Cii If4

Insurance
claims
handling
process
IF4
2021
STUDY
TEXT
Insurance claims
handling process
IF4: 2021 Study text
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2 IF4/October 2020 Insurance claims handling process
© The Chartered Insurance Institute 2020

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legal position. Specific advice should always be obtained before undertaking any investments.
Print edition ISBN: 978 1 80002 015 3
Electronic edition ISBN: 978 1 80002 016 0
This edition published in 2020
The author
Antony Greensweig ACII. Antony has had a career in Claims for over 30 years. Antony is also a 'ProSci'
accredited change management practitioner. Antony took on the role of main author in 2017.
Acknowledgements
The CII would like to thank the following for their contributions to earlier editions of this study text:
Patrick Hayward, ACII (reviewer, 2019 edition) Edward Gooda, FCII (updater 2007 to 2016) Neil Roff, B.Juris
(U.P.E.), FIISA, ACII (author of first edition)
The CII thanks the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for their kind
permission to draw on material that is available from the FCA website: www.fca.org.uk (FCA Handbook:
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3
Using this study text

Welcome to the IF4: Insurance claims handling process study text which is designed to
support the IF4 syllabus, a copy of which is included in the next section.
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5
Examination syllabus
Insurance claims
handling process
Objective
To provide knowledge and understanding of the claims handling process including notification,
assessment, settlement and associated financial factors.
Summary of learning outcomes Number of questions

in the examination*
1. Understand the general principles in the claims handling process. 12
2. Understand insurance products and associated services. 13
3. Understand claims considerations and administration. 13
4. Understand claims handling procedures and related claims services. 13
5. Understand claims handling operations. 6
6. Understand claims settlement. 10
7. Understand how expenses are managed. 8
* The test specification has an in-built element of flexibility. It is designed to be used as a guide for study and is not a statement of actual
number of questions that will appear in every exam. However, the number of questions testing each learning outcome will generally be within
the range plus or minus 2 of the number indicated.
Important notes
• Method of assessment: 75 multiple choice questions (MCQs). 2 hours are allowed for this
examination.
• This syllabus will be examined from 1 January 2021 until 31 December 2021.
• Candidates will be examined on the basis of English law and practice unless otherwise stated.
• Candidates should refer to the CII website for the latest information on changes to law and practice
and when they will be examined:
1. Visit www.cii.co.uk/qualifications
2. Select the appropriate qualification
3. Select your unit from the list provided
4. Select qualification update on the right hand side of the page
Published October 2020

©2020 The Chartered Insurance Institute. All rights reserved. IF4
1. Understand the general principles in the 5.2 Understand the importance of data protection
claims handling process. legislation and enforcement.
1.1 Describe the legal requirements for a valid claim. 5.3 Explain the roles of external support services used in
the claims process.
1.2 Describe the different types of policy conditions
relating to claims. 5.4 Describe the claims function as it appears in
functional and divisional structures.
1.3 Describe what documentary and supporting
evidence are required when notifying a claim.
6. Understand claims settlement.
1.4 Explain what is meant by proximate cause and how 6.1 Describe the way that claims can be settled.
it is applied.
6.2 Describe why a full indemnity may not always be
2. Understand insurance products and paid.
associated services. 6.3 Explain how insurers can recover the cost of claims.
2.1 Know the features, extensions and exclusions of 6.4 Describe the provisions of the Motor Insurers’
motor policies. Bureau agreement for untraced and uninsured
2.2 Know the features, extensions and exclusions of drivers.
household policies, gadget policies, travel policies
and extended warranties.
7. Understand how expenses are managed.
7.1 Describe the role of the claims manager.
2.3 Know the features, extensions and exclusions of
commercial property and pecuniary policies. 7.2 Explain what leakage is and how to identify and
reduce it.
commercial liability policies. 7.3 Explain the types of financial monitoring and how
this can impact an insurance company results.
health policies. 7.4 Explain the basis and significance of reserving
practice.
3. Understand claims considerations and
administration.
3.1 Describe the role of the claims department.
3.2 Explain the importance of service standards and
managing customer expectations.
3.3 Understand the different parties to an insurance
claim.
3.4 Explain the importance of claims estimating and how
reserving operates.
3.5 Understand how fraud affects insurance claims.
3.6 Describe the main regulatory and legislative
environment for claims handling.
3.7 Describe how disputes and complaints could be
resolved.
3.8 Describe the concepts of good faith and the duty of
fair presentation.
4. Understand claims handling procedures

and related claims services.
4.1 Know claims handling procedures for motor policies.
4.2 Know claims handling procedures for household
policies, gadget policies, travel policies and
extended warranties.
4.3 Know claims handling procedures for commercial
property and pecuniary policies.
4.4 Know claims handling procedures for commercial
liability policies.
4.5 Know claims handling procedures for health policies.
4.6 Know the Civil procedure rules.
4.7 Know how the Ministry of Justice portal works.
5. Understand claims handling operations.

