Private property and casualty insurers lose
$100 billion every year to insurance criminals. Insurance fraud is a prevalent
problem that receives little attention by the police and judicial system. Often
seen as a "victimless" crime, it is not. This drain on society can be plugged
if insurers, insureds, and others raise their voices to point out the problem
and be vigilent about seeing that justice is done.
Barry Zalma, Inc.
The first person from the insurer that the insured meets when he or she suffers
a first-party property loss is the adjuster. The adjuster will help the insured
prove the loss to the insurer and get the indemnity promised by the insurer.
The adjuster will investigate the loss, interpret the policy wording, and apply
the policy wording to the facts discovered in the investigation.
To understand a first-party property policy of insurance, the adjuster must
read and analyze the policy in a logical and thorough manner. The facts of each
individual claim clarify and color the interpretation of the policy contract
and bring different nuances to the policy wording. The adjuster must know what
coverage is available to the insured, the limits of liability, the territory
limitations, and the exclusions, conditions, and endorsements attached.
Before beginning to investigate a claim, the adjuster must first establish
or confirm coverage. To do this, he or she must get a complete copy of the insurance
policy. The company’s copy (often called the "daily") usually has only a "declarations
page" and partial copies of standard forms. However, the policy can be recreated
from the declarations page, the partial forms in the "daily file," and standard
forms from the underwriting department. By viewing a current copy of the policy
in the possession of the insured, or automated information on the insurer’s
computer database, the policy coverage can be confirmed. The adjuster must also
determine the policy limitations and determine the perils insured against. For
example, is the policy a Standard Fire Policy, a Multiple Named Peril Policy,
or a Direct Risk of Physical Loss Policy?
The adjuster must be familiar with each of the exclusions or exceptions from
coverage. The so-called concurrent cause doctrine does not exist with regard
to first-party property insurance in California and many other states. The "concurrent
cause doctrine" holds that if more than one cause concurs with others to bring
about a loss and one cause is excluded and the other is not excluded, coverage
will apply regardless of the proportion with which the non-excluded cause was
related to the loss. This is still the law in California for third-party losses
but not for first-party losses. Before other states could adopt the concurrent
cause doctrine for first-party losses, insurers changed the policy wording to
avoid insuring against something they thought they had excluded. They now require
that coverage be determined, on first-party policies, by the cause that is the
primary, moving, or efficient proximate cause of the loss.
The loss notice is one of the most important documents the adjuster will
see. It is the starting point of all claims. It tells the adjuster:
Once the adjuster has completed this basic preparation, he or she should
arrange to meet with the insured and witnesses. The adjuster should explain
to the insured that the policy requires the insured to prove his or her loss
to the insurer. In order to provide the best service possible and to act in
good faith to its insureds, the insurer hires the adjusters to help the insured
prove his or her loss. The adjuster cannot prove the loss for the insured—he
or she is only present to help the insured.
To act in good faith, the adjuster must not do, or fail to do, anything that
will deprive the insured of the benefits of the policy of insurance.
The adjuster must take a complete recorded statement from the insured and
all witnesses to the incident that caused the loss. The adjuster must get answers
to the most important of all questions: who, what, where, why, when, and how,
with regard to the policy and the loss. Recorded statements of neighbors and
relatives of the insured may also be useful in obtaining a complete picture
of the loss.
The adjuster must advise the insured of his or her obligations under the
policy, including the obligation to submit a sworn proof of loss within 60 days
of the date of the loss. The proof of loss is a key document that should be
obtained and executed under oath by all insureds on every loss. A proof of loss
is the sworn statement of the insured required by the conditions of the policy
of insurance. It sets forth the insured’s knowledge and belief as to the date,
time, and cause of the loss; the encumbrances on the property; the persons with
an interest in the property; the value of the property; the amount of loss;
and the amount of claim.
The insured may retain the services of a public adjuster (PA) to help prepare
a proof of loss. A PA, for compensation, acts on behalf of, or helps, an insured
in negotiating or effecting the settlement of a claim for loss or damage under
any policy of insurance covering real or personal property. (More details on
the duties and obligations of PAs and the law that controls their activities
are provided below.)
