1-I Interest, Subrogation, and Claims

1. Claims

1.1 Intro: Interest, Claims, and Subrogation

Chapter objectives:
● Define claim and explain the basic claims process
● Differentiate between insurable interest and lender interest
● Explain the concept of subrogation

There is a definite, predictable claims-handling process that is almost

universal, for any claim, liability or property. Some claims have more steps
than others, and the complexity can vary widely. Some claims are first party
and others are third party. But the process always begins with a claim,
includes an investigation, and ends with an adjustment.

Moreover, claims can often involve multiple parties with different financial
interest in the outcome. Understanding financial interests and how to
preserve the underlying principle of indemnity is very important for the
adjuster.

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 1

In this module, we will familiarize you with the rudiments and basic parts of
a claim and the claims-handling process. We will also explore the concepts
of insurable interest, lender interest, and subrogation, three principles that
prevent the abuse of insurance policies for financial gain.

1.2 Insurance Claims

Claim​:
A demand for payment in accordance with the terms of an insurance policy (does not
always result in indemnification)

Claimant​:
Someone who has filed a claim

Two types of Claim:

1. First-Party Claim
2. Third-Party Claim

The claim is the first step in indemnification. An insurance claim is defined

as the insured’s official demand for payment from the insurer in accordance
with the terms of a policy.

Once a policyholder has filed a claim, he is considered a claimant.

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 2

If the claimant’s damages or losses fall under the terms of his insurance
contract, he has an immediate right to demand payment from his insurer
according to the terms of the contract.

However, filing a claim is only the first step; it does not result in the
immediate indemnification of the policyholder. A claim is simply an
assertion of the policyholder’s rights against the terms of a contract,
whereby the policyholder “claims” that he deserves payment from the
insurer according to the terms of the contract.

Before we look at claims filing, we should first distinguish between first and
third party claims.

1.3 First Party Claim

First-Party Claim​:
● Filed by the policyholder against his or her own insurance policy
● Must be paid by policyholder’s own insurer

A first party claim is when a policyholder demands a payment from her own
insurer who, in turn, directly indemnifies her.

A first party claim is always paid by the policyholder’s insurer, never any
other insurer, and the payee is always the insured.

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 3

 For example…
If you insure your home against hail damage with ABC Insurance, and a hailstorm
damages your roof, you’ll make a first party claim to ABC Insurance to recover the
damages, and they’ll send you a check.

1.4 Third Party Claim

Third-Party Claim​:
A claim filed against an insurance policy by anyone other than the person named on
that policy

A third party claim is a claim filed against an insurance policy by a third

party not named on that policy.

In other words, if you injure someone else or damage their property, that
person would file a third party claim, to your insurer, against you.

For example…
If Jake runs a red light and crashes into Kelly’s car, Kelly will want reimbursement for
the loss from Jake. Kelly can file a third-party claim with Jake’s insurer to pay for the
loss that he caused to her and her car.

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 4

 Another example would be if a customer slips in a puddle of water in a grocery store
and breaks his leg, he may file a third-party claim against the insurer of the grocery
store.

1.5 Filing a Claim

Claims-filing facts:
● Filing a claim does not grant immediate indemnification
● When insured parties file a claim, it means they believe they are owed payment
by an insurer
● Policyholders file a claim by calling their insurer

So, what is the process of filing a claim?

Once again, filing a claim does not mean that the claimant is immediately
indemnified.

Claimants begin by contacting the insurer, typically by phone, and simply

state that they believe they have a legal right to compensation.

An insurance claim can also be filed with a local representative, such as an

insurance agent, or it can be filed directly with the insurance company in
writing or by phone.

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 5

1.6 Acknowledgement

After receiving a claim, an insurer must:

● Acknowledge receipt of the claim
● Begin investigating all pertinent facts and issues surrounding the claim

Insurance Adjuster:​ represents the insurer; responsible for evaluating the

circumstances of a claim.

When someone files a claim, the insurer is required by law to respond,

even if it does not think the claim is valid. Each state has its own guidelines
for how insurers should respond to claims.

The adjuster acts as a representative of the insurer and is responsible for

handling claims until they are resolved.

1.7 Investigation

Investigation​ includes:
● Finding the proximate cause of the loss
● Examining all damages
● Noting all circumstances surrounding the loss
● Taking witness statements and reviewing police reports, when necessary

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 6

 ● Determining liability, when relevant to the claim
● Deciding whether the claim is valid or not

When investigating a claim, the adjuster will determine the proximate cause
of the loss, examine the damage, and take notes of all circumstances
surrounding the loss, including witness statements and police reports, if
any. In some cases, the adjuster will need to determine who was liable, or
responsible, for the loss.

Based on the investigation, the adjuster will determine whether or not the
claim is valid. He will make sure the policy was in effect at the time of the
loss, and that the damages are covered under the terms of the policy.

If a claim is not valid, the insurer will deny it. If it is valid, the adjuster will
move on to the next step in the claims process: evaluation.