5.1 Describe the key features, structure and objectives
of different claims systems.
Published October 2020 2 of 3

©2020 The Chartered Insurance Institute. All rights reserved.
7
Reading list Examination guide

If you have a current study text enrolment,
The following list provides details of further
reading which may assist you with your the current examination guide is included
studies. and is accessible via Revisionmate
(www.revisionmate.com). Details of how to
Note: The examination will test the
syllabus alone. access Revisionmate are on the first page of
your study text. It is recommended that you
The reading list is provided for guidance only study from the most recent version of
only and is not in itself the subject of the
examination. the examination guide.
The resources listed here will help you
keep up-to-date with developments and Exam technique/study skills
provide a wider coverage of syllabus topics.
There are many modestly priced guides
available in bookshops. You should choose
CII study texts
one which suits your requirements.
Insurance claims handling process. London:
CII. Study text IF4.
Books and eBooks
‘Claims handling’. Chapter – Insurance
theory and practice. Rob Thoyts. New York:
Routledge, 2010. *
Claims handling law and practice. Richard
West et al. London: Kennedys Law LLP,
2018.
‘Claims under the policy’. Chapter 14 in
Bird’s modern insurance law. 10th ed. John
Birds. London: Sweet & Maxwell, 2016.
Insurance claims. 4th ed. Alison Padfield.
Bloomsbury Professional, 2016.
Insurance theory and practice. Rob Thoyts.
Routledge, 2010.
The Insurance Act 2015: a new regime for
commercial and marine insurance law.
Malcolm Clarke, Baris Soyer (eds.).
Abingdon: Informa, 2016.
Periodicals
The Journal. London: CII. Six issues a year.
Post magazine. London: Incisive Financial
Publishing. Monthly. Contents searchable
online at www.postonline.co.uk.
Reference materials
Concise encyclopedia of insurance terms.
Laurence S. Silver, et al. New York:
Routledge, 2010.*
Dictionary of insurance. C Bennett. 2nd ed.
London: Pearson Education, 2004.
Financial Conduct Authority (FCA)
Handbook. Available at
www.handbook.fca.org.uk/handbook.
Prudential Regulation Authority (PRA)
Rulebook Online. Available at
www.prarulebook.co.uk
* Also available as an ebook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only).
Published October 2020 3 of 3

©2020 The Chartered Insurance Institute. All rights reserved.
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9
IF4 syllabus
quick-reference guide
Syllabus learning outcome Study text chapter
and section
1. Understand the general principles in the claims handling process.
1.1 Describe the legal requirements for a valid claim. 1A
1.2 Describe the different types of policy conditions relating to 1B, 1C
claims.
1.3 Describe what documentary and supporting evidence are 1D
required when notifying a claim.
1.4 Explain what is meant by proximate cause and how it is applied. 1E
2. Understand insurance products and associated services.
2.1 Know the features, extensions and exclusions of motor policies. 2A
2.2 Know the features, extensions and exclusions of household 2B, 2C, 2D, 2E, 2F
policies, gadget policies, travel policies and extended warranties.
2.3 Know the features, extensions and exclusions of commercial 2G, 2H
property and pecuniary policies.
2.4 Know the features, extensions and exclusions of commercial 2I
liability policies.
2.5 Know the features, extensions and exclusions of health policies. 2J
3. Understand claims considerations and administration.
3.1 Describe the role of the claims department. 3A
3.2 Explain the importance of service standards and managing 3B
customer expectations.
3.3 Understand the different parties to an insurance claim. 3C
3.4 Explain the importance of claims estimating and how reserving 3D, 6B
operates.
3.5 Understand how fraud affects insurance claims. 3E
3.6 Describe the main regulatory and legislative environment for 3F, 3H
claims handling.
3.7 Describe how disputes and complaints could be resolved. 3G
3.8 Describe the concepts of good faith and the duty of fair 3F
presentation.
4. Understand claims handling procedures and related claims services.
4.1 Know claims handling procedures for motor policies. 4A, 4C
4.2 Know claims handling procedures for household policies, gadget 4A, 4C
policies, travel policies and extended warranties.
4.3 Know claims handling procedures for commercial property and 4B, 4C
pecuniary policies.
4.4 Know claims handling procedures for commercial liability 4B
policies.
4.5 Know claims handling procedures for health policies. 4A, 4C
4.6 Know the Civil procedure rules. 4D
4.7 Know how the Ministry of Justice portal works. 4D
5. Understand claims handling operations.
5.1 Describe the key features, structure and objectives of different 5A
claims systems.
Syllabus learning outcome Study text chapter