The oath carries with it the penalties of perjury—up to 5 years in prison
in most states. More important than the seldom-prosecuted criminal penalties,
if the proof of loss is falsely sworn, the insured loses any right he or she
might have to any of the benefits of the policy. False swearing might also violate
the penal provisions of one of the insurance fraud statutes enacted in many
states. These statutes usually make insurance fraud a felony punishable by up
to 5 years in prison—a felony that is being prosecuted with more vigor than
perjury. Since it is the insured who swears to the truth of the statements on
the proof of loss, the adjuster should not attempt to dictate the contents of
the form. The adjuster will help the insured but cannot execute a sworn proof
of loss for him or her because the insured alone has the personal knowledge
that the statements in it are true. In most cases, the insured is required to
sign the proof of loss and have his or her signature notarized, thereby swearing
to the accuracy of the information provided.
Some insurers instruct their adjuster to waive the proof of loss requirement
except under special circumstances. I believe such a policy is improper and
emasculates the policy condition requiring a proof of loss and could be construed
to weaken other conditions of the policy. If such a waiver of this important
policy condition is needed, it must be applied uniformly for all insureds. The
policy should be limited and capable of being applied to all claims with language
such as: "no proof of loss is required if the claim is less than $5,000."
If the adjuster and the insured are in agreement on the amount of the loss,
the proof of loss is one of the last documents prepared (along with the statement
of loss, the subrogation agreement, and the settlement draft). California Insurance
Code section 2057 provides:
Similar statutes, regulations, or case authority can be found in other states.
The California Insurance Code Section quoted here is an expression of California’s
desire to protect insureds from insurers. The adjuster must determine if the
statutory or contractual 60-day period has been shortened by statute or court
decision in the particular jurisdiction in which he or she practices.
Many adjusters have misinterpreted this section of the California Insurance
Code to require a response to a proof of loss within 30 days of its receipt
by the company. The section does not impose such a requirement. The section
merely changes the Standard Fire Policy’s promise to pay within 60 days to 30
days and it sets out methods for enforcing failure to pay promptly. It also
codifies a simple fact of business life: it is business suicide to delay payment
of a claim once an agreement on the amount has been reached.
The insurer has a reasonable time to respond to a proof of loss. Some personal
and commercial lines policies now put in the wording a requirement that the
company respond to the proof of loss within 30 days. The adjuster must verify
the wording of the particular policy that is involved in the adjustment.
If the adjuster representing the insurer and the insured are not in agreement
on the compensability or the extent of the loss, a blank form of proof of loss
should be provided to the insured. The insured should be advised that when the
proof of loss is presented to the insurer, the insurer will respond to the document
accordingly. Providing a blank proof of loss to the insured is one of the only
ways an insurer can compel insureds to reveal their opinion of the amount of
loss. When fraud is suspected, the adjuster should demand a sworn proof of loss.
By so doing the adjuster gives the insurer help in defeating a potentially fraudulent
claim by compelling the insured to put the claim under oath.
The adjuster should be careful not to waive the 60-day proof of loss requirement
inadvertently. It should be waived, in appropriate cases, for a specified period
of time, but should never be an open extension. If the adjuster has waived the
60-day time limit expressly, or by actions, the adjuster must demand that the
proof of loss be presented to him or her on a certain date. I recommend not
less than 30, nor more than 60, days after the demand. The extended time should
not be extended further without exceptionally good cause.
When the proof of loss is received, the adjuster must recognize that most
policies have no language defining what a reasonable time is to respond to a
proof of loss. Depending on the facts, a "reasonable time" can be as short as
30 days and as long as 1 year. I would recommend that the adjuster attempt to
respond in some way to any proof of loss within 30 to 40 days of its receipt.
The Fair Claims Practices Regulations, enacted in many states, following
a National Association of Insurance Commissioners (NAIC) model set of regulations,
requires response to the proof of loss or proof of claim immediately, but no
later than 40 calendar days after receipt of the proof of loss.
If investigation reveals to the adjuster that it will take longer than 30
days to respond to a proof of loss, the adjuster should advise the insured of
this. The adjuster may, as appropriate, state that investigation is incomplete,
that experts have been retained who require at least 90 days to complete their
work, that counsel has been retained to advise the company, and it is expected
to take 30 to 60 days to complete counsel’s research, or any other honest and
reasonable excuse available. If the adjuster does not have an honest or reasonable
excuse, the insurer should either accept or reject the proof of loss.
