Claims Terminologies (1)

(by Tarran Dookie)

claims-terminologiesIn this two-part series we will identify various claims terminologies used in general insurance and explore their meaning. This article will highlight common claims terminologies and in the next article we will focus on claims terminologies met in specific classes of  insurance.


Act of God: This was defined in the case Nugent v Smith (1876) as “Natural causes directly and exclusively without human intervention and that could not have been prevented by any amount of foresight and pains and care reasonably to have been expected”. Examples are earthquakes, tsunamis, volcanoes, hurricanes and flood. Most policies insure acts of God as part of the basic cover or provide cover for extra premium.

Adjuster: A person contracted by an insurer to investigate the cause and circumstances of a claim. The adjuster would report his findings to the insurer and, if he believes that there is a valid claim, would usually recommend a settlement.

Arbitration: A system of deciding legal disputes between an insured and an insurer by use of a private tribunal instead of the matter going to court. Most policies contain an arbitration condition which stipulates that in certain circumstances arbitration must first take place before any legal action can be taken.

Claimant: The person making a claim under a policy. While many times the claimant is the insured, the claimant can also be a third party or someone whose life, limb or property or potential liability is covered under the insured’s policy.

Claims notification: Virtually all policies have a claims notification condition. The insured must notify the insurer as immediately as practicable of any event likely to result in a claim under the policy. Details of the claim must be submitted in the time frame given in the policy. Notice of any impending prosecution, inquest or fatal inquiry must be given to the insurer. Also, every letter, claim, writ, summons and process must be forwarded to the insurer immediately on receipt. Complying with the claims notification condition is important as an insurer can deny a claim if the condition is breached. A good example is unreasonably late reporting of a loss.

Condition precedent to liability: Conditions which must be fulfilled before an insurer becomes liable. For example, a claims notification condition may require an insured to report a loss or accident in a certain time frame or as soon as possible. If this condition is not fulfilled, the claim can be denied by the insurer.

Contribution: When an item is insured with more than one insurer, each insurer will pay a rateable proportion of the claim (i.e. in proportion to the amount each bears of the total risk). For instance if there are two insurers, one insurer may pay 60% and the other the remaining 40% if this represents their respective proportions of the risk. Contribution is a common law principle but it also appears as a condition in most general insurance policies. The principle is often seen at work in collective policies covering risks where the values are high. In a collective policy there is one policy but several insurers carrying varying proportions of the risk. If the principle of contribution did not exist there would be nothing to prevent someone  from insuring an item with more than one insurer and make claims on each insurer for the full value, thereby making a huge profit from any loss.

Ex gratia payment: This is a payment made by an insurer when according to the exact terms of the policy they are not obligated to pay. The payment is said to be ‘ex gratia’, meaning  ‘out of grace’. Ex gratia payments are usually less than the actual amount claimed. Such payments are made because the insured may be a long-standing or important client or sometimes the insurer pays on grounds of sympathy. Sometimes a plea by an insurance broker on behalf of a client may move the insurer to make an ex gratia payment.

Excess/Deductible: The words are used interchangeably and refer to the amount of each claim that the insured/policyholder must bear or contribute. When the word ‘deductible’ is used it is telling us that an amount is deducted from the claim. When the word ‘excess’ is used it refers to the fact that the insurer is only obligated to pay the amount in excess of the what the insured bears. The word ‘excess’ is regularly used in motor insurance. In property insurance both words are used. Whether we use deductible or excess the effect is the same.

Excesses or deductibles are used for three main reasons: 1) to induce care and risk- consciousness among policyholders; 2) to avoid trivial claims which become an undue burden on the pool of funds; 3) to reduce the overall claims costs, thereby keeping premium levels down.

Exclusion: A provision in a policy that excludes the insurer’s liability in certain circumstances or for specified types of losses. Standard exclusions in most general insurance policies terrorism.

Indemnity: A principle whereby the insurer seeks to place the insured in the same position after a loss as he occupied immediately before the loss (as far as practicable). Where an item is insured on an “indemnity” basis, a deduction for wear and tear or depreciation will bemade when settling any claim for damage or loss. Wear and tear is the amount deducted from claims payments to allow for any depreciation in the property insured which is caused by its age or usage.

Insurable interest: In order to make a claim under a general insurance contract the claimant must demonstrate that at the time of loss he suffered a pecuniary or economic loss. The claimant must stand, in relation to the subject matter of insurance, to benefit by its safety or suffer some prejudice by its loss.

Insured event: Occurrences, perils or contingencies which cause loss or damage and which are listed in the relevant policy as being covered.

Misrepresentation and non-disclosure: Misrepresentation is the supply of incorrect information by the insured about the risk , and can be innocent or fraudulent. Non-disclosure is the withholding of material information about the risk, and can also be innocent or fraudulent. Where there is misrepresentation or non-disclosure, the insurer has various options. The insurer may refuse or deny a claim and this is likely to be the case if the breach is intentional or fraudulent. The insurer may waive the breach and this is often done when the breach is innocent or unintentional or does not affect the risk in any serious way. However, the insurer is under no legal obligation to waive a breach, even if the breach is innocent. This shows the importance of disclosing all material facts, whether one believes they are important or not.

Subrogation/recovery: There are situations where an insured makes a claim under a policy but equally he could have pursued (or may have pursued) action against a third party who is responsible for his loss. It would be inequitable to allow the insured to recover under his policy and also recover from the third party. Subrogation operates to prevent the insured from being over-indemnified. Subrogation gives the insurer the right to take action against a third party to recover what has been expended in claim payments.

As an example of subrogation, let us say that an insured under a homeowner’s policy suffers damage to a wall due to the negligence of a truck driver. If the insured makes a claim under his homeowner’s policy, his insurer will now have the right to pursue recovery of the amount paid from the truck driver or truck owner and this may mean ultimately the insurer of the truck.

Waiver of excess: There are occasions where an insurer may not apply the excess or deductible to a claim. This is called ‘waiver of excess’ as the insurer is waiving the requirement of the insured to bear the excess. A waiver of excess clause may be put on a policy for an extra premium.

A waiver of excess clause (for which a premium is generally payable) must be distinguished from an insurer waiving the requirement for their client to bear an excess because the other’s party’s insurer has agreed that their insured is liable and therefore there will be a full recovery from that other party’s insurer.

Warranty: A term or condition on a policy that must be strictly and literally complied with. A breach entitles the insurer to deny liability. It is a policy term setting out an obligation that the insured must comply with, either to do something, or refrain from doing something, or stating that some condition will be fulfilled. A warranty can also be a statement affirming the existence of certain facts. For instance, a policy may have an alarm warranty which states that the alarm must be installed and functioning. If there is a claim and the alarm was not installed and functioning the claim may be denied.