and section
5.2 Understand the importance of data protection legislation and 5A
enforcement.
5.3 Explain the roles of external support services used in the claims 5C
process.
5.4 Describe the claims function as it appears in functional and 5B
divisional structures.
6. Understand claims settlement.
6.1 Describe the way that claims can be settled. 6A
6.2 Describe why a full indemnity may not always be paid. 6C, 6F, 6H
6.3 Explain how insurers can recover the cost of claims. 6D, 6E, 6G
6.4 Describe the provisions of the Motor Insurers’ Bureau agreement 6I
for untraced and uninsured drivers.
7. Understand how expenses are managed.
7.1 Describe the role of the claims manager. 7A
7.2 Explain what leakage is and how to identify and reduce it. 7B
7.3 Explain the types of financial monitoring and how this can impact 7C
an insurance company results.
7.4 Explain the basis and significance of reserving practice. 3D
11
Introduction
The Oxford Dictionary defines insurance as ‘an arrangement by which a company…
undertakes to provide a guarantee of compensation for specified loss, damage, illness, or
death in return for payment of a specified premium’. From this we can surmise that the key
role of insurance is the provision of compensation. In other words, insurance exists to pay
claims. A person or business pays their premium in the expectation that, should the worst
happen and an insured against event occurs, they will be financially protected.
Someone may pay premiums for many years to the same insurance company and in all that
time, apart from consideration of what the policy covers and the cost of the premium, they
will have little idea of how good their insurer really is. When an insured event occurs,
however, and a claim is made, the insurer has an opportunity to impress or disappoint. Poor
handling of a claim can bring an abrupt end to a relationship of many years standing.
Consistent poor handling of claims could multiply this loss of customers, bringing into
jeopardy the continued success of the insurance company.
However, not all claims will be paid – and it will be just as detrimental to the success of the
insurer if all claims were settled as presented, regardless of policy coverage, sums insured
or even fraud. It is not simply a case of receiving a claim and paying it. The individual
handling the claim must check its validity first. If the claim should not be paid, the task then is
to break this news to the policyholder in such a way that they accept the decision and their
custom is not lost.
So, if you are someone who has been tasked with handling claims you have a key role in
presenting your company to the world and also contribute towards its continued success. In
this study text we will look at the knowledge and skills you will need to be able to handle
claims in a professional, consistent and accurate manner. And because claims handling is of
such importance to the insurance company, we will place claims handling within the wider
context of the systems, processes and functions that surround it.
13
Contents
1: General principles
A Legal requirements for a claim 1/2
B Policy conditions 1/3
C Duties of the insured after a loss 1/5
D Documentary evidence 1/5
E Proximate cause 1/8
2: Insurance products
A Motor insurance 2/2
B Household insurance 2/6
C Gadget insurance 2/8
D Travel insurance 2/9
E Pet insurance 2/10
F Extended warranties (and breakdown insurance) 2/11
G Commercial property insurance 2/11
H Pecuniary insurance 2/14
I Liability insurance 2/16
J Health insurance 2/18
3: Claims considerations and administration

A Claims staff 3/2
B Service standards and managing customer expectations 3/2
C Parties to a claim 3/4
D Estimating and reserving 3/5
E Fraud 3/6
F Regulation of claims handling 3/10
G Disputes and complaints 3/16
H Fair treatment of customers 3/19
4: Claims handling procedures and related claims services

A Personal insurance 4/2
B Commercial insurances 4/5
C Related claims services 4/9
D Civil Procedure Rules 4/13
5: Claims handling systems

A Analysis of claims systems 5/2
B Organisational structure 5/9
C Support services 5/10
6: Claims settlement
A Claims settlement 6/2
B Reserving: the process 6/4
C Invalid and partially met claims 6/5
D Recovery 6/6
E Salvage 6/7
F Average 6/7
G Market agreements 6/8
H Excesses, deductibles and franchises 6/9
I Motor Insurers’ Bureau 6/10
7: Management of expenses
A Role of the claims manager 7/2
B Leakage (or overpayment of claims) 7/3
C Monitoring financial performance 7/6
Self-test answers i
Cases ix
Legislation xi
Index xiii
Chapter 1
General principles
1
Contents Syllabus learning
outcomes
Introduction
A Legal requirements for a claim 1.1
B Policy conditions 1.2
C Duties of the insured after a loss 1.2
D Documentary evidence 1.3
E Proximate cause 1.4
Conclusion
Key points
Question answers
Self-test questions
Learning objectives
After studying this chapter, you should be able to:
• describe the legal requirements for a valid claim;
• describe the working of the policy conditions that are applicable in respect of claims;
• detail the documentary evidence that is needed in respect of claims; and
• explain what is meant by proximate cause and it's application.
Chapter 1 1/2 IF4/October 2020 Insurance claims handling process
Introduction
The claims department can be seen as the ‘shop window’ of the insurance company. It does
not matter how competitive an insurance company’s premiums are, or how efficiently they
conduct their underwriting administration, if a claim is not properly and fairly dealt with this is
where an insurer will be judged.
However, an insurer has obligations to every policyholder, all of whom have contributed to
the common pool from which claims are paid. There are more interests than those of the
individual claimant to be considered and, as we will see later, insurers must always treat all
their policyholders fairly. For this reason, the claimant has certain obligations that they have
to meet before any settlement will be paid.
In this chapter, we will be considering the subjects of valid claims and the duties of the
various parties.
NOTE: The term policyholder or insured refers to the person or party purchasing the
insurance. When they make a claim against the policy, we refer to that person as the
claimant, although they will still be the policyholder/insured.
Key terms
This chapter features explanations of the following ideas:
Average clause Claim form Conditions Deductible

Duties of the insured Excess Express duties Implied duties
Limits of liability Onus of proof Proximate cause Quantum
Sum insured
A Legal requirements for a claim