1.8 Evaluation

If the claim is valid, the adjuster evaluates it, which includes:

● Considering policy limits and deductibles
● Calculating lender interest
● Determining the value of the loss
● Applying all financial provisions of the policy

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 7

If an adjuster completes the investigation and decides the claim is valid, he
must then evaluate it to determine a fair indemnity.

The evaluation will take into account all provisions of the policy, including
coverage limits, deductibles, valuation, coinsurance, and lender interest,
among others. We will cover these terms in more depth a little later.

Once the adjuster has concluded the evaluation, he will report his findings
to the insurer.

1.9 Adjustment

Adjustment: ​The final disposition of a claim

● If claim is accepted, the insurer must pay promptly after notifying that the claim
will be paid
● If claim is denied, the insurer must explicitly state its reasons for denial

The final disposition of a claim is called an “adjustment.”

If the insurer agrees with the adjuster’s evaluation, then the adjuster will
contact the claimant to accept or negotiate the settlement amount. Once
approved by both parties, the claim must be paid reasonably promptly.

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 8

If the insurer denies payment on the claim, they are required by law to state
the reasons why the claim was rejected.

It is also important to note that an adjuster can have more or less authority
to settle the claim, depending on his work relationship with the insurer.
Employee adjusters tend to have more authority to settle directly with the
claimant, while independent adjusters tend to need to get review by the
insurer first.

1.10 Review: Claims

First Party claim: ​made by the policyholder on her own policy

Third Party claim: ​made by anyone other than the policyholder

The Claims Process:

● The claimant contacts the insurer and files a claim
● The insurer acknowledges the claim and requests all items necessary to prove
the loss
● The adjuster investigates the claim and determines whether it is valid
● If valid, the adjuster evaluates the claim
● The insurer accepts or rejects the claim

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 9

In review, a claim is an assertion of the policyholder’s rights against the
terms of a contract, whereby the policyholder “claims” that she deserves
payment from the insurer.

In a first party claim, the policyholder makes a claim against her own policy.

A third party claim is made by anyone other than the policyholder. This is
usually done when the policyholder is liable for damages to the third party.

The claims-handling process is almost universal for any claim. This

involves acknowledgement of the claim, an investigation and evaluation,
and finally an adjustment.

2. Insurable Interest and Subrogation

2.1 Insurable Interest

Insurable Interest:
Direct financial interest in protecting something or someone
● Only parties with insurable interest can insure a property or person
● You cannot insure a house you do not own or have some financial interest in
● You can only insure someone’s life if that person’s death would cause you
economic hardship

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 10

Because insurers indemnify first party claimants for damage to their insured
property, it is important to safeguard against paying claims for any loss that
falls outside of the intended scope of the policy. One safeguard is for
insurers to require that the policyholder has an actual, verifiable insurable
interest in the insured item.

Insurable interest means that the policyholder has direct financial interest in
the insured item.

For example…
A person can buy an insurance policy on her own house because she has a direct
financial interest in preserving the house from damage or destruction. She has an
insurable interest.

However, she cannot buy insurance on her friend’s house. If her friend’s house is
destroyed, she suffers no direct economic hardship because she has no financial
interest in preserving that house.

2.2 Lender Interest

Lender Interest​:
A lender’s financial stake in an insured item

Lender interest:
● Protects a lender who loans money to a buyer

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 11

 ● Allows insurers to compensate a lender if a property, in which the lender has a
financial interest, is damaged

Note that it is possible for more than one party to have an insurable interest
in the same property. Lender Interest represents the lender’s financial
stake in an insured item.

The majority of all insured property in the USA is purchased with credit
through a lender; for instance, mortgage companies for home loans, and
banks or credit unions for auto loans.

Because lenders also have an insurable interest in these items, they

require insurance policies from their borrowers in order to protect their own
financial stake in a home or car or property. This way, lenders can expect
indemnification for losses or damage to property purchased with their
money.

Virtually all insurance policies contain special lender interest provisions,

described in the conditions section of a policy.

These provisions ensure that the lender will be listed as a payee under the
policy if a loss or damage occurs. Lenders are paid directly by the insurer
to cover their financial interest in the property. Often this is done by having
both the insured’s and the lender’s name on the check; both must sign off
on it, and the lender retains the right to withhold their interest in the

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 12

property; indefinitely in the case of total loss, or until adequate repairs are
made if the item is in fact repairable.

2.3 Lender Interest Provisions

Lender interest provisions:

● Allow the lender to be listed as a payee on the policy
● Ensure that the lender is notified if the policy is canceled, reduced, or expires
● Provide compensation for the lender in the event of an act or an omission by
insured party
● Permit the lender to pay policy premiums to maintain coverage, if the insured
fails to do so

In an insurance policy, the lender provisions afford a number of rights to the

lender. They allow the lender to be listed as a payee on the policy, and they
will be given notice if the policy is canceled, reduced, or has expired
without payment. It also provides compensation for the lender in the event
of an act or an omission by the insured party, and permits the lender to pay
the policy premium if the insured fails to maintain coverage.

