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The Basics of Property Claim Adjusting

November 2003

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.

by Barry Zalma
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.

Read the Policy

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.

Read the Loss Notice

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:

  • when the loss occurred;
  • the type of coverage the insured has;
  • the type of loss;
  • the insured’s name, address, and telephone number;
  • the agent’s name and address;
  • the location of the loss;
  • who to contact and how to contact him or her; and
  • whether there is anything to which the adjuster should give special attention.

Meet with the Insured and Witnesses

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.

Obtain a Recorded Statement

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.

Obtain the Proof of 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:

  • Under a contract of fire insurance, payment to the insured shall be made within 30 days after the amount of the loss and the liability of the company have been agreed upon or settled by the insured and the company in writing. If the company fails to pay within the 30 days, the payment shall bear interest, beginning the 31st day, at the prevailing legal rate. The company also shall be liable for all costs of collection, including reasonable attorneys fees, if legal action is necessary to obtain payment.

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.

Obtain Relevant Documents

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

  • leases;
  • documents establishing title to real property (deeds and trust deeds);
  • the last physical inventory;
  • receipts, invoices, purchase orders, and other evidence of purchase and ownership;
  • the general ledger of the business;
  • the banking records of the business for at least the 6 months before the loss; and
  • 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. 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:

  • [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

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:

  • take a quick look around and ask the insured to fill out a property loss form at his or her 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 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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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