When someone takes out an insurance policy, a legally binding contract is formed between
the insurer and the insured. The policy document issued by the insurer is proof of this. Most
policies provide indemnity to the insured.
Question 1.1
Think back to your earlier studies, what do we mean by the term 'indemnity'?
a. Providing the insured with something similar to that which they had prior to the □
loss.
b. Placing the insured in the same financial position as they enjoyed prior to the loss. □
c. Providing the insured with replacement for their loss, whatever the cost. □
When an insured makes a claim, it is their responsibility to prove that they have a valid claim.
This is known as onus of proof. The insured will need to prove two things:
• That an insured peril arose: the insured must prove that they have suffered a loss that
was directly caused by a peril that is covered by the policy. This may start with the
completion of a claim form or telephone notification, but other supporting evidence could
also be required.
• The amount of the loss: where the policy is one of indemnity, the insured must also
prove that they have suffered a financial loss and its size. The insured cannot simply
claim for a lost or damaged item without proving the value of the item. Proof would
include a purchase receipt, repair account or a valuation. The important issue is that it is
not the insurer’s duty to prove the value of the loss.
There will be exceptions to the above, for example, with liability claims. In these cases, the
insured would still need to prove a valid claim, but the insurer would then generally handle
the negotiation and claims settlement aspects. The amount payable could be a court award
or a negotiated settlement, so the insured would not be involved in proving the amount of the
claim (referred to as the quantum). In any event, the insured would not be the one receiving
Chapter 1 General principles 1/3
Chapter 1
the settlement as this is usually paid directly by the insurer to the third party. The
policyholder would only be indemnified by not having to pay the settlement amount to the
third party from their own pocket.
Should an insurer refuse to pay a claim because of, for example, the operation of an
exclusion, then the onus of proof moves to the insurer, which must prove that such an
exclusion applies.
The insurer has its own duties and responsibilities in respect of a claim. It will need to
ensure that:
• cover was in force at the time of the loss (or when the claim was made, under certain
policies);
• the insured is the same as that named in the policy (or is the person entitled to
indemnity);
• the peril (or event) is covered by the policy;
• the insured has taken reasonable steps to minimise the loss (mitigation);
• all conditions and warranties have been complied with;
• the duty of fair presentation has been complied with in respect of commercial
customers/the duty to take reasonable care not to make a misrepresentation has been
complied with in respect of consumer customers;
• no exceptions apply; and
• the value of the loss is reasonable.
The insurer has a duty to its other policyholders (and shareholders, if appropriate) to ensure
that all claims payments are fair and are made on time.
B Policy conditions
All insurance policies contain a list of conditions. Conditions can be express or implied. An
express condition is stated in the policy but an implied condition is one that everyone
accepts as applying to the policy, but is not actually stated in it.
Examples of these types of conditions are as follows:
Express condition A motorbike must be stored in a locked garage for theft cover to be valid, as
stated in the policy
Implied condition The insured cannot use the existence of the insurance as an excuse to act
recklessly or without care
The effect of a breach of a condition varies depending upon which of the following three
groups it falls into.
Conditions precedent to the Conditions subsequent to the Conditions precedent to liability