For example....
If the insured burns down his own house, the lender can still collect indemnification up
to the limit of its insurable interest, even though intentional acts by the policyholder
are not covered. In a homeowner’s policy, the lender’s rights are detailed in what is
called a “mortgagee clause.”

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 13

2.4 Limits on Lender Provisions

Limits on Lender Interest Provisions:

● Lender may only collect up to its financial interest in a property
● Lender may never change or cancel an insurance policy

While the law does recognize lender rights to protect financial interests, the
provisions also place limits on the lender’s role in the contract.

Lenders, for instance, are never allowed to interfere with a borrower’s

insurance contract outside the provisions outlined in the conditions.

For example…
An insurer would ​never​ allow a lender to cancel an insurance policy on a borrower.

2.5 Subrogation

Subrogation
The transfer of rights that allows the insurer to recover its losses after it has
indemnified a policyholder

How it works: ​When a policyholder is indemnified for a loss, she may no longer

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 14

 collect payment for that loss from anyone else. She has transferred this right to the
insurer.

Subrogation is the transfer of rights that allows the insurer to “step into the
insured’s shoes” and recover its losses after it has paid the insured for a
claim.

When an insurer indemnifies a policyholder for a loss caused by a third

party, the insured automatically transfers to the insurer his right to recover
financial damages from the negligent party. In other words, a policyholder
receives indemnification from his insurer, and therefore may not be
compensated for those same losses by the person who actually caused
them.

By indemnifying the policyholder, the insurer has already paid for the
damages caused by the negligent party. This gives the insurer the right to
be the only party allowed to collect reimbursement for what it paid, from the
negligent party.

For example…
Say Ed destroys some of Sue’s property. As a matter of justice, once Sue is paid by
her insurer for the damage that Ed caused, she no longer has any legal right to collect
money from Ed for those losses. Only her insurer can demand payment from Ed in
order to recover the amount it paid to Sue.

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 15

2.6 Subrogation Example

Let’s look at an example.

For example…
While out driving, Beth is struck by Sarah who runs a red light. Beth suffers severe
injuries and files a claim with her insurer to pay $25,000 in medical expenses, and the
insurer pays her bills.

When Beth accepts the $25,000 indemnification from her insurer to pay her medical
bills, she automatically transfers her right to collect $25,000 directly from the negligent
party or from the negligent party’s insurer. Beth’s insurer now has the right of
subrogation, which means it has the right to stand in Beth’s place and seek restitution
from Sarah.

2.7 Limits on Subrogation

Limits to Subrogation:
● Subrogation only applies up to the amount that the insurer pays
● The policyholder still has the right to demand payment from the guilty party for
any damages that were not covered

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 16

Another important aspect of subrogation is that it only applies to the
amount actually paid to the insured through the insurer, which of course is
limited by the insured’s policy limits.

For example…
Let’s say that Beth suffered $25,000 in damage but her insurance policy maxed out at
$20,000 of coverage. In this case, Beth would still have the right to collect the
remaining $5,000 from Sarah or Sarah’s insurer.

So subrogation prevents injured parties from collecting multiple damages

on a single loss, which would violate the principle of indemnity, which
establishes that a policyholder cannot profit from a claim.

2.8 Waiver of Subrogation

Waiver of Subrogation
● Included in certain types of policies and contracts
● Takes away the insurer’s right to recover its losses after paying a claim
● Usually involves a higher premium

Some types of policies and contracts usually include a clause that waives
the right of subrogation. This means that the insurer does ​ ​ ave the right
not h
to recover its losses from the at-fault party after paying a claim.

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 17

This clause is often found in construction contracts and other professional
services contracts. The waiver is often accompanied by an additional fee or
a higher premium, since the insurer is taking on more risk.

For example…
Let’s say that a company rents space in an office building. Included in the rental
agreement is a waiver of subrogation, which means that the tenant and the owner of
the office building give up their rights to sue each other if damages occur. If one of the
tenant’s employees causes significant damage to the building, the building’s insurer
will step in to pay the claim, but cannot pursue restitution from the tenant.

You can see how this clause involves more exposure for the insurer, but
also minimizes lawsuits.

2.9 Review: Interest and Subrogation

Insurable interest
Direct financial interest in protecting a unit

Lender interest
The lender’s financial stake in an insured item

Lender Interest Provisions

Protect lender interest by allowing the lender certain rights in the policy

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 18

 Subrogation
The transfer of rights that allows the insurer to recover its losses after it has
indemnified the policyholder

Insurable interest is direct financial interest in protecting something or

someone. If a person has insurable interest in something, it means that the
person will suffer a direct economic hardship through the loss of that item.

Lender Interest represents the lender’s financial stake in an insured item.

Lender interest provisions in an insurance policy protect lenders by
granting them certain rights.

Subrogation applies when a third party is at fault for a loss. It is the transfer
of rights that allows the insurer to recover its losses from the third party
after it has paid the policyholder for a claim.

Copyright © 2012-2020 COR Enterprises LLC dba AdjusterPro 19