The adjuster must obtain copies of all relevant and material records from
the insured. These include:
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.
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 Ins.,
536 F2d 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. The New York Court of Appeals in Saks & Company v Continental Ins., 23 NY2d 161,
242 NE2d 833 (1968) held:
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 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 adjuster can get this agreement orally with a tape recorder or write
it down. 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.
The adjuster must never:
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 on, 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.
Photograph the Scene. To substantiate the agreed
scope of the loss, the adjuster must photograph the scene—both the damaged and
undamaged portions of the property—that is the subject of the loss. The adjuster
must take a complete photographic and written inventory of the loss scene, taking
photographs of everything damaged, any possible source of ignition of a fire,
or any other peril that may have caused the damage and those things not damaged.
If the scene is extensive, the adjuster should consider hiring a professional
to do a video inventory of the loss location. It should be taken silently. A
narration can be added later, after everything has been seen. If there is an
extensive contents loss, the adjuster must retain the services of a salvor to
inventory and price each item of inventory, whether damaged or not.
Contact Authorities. Contact must be made with
the official investigating officers, either police or fire arson investigators,
in person. Personal contact is necessary to gain more than cursory information
from a report. The prudent adjuster cultivates a relationship with official
investigators. If the adjuster shows an interest in their work and an inclination
to help, the official investigator will more readily share information with
the adjuster. The adjuster who demands information from a police or arson investigator
will invariably be met with a refusal to comment. The adjuster should collect
as many investigation reports as are available and may purchase photographs
taken by the official agency. When an arson fire happens, both the arson unit
and the local police force will be on hand, and both will be taking pictures.
Determine Values. The adjuster should obtain
from the insured any photographs, videotapes, or motion pictures the insured
or its employees may have made of the loss. He or she must determine the actual
cash value of all of the property insured. If a replacement cost value endorsement
applies, the adjuster also must determine the full cost to repair or replace
the items with like kind and quality. If necessary to establish values, the
adjuster should retain the services of a real estate or commercial equipment
and stock appraiser.
Additional Living Expenses. If additional living
expenses are involved, the adjuster must instruct the insured that the coverage
is only for "additional" expenses incurred over normal expenses. Therefore,
the adjuster must obtain the amounts of the insureds’ normal expenses for: mortgage
payments, electricity, gas, water, trash pick up, gardening, laundry, food,
eating out, entertainment, travel, dry cleaning, property taxes, and any other
continuing usual household expenses.
Other Considerations. The adjuster must confirm
that the coinsurance, average, or reporting provisions have not been violated.
He or she obtains authority to agree with the insured as to the amount of the
loss and obtains from the insured a signed proof of loss of property, executed
before a notary, under oath, or signed under penalty of perjury.
The adjuster must obtain a subrogation agreement since almost every loss
has a potential for subrogation, and then issue a settlement draft in the amount
agreed in the proof of loss. The adjuster concludes by writing the closing report
with recommendations for the pursuit of subrogation or the disposal of salvage.
If the loss is extensive, the adjuster may need to hire a salvor to perform
a complete inventory for the insurer. If a structure is involved a construction
consultant or contractor can be retained to advise the adjuster and, for a fee,
to write a detailed repair scope for the benefit of the adjuster and the insured.
There should be agreement with the insured as to what was left after the
loss and what work needs to be done. If the adjuster does not have an agreed
scope of loss at the beginning of an adjustment, the loss will, invariably,
be larger when it is finally put together by the insured or the PA.
With regard to personal property, the adjuster will help the insured obtain
verification of the values of the property and descriptions. The adjuster will
develop sources that can establish values of certain classes of personal property.
This can be as simple as collecting retail catalogs, like those from Montgomery
Wards, J.C. Penney, or Tiffany’s. The adjuster can also find jewelers, furriers,
art dealers, computer stores, and the like who will talk to adjusters on the
telephone about values. Adjusters should develop sources at firms specializing
in replacing personal property who will provide insurers a volume purchase discount.
With the insured, the adjuster must prepare, as part of the agreed scope,
a list of all of the damaged or destroyed personal property showing its description,
age, cost, fair market value, actual cash value, or depreciated value. A combination
of all the efforts recommended will result in the adjuster establishing the
amount of loss and claim.
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