contract contract (or recovery)
Here we are going to concern ourselves with the conditions precedent to liability or recovery,
as this is where the claims conditions fall.
If a condition precedent to liability or recovery is not met, insurers may avoid liability for a
particular loss, but they need not repudiate the contract as a whole. If a later valid claim
is made, the insurers must pay, provided that the insured complies with the condition in this
instance.
The Insurance: Conduct of Business Sourcebook (ICOBS) states that, unless fraud is
involved, the insurer should not refuse to pay a claim from a consumer on the grounds that a
condition was not met, where that condition was not connected with the circumstances of the
loss.
Example 1.1
Henry Ramsden takes out a household policy, one of the conditions of which is that he fits
window locks as a precaution against burglary. He fails to do this. Later, a poorly
maintained chimney flue leads to a fire which spreads to the timber frame of the building.
Will his insurers pay for the damage despite the fact that he has breached a condition of
the policy?
Because the condition that Henry breached was not connected to the circumstances of his
loss, ICOBS states that it would be unreasonable for the insurer to avoid payment. Henry
would have been in a more serious position though if he had been burgled, and he would
be well-advised to fit those window locks.
There are also policy conditions which mean that a claim may be only partially met:
• The sum insured (in respect of property insurance) or limits of liability (in respect of
liability insurance): this forms part of the policy and limits the maximum amount
recoverable. Claims for losses above this amount will not be met in full.
• The average clause, in the case of under-insurance for property insurances: this states
that the amount paid will be reduced in proportion to the amount of under-insurance.
• Voluntary or compulsory excess or deductible.
Question 1.2
What is an excess or deductible?
a. A term meaning the amount of indemnity paid to the insured. □
b. An amount taken from the insured's premium to cover the first part of the claim. □
c. An amount deducted from each claim and borne by the insured. □
B1 Unfair or hidden terms and conditions
The core terms and conditions of insurance contracts, such as exclusions, typically cannot
be challenged on the grounds of fairness; this default position remains unchanged under the
Consumer Rights Act 2015. However, the Act does state that if a term of a contract is not
transparent or prominent, it can be assessed for unfairness. A term is:
• transparent, if it is expressed in plain and intelligible language; and
• prominent, if it is brought to the consumer’s attention in such a way that an average
consumer would be aware of it.
The Act defines an average consumer as one who is ‘reasonably well informed, observant
and circumspect’.
To avoid challenges for unfairness, insurers will need to ensure that the significant terms
included in their insurance contracts are communicated transparently and prominently. If a
contract term is deemed unfair it will not be binding, although consumers are still within their
rights to rely on a term if they wish to do so.
These rules cover both the consumer contract (the policy itself) and notices, such as renewal
invitations and customer promotions.
We will consider the effects of the Act with regards to claims handling in chapter 3.
Chapter 1
C Duties of the insured after a loss
The duties of the insured after a loss can be divided in to two different categories.
Implied duties Express duties
C1 Implied duties
These are imposed by common law, whether or not they are actually found in the policy
wording. For example, the law requires that the insured should:
• act as though they are uninsured, and take all reasonable steps to minimise the loss;
• advise the appropriate authorities as necessary in the event of loss or damage, e.g.
advising the fire service in the event of a fire or advising the police in the event of a theft;
• take all steps to prevent a loss from spreading, e.g. attempt to contain a fire; and
• not hinder the insurer in the claims investigation process and must assist the insurer
where possible with all aspects of dealing with the loss, including helping it to recover its
outlay where recovery opportunities exist.
Failure to comply with these conditions could render the claim invalid.
C2 Express duties
These are always written into the contract, and are usually found as conditions in the policy.
A breach of these conditions allows the insurer to reject a particular claim if the breach of the
condition is connected to the circumstances of that claim.
There is always a condition setting out the insured’s duties in the event of an insured event
occurring. It is often entitled ‘claims procedure’ or ‘action by the insured’.
Although the condition may vary in length and detail from policy to policy, the action required
by the insured will be to:
• notify the insurer promptly;
• involve the emergency services, if appropriate;
• take reasonable steps to prevent further damage; and
• give proof and details of the loss in writing within a certain timescale.
C2A Notification
Most policies state that the insured should notify their insurer of a claim ‘promptly’. In the
absence of an express condition to the contrary, verbal notice is sufficient, i.e. a
telephone call.
In most instances, further information is obtained by the completion of a claim form, usually
issued by the insurer after the initial notification has been made. However, in some lines of
business, particularly personal lines, the information is taken over the telephone at point of
notification. In respect of motor or liability claims, there is usually a requirement that all
notifications of fatal injury inquiries, coroner’s inquests, proceedings or prosecutions are
forwarded to the insurer as soon as possible. This is to enable the insurer to arrange a
suitable defence, if necessary.
D Documentary evidence
It is the insured’s duty to prove that a loss has occurred and to demonstrate its size. The
precise nature of the proof needed will depend on the policy wording. We will now consider
the way that a consumer can report their claim and examples of the supporting evidence
needed for different types of claim.
D1 First notification of loss (FNOL)

Most insurers operate a first notification of loss process (FNOL) in order to quickly gather
details about the claim. This is usually a telephone process whereby the customer calls a
hotline to report the claim to a dedicated claims team. In some instances, this can be done
online or via a smart phone app and, as technology expands, we can expect to see more
notifications via non-traditional ways. For example, an alert from a telematics device
automatically triggering the FNOL process, following a motor accident.
For some claims, especially low value motor and property claims, the telephone or internet
notification is sufficient to validate the claim and for the insurer to make arrangements for
adjustment or settlement without a signature on a form. In more complex claims, such as
large commercial property or liability claims, a claim form may be issued to supplement the
details provided over the phone.
D1A Benefits of telephone FNOL
Consider this…
What are the benefits of a telephone notification process to:
• the insurer; and
• the insured?
The benefits to the insurer are:

• control over cost: claims are notified quicker and insurers have more opportunities to use
their approved repairers and goods suppliers, with whom they will negotiate discounts;
and
• fewer exaggerated claims: the insured is talking directly to the claims handler so will find it
more difficult to embellish their claim and the quick notification gives them less time to
‘invent’ items.
The benefits to the insured are:
• immediate access to the service;
• the claims process is simplified;
• claims are settled more quickly; and
• the quality of repair and replacement work is generally of a high and consistent standard
(because approved repairers or service providers are vetted and monitored).
D2 Claim form
If a claim form is required it will either be issued on the conclusion of the FNOL call or, in
some cases, directly by the broker that sold the policy to the insured. The purpose of the
claim form can be summarised as to:
• establish whether the insured is entitled to indemnity under the policy;
The insurer must satisfy itself that:

