Chapter 31

Payment of Claims

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
 Introduction
• The insured must inform the insurer about the loss as
soon as the loss occurs.
• On receiving the notice, the insurer appoints an
assessor/adjuster to examine the facts of the case and
to determine the amount of liability.
• Steps taken to check that;
• The policy is in force on the date of occurrence of the loss.
• The loss is done by a peril insured.
• The property affected by the loss is the same under the
policy.
• Notice of loss is received duly.
 Claim Form
• The claim form requires the following
information;
• Full description of circumstances of the loss such
as date, time, the place of fire.
• Cause of fire.
• Particulars of the property.
• Statement of other insurance of the property,
name of the insurer, the policy number and the
sum assured.
• Sound value of the property.
 Survey Report
• Cause of loss
• The amount recommended for payment
• Detail and value of salvage, the method of disposing it.
• The position in respect of compliance of the warranties.
• Apportionment of loss and expenses among the insurers
where there are more than one insurance.
• Information about natural ignition of fire or arson attack.
• Whether there was a breach of warranty.
• The exact amount of loss to be paid by the insurer.
 Salvage Corp
• Fire Salvage Association Corporation. the objective of
the corp. is to provide a fully trained corps to salvage
materials from the buildings on fire, to protect them
from water damage.
• The corps also render following services;
• checking the fire hydrants in the cotton green storage area.
• Inspection of sprinklers in the godown.
• Training of the fire fighting squads.
• Provision of facilities to fire sub committee to test sprinklers.
• Reporting on unusual features on the premises at time of
fire extinguishment.
 Application of Average Clause in
Payment of Claims
• In case of under insurance, the liability of
insurer is restricted to that proportion of the
loss that the sum assured bears to the value of
the property at the time damage.
The Pro Rata Condition of Average
• The operation of the condition can be shown as
bellow;
Sum assured Tk.
1,500,000
Loss 300,000
Value of the property at the time of fire 1,800,000

The insurer’s liability is = sum assured/value of property x loss

= 1,500,000/1,800,000 x 300,000 = tk. 250,000

• Thus the insured will bear tk. 50,000 and the

insurer will pay tk. 250,000
 Contribution
• Contribution is corollary to principle of indemnity. It
prevents the insured from receiving more than the
total amount of the loss.
• It is applied where two or more insurance cover the
same interest, the same subject-matter against the
same peril.
• Pro rata contribution; the insurer shall not be liable to
pay or contribute more than its reasonable proportion
of loss.
• The insured is obliged to claim from each insurer, a
ratable proportion of his loss.
 Some Examples
• Example 1;
• If two policies A and B have been taken for tk.
30,000 of a building respectably at tk. 10,000 from
A and 20,000 from B and loss is tk. 6,000.
The policy A will pay;
= 10,000/30,000x6,000= tk. 2,000
Policy B will pay;
= 20,000/30,000x6,000= tk. 4,000
 Example 2
• If the value is tk. 60,000 in the previous
example, the payment will be;
• Policy A = 10,000/60,000x6,000= tk. 1,000
• Policy B = 20,000/60,000x6,000= tk. 2,000
• Total tk. 3,000
 Example 3
• In the example 1, if the insured value of the building is tk.
20,000 and the loss is tk. 6,000, the payment, therefore, is
made by the following;
• Policy A = 10,000/20,000x6,000 = tk. 3,000
• Policy B = 20,000/20,000x6,000 = tk. 6,000
• Total tk. 9,000
• Here the amount of indemnity of tk. 9,000 is more than the
actual loss of tk. 6,000 where the insured will be paid tk. 6,000
only to the extent of loss.
• So,
• Policy A = 3,000/9,000x6,000 = tk. 2,000
• Policy B = 6,000/9,000x6,000 = tk. 4,000
• Actual claim/or payment = tk. 6,000
 Coinsurance
• When a large risk is shared by two or more
insurance companies (insurers), it is done on a
coinsurance basis i.e., each insurer accepts
only a specific percentage of the risks as shown
bellow;
Apportionment
Insurance Sum assured Share of loss Share of
Company expenses
A % Tk. Tk.
B % Tk. Tk.
Total 100%
 Example
• The sum assured tk. 20,000 by A & Co. and tk. 40,000
by B & Co. the amount of loss is tk. 12,000 and the
expenses to extinguish the fire is tk. 6,000. the
insurance companies will share the loss and expenses
as bellow in proportion to their respective sum
assured.
Apportionment
Insurance Sum assured Share of loss Share of
Company expenses
A 20,000 =33.33% Tk. 4,000 Tk. 2,000
B 40,000 =66.67% Tk. 8,000 Tk. 4,000
Total 60,000 =100% Tk. 12,000 Tk. 6,000
 Loss expenses
A = 20,000/60,000x12,000 = tk. 4,000 A = 20,000/60,000x6,000 = tk. 2,000

B = 40,000/60,000x12,000 = tk. 8,000 B = 40,000/60,000x6,000 = tk. 4,000

Thus the both company A and B will share the loss and expenses according to their
proportion in the insurance
 Special Condition of Average
• The condition shall operate only if the sum
assured is less than the 3/4th of the value of
the property.
• If the sum assured exceeds this proportion of
the value at risk, the insured recovers the full
amount of the loss up to the sum assured.
 Task of Adjuster
• What policies and agreement covered the property at the time of loss.
• Whether the property described in the policy really located and placed at
the described place.
• Whether property had been removed at the safer place at the time of loss.
• The nature and extent of the insured's interest in the property.
• Whether loss occurred after the commencement and before the expiration
of the contract.
• Whether the loss was direct result of fire or other insured perils.
• Whether any part of the loss was caused directly or indirectly by enemy
attack, military offenses etc.
• Whether the loss occurred while hazard was increased by any means
within the control or knowledge of the insured.
• Whether before or after the loss, the insured willfully concealed or
misrepresented any material facts.
 Required Task by Adjuster
• By agreement with the insured or by appraisal fix the
actual cash value of the property at the time of loss and
amount of loss thereto.
• Exclude uninsurable property or excepted property from
the claim.
• Determine the extent of the application of the insurance
and the contribution to be made by the policies.
• If there are two or more policies covering the property,
apportion the loss among these policies.
• Investigate any disputed cancellation of the policy.
• Preserve any right of recovery from third parties to the loss
Payment and Discharge by Adjuster
• Meet the insured who will act for him in the adjustment,
discuss the loss with him and make any necessary
examination of the records.
• Examine the policy. If it cannot easily be produced, search for
the agent’s or broker’s policy instead.
• Inspect the scheme of the loss and examine any of the
property still in evidence.
• Examine available reports or records covering the occurrence
of the loss, those of fire department, peril or salvage corps,
police etc.
• Consider whether any insurance held by others should bear
the loss or any part of it.
 Waiver and Estoppel
• Waiver is defined as the voluntary relinquishment of a known
right.
• The waiver may be expressed or implied.
• An insurer is informed that a policy under which claim is made is void
because the person had no insurable interest in the property; but still, the
insurer is going to pay it is a waiver.
• Estoppel is the legal bar raised by a person’s own action against
asserting a right that he/she once possessed or making a choice
that once open to him.
• An insurer may be estopped from exercising its option to take all or any
part of the property at the agreed or appraised value if it delays its notice
to the insured that it intends to do so.
• When the insurer has sought to fix the amount of loss through arbitration,
it is estoppel from exercising its option to reinstate or replace.
End of Chapter