va. 2010)]

Morale Hazard

There are cases where the ownership of the property is less desirable than the proceeds from insurance. One example is an outdated building situated in a business area with a high concentration of business and a shortage of parking space. The owner might receive rent from tenants but could receive more if the building was razed and the land used as a parking lot. Under such circumstances, there may be a temptation to start a fire, or at least to avoid taking steps to prevent a fire. This is an example of what insurance underwriters consider to be a morale hazard.
Similarly, the person who is unable to meet the payments on a loan and is faced with foreclosure can present a moral or morale (lack of self-interest) hazard. The property may not be saleable at a price high enough to repay the loan. The policyholder may fear a lower credit rating if foreclosure begins. When any of these conditions exist, there may be a temptation to “sell the property to the insurance company” by means of a total loss.

Underwriting decisions are based upon the assumption that the record of the past will continue into the future. When the underwriter looks at the character of an applicant, he or she assumes that the character will not change in the future. If an applicant shows that he or she has resorted to questionable acts in the past it is likely he or she will do so again in the future.

The most obvious example is an applicant who has had one or more questionable insurance claims. Since arson-for-profit is difficult to prove and allowances are made for coincidences in order to avoid prejudging a person, the claim may be on record as a questionable one. A record of questionable non-insurance transactions in the past should also provide a clue to the character of the applicant. The underwriter who ignores an insured’s history will likely cause the insurer to pay for the repetition of it.

One example from my personal experience an insured who was asked if he had incurred a loss or claim in the five years before signing the application responded in the negative. Investigation established five prior claims during that period and two losses that were not presented as a claim. In addition, the insured, an immigrant who had only been in the U.S. for ten years had filed in Los Angeles County Superior Court more than 150 lawsuits. Had the underwriter known any of the true facts, including the fact that one of his claims was paid on the date he signed the application, the policy would never have been issued. Although the case was finally resolved with a summary judgment affirmed on appeal that the policy was rescinded to its inception, the fact that the insurer took the insured at his word without any attempt to investigate before offering to insure cost the insurer more than $500,000 in legal and investigation fees.

ZALMA OPINION

It is essential for a claims person to understand that he or she is an important part of the insurance relationship. The adjuster is not limited to adjusting and resolving claims but to also observe and report what is observed that might effect the insurance.

Available as a hardcover Available as a Kindle book Available as a paperback

© 2021 – Barry Zalma Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at

http://www.zalma.com

and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ Rhe last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/ podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4