– the loss (actual or potential) is covered under the terms of the policy, and
– the information given on the claim form is consistent with that given on the proposal
form;
• provide sufficient information to permit the insurer to begin processing the claim (if
appropriate);
• enable the insurer to make an assessment of the potential severity of the claim;
• enable the insurer to assess whether there may be a potential third party claim (in respect
of motor and liability insurance); and
• enable the insurer to consider whether any potential recovery rights exist.
All these issues have an important impact on the claim liability and therefore the reserves.
Reserves are covered in Estimating and reserving on page 3/5.
D2A Contents of a claim form/notification
The claim form/notification consists of a number of questions. The questions vary according
to the class of insurance concerned, although the basic purpose is the same.
An illustration of the type of information required can be seen by looking at the various
classes of insurance.
Chapter 1
Consider this…
Choose a class of insurance that you are familiar with and consider what kind of
information you would need to be able to process a claim. How much of this information
could be obtained in a telephone call or via the internet, rather than by completing a
traditional claim form?
A property claim notification may require the following information, apart from the basic
personal details:
• description of the property damaged, e.g. stock, fixtures and fittings;
• date, cause, circumstances and the monetary amount of the loss or damage;
• situation and occupancy of the premises;
• capacity in which the insured is claiming (e.g. as owner, custodian etc.);
• whether any other person has an interest in the lost or damaged property; and
• whether there is any other insurance in force.
A motor accident notification may require the following information:
• details of the insured;
• the vehicle involved in the accident, and its use (i.e. domestic or business);
• the specific detail of the accident: date, time, road conditions, lighting etc.;
• sketch plan of the accident scene, showing positions of vehicle(s) before and after the
accident; and
• details of any independent witnesses to the accident.
With other classes of insurance (for example, theft insurance), there may be questions
relating to informing the police and whether steps have been taken to prevent a recurrence.
Once the claim form or notification is received, the insurer’s claims department will carry out
certain tasks, for example checking with its underwriting records to make sure:
• that the policy is in force; and
• that the peril that has caused the loss or damage is covered in the terms of the policy.
In most cases this information is added to the claims system and only discrepancies
between what is held and being advised at claim stage would be referred to underwriters.
The condition of good faith also has to be considered. The insurer will compare the
answers on the claim form with those on the proposal form. This is to check that all material
information was notified to the underwriters at the start of the policy, and that there has not
been a breach of the duty of fair presentation in respect of commercial customers, or the
duty to take care not to make a misrepresentation in respect of consumer customers.
The claims handler next needs to check that the value of the loss is reasonable. This is
usually done by looking at relevant internet sites, reference books, using the handler’s own
experience and validating it with experts in the applicable field of insurance.
Most small domestic claims can be dealt with quickly and efficiently once the claim is
validated and everything is in order. However, for larger claims, a loss adjuster may visit the
claimant to assess the damage.
D3 Supporting evidence
In addition to the notification information, additional evidence and/or enquiries could be
made. These will be different depending on the type of claim, as the following examples
show. These are merely examples and the list is by no means exhaustive.
Theft claims The details given at notification can often be compared with the list given to the
police by the insured
Motor liability claims Images/dashboard camera footage of the incident and satellite images of the location
may be reviewed as necessary, as well as engineering reports
Personal injury and Medical evidence and/or doctors’ certificates, death certificates and coroners’ inquest
sickness claims judgments will be examined, as applicable
Motor damage claims Vehicle registration documents in respect of total loss motor claims or vehicle theft
would be appropriate
Different types of experts may also be used in the investigation process, for example:
Solicitors to give legal opinions, or to commence or defend legal proceedings
Surveyors to estimate rebuilding costs
Doctors to verify or assess the severity of injuries and assist in rehabilitation
Motor engineers to verify the damage caused and agree repair costs with the garage
Restoration experts to restore property or contents damaged by water and fire
Supply chain records are often used in place of experts to help validate a loss. For example,
most large household insurers will have a delegated authority agreement with their building
repair suppliers, so that the suppliers can validate the loss on the insurer’s behalf without the
use of an expert.
Where an insurer wishes to involve other experts, it should always give an explanation to the
insured as to why they are involved and the extent of their role.
E Proximate cause
Consider this…
Think back to your earlier studies. Can you remember the definition of proximate cause
and how it worked in practice?
‘Proximate cause’ was defined in Pawsey v. Scottish Union and National (1907) as:
the active, efficient cause that sets in motion a train of events which brings about a
result, without the intervention of any force started and working actively from a
new and independent source.
It is one of the basic principles of insurance, and is the last link in a chain of cause and
effect. Insurers will, therefore, look first at the relationship between the peril and the loss to
establish the proximate cause of the loss. The proximate cause of an incident is always the
dominant cause and there is a direct link between it and the resulting loss.
Picture a row of dominoes, all standing. If the first domino is pushed over and knocks over
the second, and so on, the proximate cause of the last domino falling would be the push of
the first domino. However, if an onlooker pushed over another domino, the train of events
stops, and the intervention of a new force becomes the cause of the fall of the last domino
and is, therefore, the new proximate cause.
The following figure shows a train of events:
Chapter 1
Figure 1.1:
Events Loss
Jo rides a horse
Jo is thrown from the horse
Jo lands in a ditch, and

