How an Insurer Resolves a Claim

Processing a Claim

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Obtain Relevant Documents

The adjuster must obtain copies of all relevant and material records from the insured. These include:

1. leases;

2. documents establishing title to real property (deeds and trust deeds);

3. the last physical inventory;

4. receipts, invoices, purchase orders, and other evidence of purchase and ownership;

5. the general ledger of the business;

6. the state and federal income tax returns of the insured if willing to produce them;

7. § the policy as delivered to the insured;

8. § the banking records of the business for at least the six months before the loss;

9. § a sworn proof of loss; and

10. § any other document that might be relevant or material to the investigation.

Most insurance policies contain provisions requiring the insured or claimant to cooperate in the investigation of a claim and to produce certain documents and information in support of the claim. Documenting the claim is important because it commits the insured or claimant to a position with respect to the claim. After committing to a position, the veracity and legitimacy of the claim can more easily be tested.

Claims Inventories or Other Documents

Many insurers, when faced with a property claim, require the insured to present an itemized list of contents included in the claim. Frequently, forms are sent to the insured that request information concerning claimed items such as a description of the item, date of purchase, place of purchase, and purchase price.

The adjuster should also request any supporting documentation such as receipts, operating instructions, warranties, photographs, or other documents that the insured has to establish the existence, ownership, and value of the items claimed lost. This information assists the insurer in establishing the amount of the loss and the appropriate quantum of the claim. It also locks the insured into a position concerning the claimed items from which he or she cannot later retreat.

As with intentional misrepresentations in a proof of loss, it is generally well settled law that intentional misrepresentations in a claims inventory will void coverage under the standard fraud provision in most insurance policies. Claims can be denied if the jury could find that the actual inventory at the time of the fire was less than that claimed.

In Gregory’s Continental Coiffeurs & Boutique, Inc. v. St. Paul Fire & Marine Insurance Company, 536 F. 2d 1187 (7th Circuit 1976), the Seventh Circuit held that the company’s gross overvaluation would, of itself, support an inference by the trier of fact that the overvaluation had been deliberate and intentional.

Some courts have held that even where an actual loss happens, coverage for the insured’s entire claim may be barred where the insured also claims additional items not damaged or destroyed in a loss. Overvaluation raises a presumption of fraud in proportion to the excess. That presumption can be avoided by presenting evidence that the overvaluation was innocent and not intentional. [Stebane Nash Co. v. Campbellsport Mut. Ins. Co., 27 Wis.2d 112, 124, 133 N.W.2d 737 (1965); American Family Mut. Ins. Co. v. Schley, 978 F.Supp. 870 (E.D. Wis. 1997)]

In my experience claims have been denied and insureds prosecuted for insurance fraud when it was discovered that something as insignificant as a wooden duck decoy, an Encyclopedia Britannica, or diamonds were discovered in the possession of the insured or returned to a vendor after the claim was made.

The New York Court of Appeals in Saks & Company v. Continental Insurance Company, 23 NY. 2d 161, 242 NE. 2d 833 (1968) held:

[t]he insured fraudulently includes additional items to those actually destroyed by fire in his proof of loss, the policy vitiated and recovery thereunder is not permitted even though the insured has suffered an actual loss as to part of the included items.

Establish the Amount of the Loss and Claim by Preparing a Scope of Loss

To aid the insured in his or her obligation to prove the loss, the adjuster must, on the first visit, establish with the insured the exact scope of loss. This means that the adjuster and the insured (or the insured’s PA) must walk through the insured’s house or business and agree to exactly what was damaged and destroyed as a result of the peril insured against.

The term "scope of loss" ordinarily refers to the domain of putatively damaged items relevant to a claim. [(Lee v. California Capital Ins. Co. (2015) 237 Cal.App.4th 1154, 1160, 1161-1164, 188 Cal.Rptr.3d 753 (Lee).) Khorsand v. Liberty Mut. Fire Ins. Co., 230 Cal.Rptr.3d 89, 20 Cal.App.5th 1028 (Cal. App., 2018)]

The adjuster can get this agreement orally with a tape recorder or write it down on paper. The scope of loss must be detailed. Descriptions, including room dimensions; materials, like moldings, flooring, wall coverings, and fixtures; and information about special features, openings, casements, detailing, moldings, and other architectural features must be part of the scope of loss. The scope of loss must be complete.

In Arizona, the USDC concluded that no reasonable juror could conclude that despite the additional consideration given regarding the scope of loss, State Farm's decision to pay based on its own estimates was evidence of a bad faith failure to reconcile its scope of loss with estimates from the insured. [El Capitan HOA v. State Farm Fire & Cas. Co. "No. CV -PHX-SMM (D. Ariz. 2014)]

In California the insureds claimed the insurer violated Insurance Code section 10103.5, which requires every residential property insurance disclosure to attach a California Residential Property Insurance Bill of Rights. Among those rights are the right to receive, "[i]n the event of a claim, an itemized, written scope of loss report prepared by the insurer or its adjuster within a reasonable time period" and "notification of a consumer's rights with respect to the appraisal process for resolving claims disputes." [2156 Stratford Circle, LLC v. AIG, Inc. (Cal. App. 2012)]

The adjuster must never:

• take a quick look around and ask the insured to fill out a property loss form at his convenience;

• leave the insured with blank forms, except for supplemental items learned of after the initial scope was completed;

• take a partial scope and attempt to do the rest later;

• rely on the expertise of the insured’s public adjuster; or

• rely on a contractor to establish the scope.

The adjuster must walk through the entire scene of the loss with the insured and obtain an agreed scope of loss. He or she must advise the insured that the adjuster will be retaining experts in the valuation and repair of the type of property that is involved. These experts will bid on the repair and replacement from the agreed scope. The adjuster must present the insured with a copy of the agreed scope, and inform him that he may, if he wishes, obtain similar opinions based on the same agreed scope.

The adjuster should provide two general contractors (different from the construction consultant who helped the adjuster set the scope) with a copy of the adjuster’s scope of loss. Each contractor should prepare detailed estimates of the costs of repair based upon, and written in the same order as, the adjuster’s scope of loss so that the adjuster can identify the low bidder. The adjuster then should prepare an estimate of the cost of repairs for comparison with the estimates made by the contractors.

Once the adjuster and the insured have agreed to the scope of loss, the adjuster should have the insured sign the form agreeing to the scope. If the adjuster had tape recorded the scope of loss the insured can sign the tape itself or a transcribed copy of it.