breaks both legs Jo dies of pneumonia
Jo cannot move and spends

the night in the ditch
Jo catches pneumonia
Question 1.3
Test the rule of proximate cause by drawing lines from each event to the loss.
Establish whether any individual event on its own could have directly caused the
ultimate loss.
In most cases, common sense can be used to decide the proximate cause of a loss by
looking at cause and effect.
Example 1.2
Marsden v. City & County Insurance Company (1865): A shopkeeper insured his plate
glass against loss or damage arising from any cause except fire. Fire broke out at a
neighbour’s shop and a mob gathered. The mob rioted and broke the plate glass. It was
held that the riot and not the fire was the cause of the loss. The damage was not the
inevitable result of the fire.
Gabay v. Lloyd (1825): Horses on board a ship were frightened by a storm. They broke
down their stalls and kicked one another, resulting in some deaths. It was held that death
so caused was a loss by perils of the sea.
Once the insurer has established the proximate cause of the loss, it must check that the peril
is covered by the policy. Perils can be classified as follows.
Insured perils those named in the policy as covered
Excepted or excluded perils those named as specifically not covered
Uninsured or unnamed perils those perils not referred to in the policy and therefore not insured
If an excepted or uninsured peril is the proximate cause, the insurer will not be liable. There
may be circumstances where the ultimate cause of the loss appears to be an uninsured peril,
e.g. water damage resulting from putting out a fire, but insurers will nevertheless be liable if
the proximate cause was an insured peril. The effect of an excepted peril being involved in a
chain of events will depend on the wording of the exception. It is very important for the
insurer to draft the exclusions in such a way that whatever is excluded is clearly mentioned
in the policy. In the case of any ambiguity in the policy wording, the benefit of doubt will
always go to the insured. This is because the insurance company drafts the policy terms,
conditions and exclusions.
Conclusion
This concludes our overview on the general principles of insurance and how they link to the
claims handling process. The next important aspect we need to be aware of relates to the
different types of policy and cover available in the insurance market. In the next chapter we
will explore what these are. Together, these two chapters will form the basis of our
consideration of claims handling in the rest of the study text.
Chapter 1
Key points
The main ideas covered by this chapter can be summarised as follows:
Legal requirements for a claim
• When an insured makes a claim the onus of proof is on them.

• The insured needs to prove that an insured peril arose and the amount of the loss that
resulted.
Policy conditions
• Policy conditions can either be precedent to the contract, subsequent to the contract or
precedent to liability.
• If a condition precedent to liability is not observed, insurers may avoid liability for a
particular loss, but need not repudiate the contract as a whole.
• ICOBS states that, in the absence of fraud, the insurer should not refuse to pay a claim
from a consumer for breach of condition where the condition is not connected to the
circumstances of the loss.
• Certain policy conditions mean a claim may only be partially met.
• The Consumer Rights Act 2015, states that if a term of a contract is not transparent or
prominent, it can be assessed for unfairness.
Duties of the insured after a loss
• Implied duties are imposed by common law and include duties such as taking steps to
minimise the loss and not hindering the investigation of the claim.
• Express duties are written into the contract and detail specific action the insured must
take when an insured loss occurs, e.g. the need to notify the insurer promptly.
Documentary evidence
• On being advised of a claim, the insurer may ask its insured to complete a claim form.
• The claim form is designed to help the insurer determine whether the insured is entitled
to an indemnity, the severity of the claim, the potential for third party involvement and
the possibility of recovery.
• The insurer will compare the answers on the claim form with the proposal form to
ensure that the condition of good faith has been met.
• For complex claims a loss adjuster will be appointed.
• Supporting evidence is required to confirm a claim and this depends on the type of
loss.
Proximate cause
• The proximate cause is ‘the active, efficient cause that sets in motion a train of events
which brings about a result, without the intervention of any force started and working
actively from a new and independent source’.
• The proximate cause of an occurrence is always the dominant cause and there is a
direct link between it and the resulting loss.
• Once the proximate cause is established, the insurer must establish whether it is an
insured peril, an excepted or excluded peril or an uninsured peril.
Question answers
1.1 b. Placing the insured in the same financial position as they enjoyed prior to the
loss.
1.2 c. An amount deducted from each claim and borne by the insured.
1.3 The proximate cause of Jo’s death would be riding the horse, as no other cause has
arisen to break the chain of events.
(The circumstances would be different if Jo had managed to get help, had been
taken to hospital and caught an illness in the hospital from another patient. The
proximate cause of her death would be the illness, as riding the horse would be too
remote a cause and the chain of events would have been broken.)
Chapter 1
Self-test questions
1. What is meant by the 'onus of proof' in relation to a claim?
a. The duty on the insured to demonstrate they have a valid claim. □
b. The duty on the insurer to prove the claim happened. □
c. The duty on the broker to submit the claim in time. □
2. Which of the following does an insured have to prove when making a claim? (Select
all that apply.)
a. The insured peril arose. □
b. The insured is named in the policy. □
c. The financial extent of the loss. □
3. Which of the listed facts must an insurer check when establishing whether a claim is
valid or not? (Select all that apply.)
a. Cover was in force. □
b. Peril is covered. □
c. Conditions have been complied with. □
d. The insured has mitigated their losses. □
e. The amount of the loss is reasonable. □
4. Why might a claim only be partially paid? (Select all that apply.)
a. The claim exceeds the sum insured. □
b. The policy is subject to a large deductible. □
c. The claim was notified late to the insurer. □
5. Implied duties on an insured following a loss are ones which are stated in the policy.
a. True. □
b. False. □
6. Why does the insurer require completion of a claim form or first notification?
a. To gather all the information about the claim in one place. □
b. To delay the settlement. □
c. To put the insured to proof that their claim is valid. □
7. Which case defined proximate cause?
a. Wadsworth vs Gillespie. □
b. Pawsey vs Scottish Union & National. □
c. Gabay vs Lloyd. □
8. Where an excepted peril is at the start of a chain of events, the claim would not be
covered.
a. True. □
b. False. □
You will find the answers at the back of the book
2
Chapter 2
Insurance products
outcomes
Introduction
A Motor insurance 2.1
B Household insurance 2.2
C Gadget insurance 2.2
D Travel insurance 2.2
E Pet insurance 2.2
F Extended warranties (and breakdown insurance) 2.2
G Commercial property insurance 2.3
H Pecuniary insurance 2.3
I Liability insurance 2.4
J Health insurance 2.5
Conclusion
Key points
Question answers
Self-test questions
Learning objectives
• describe the basic features and typical policy cover of the following insurance types:
• motor;
• household;
• gadget;
• travel;
• pet;
• extended warranty;
• commercial property
• pecuniary;
• liability; and
• health.
2/2 IF4/October 2020 Insurance claims handling process
Introduction
There are various forms of insurance available to commercial and business customers with
Chapter 2
specific considerations that apply when handling claims.

This chapter will outline the features of the following types of insurance:
• motor (private car, motorcycles and commercial vehicles);
• personal insurances (i.e. household, travel and pet);
• insurances of property (fire and special perils, all risks, theft, glass and money);
• pecuniary insurances (legal expenses, business interruption and creditor insurance);
• the different forms of liability cover;
• extended warranties;
• gadget insurance; and
• health (personal accident, sickness and medical expenses).
The first six sections of this chapter will deal largely with personal insurance; that is
insurance that is designed for the individual. The following four sections will deal with
commercial insurance; that is insurance for businesses. The exception is commercial
motor insurance, which is included with personal motor insurance because of their
similarities.
Key terms
Benefit policy Commercial Extended warranties Fleet insurance

insurance
Franchise Gadget insurance Health insurance Household insurance
Liability insurance Motor insurance Personal insurance Pet insurance
Special perils Travel insurance
A Motor insurance
A1 Private motor insurance
Private motor insurance is the most significant compulsory insurance in the UK. It is illegal
to drive or be in charge of a vehicle on a public road unless an insurance policy is in force.
The policy must cover the driver’s legal liability for injury to others and damage to their
property. There are four different levels of cover available, with the lowest level being the
most restrictive and extra areas of cover added for each level.
The following figure shows these in ascending order of the level of the cover provided.
Figure 2.1:
Increasing cover
1. Road Traffic 2. Third Party 3. Third Party, 4. Comprehensive.

Act only. only. Fire and Theft.
It is worth noting that there are other levels of cover, such as ‘fire and theft’ and ‘off-road’.
Whilst uncommon, these provide a different level of cover for specific circumstances.
Question 2.1
Take a look at your own motor insurance policy, or obtain one from a family member
or a friend. What sort of cover is provided?
Chapter 2 Insurance products 2/3
A1A Road Traffic Act only

This is the minimum cover required to comply with the Road Traffic Act 1988 (as amended)
and provides for:
Chapter 2
• unlimited indemnity in respect of bodily injury or death to third parties;
• a £1,200,000 limit for loss of or damage to third party property (this complies with the
Fifth EU Motor Insurance Directive 2005);
• claimants’ costs and expenses; and
• emergency medical treatment and hospital charges arising out of the vehicle use.
In accordance with the Third EU Motor Insurance Directive 1992, motor insurance policies
issued in the EU must provide cover for the vehicle to be used in any other EU country. This
cover must be the minimum cover required by either the country visited or the country in
which the vehicle is kept, whichever is the greater. It must also cover injuries to employees of
the insured when travelling as passengers in the course of employment.
Very few of this type of policy are issued as it is similar to the next type of coverage and most
consumers will require more extensive cover than is provided here.
A1B Third party only
This provides, in addition to the above:
• increased third party property damage cover to £20m;
• passenger indemnity; and
• cover for the legal costs of defending a claim.
It also includes third party cover for the vehicle whilst being used in any country that is a
member of the European Union.
When the UK leaves the EU (with or without a deal) policyholders will require proof of cover,
known as a ‘Green Card’, from their UK insurer in order to drive in any European Economic
Area (EEA) country.
There are two specific exclusions:
• damage to the vehicle itself (regardless of whom was driving it); and
• liability covered by another policy (e.g. when driving someone else’s car, cover may be
provided under that car owner’s insurance).
A1C Third party, fire and theft
This includes, in addition to the above:
• the cost of repair or compensation to the insured if the vehicle is stolen or damaged
during theft or attempted theft; and
• damage by fire, lightning or explosion.
The same exclusions apply here as to third party only. In addition, ‘loss of use’ (i.e. the extra
expense to the insured of having to use alternative transport whilst their car is out of action)
is specifically excluded. Some policies may include a benefit to include cover for a hire car if
the subject vehicle is stolen or damaged by theft.
A1D Comprehensive
This is the widest possible protection and includes any accidental or malicious damage to
the insured vehicle. The cover is ‘all risks’, i.e. all loss or damage is covered however it is
caused, with the following exclusions:
• wear and tear;
• depreciation;
• loss or damage to spare parts and accessories unless on the vehicle or in the insured’s
garage;
• loss of use (though this can sometimes be purchased as add-on cover, usually in the
form of a hire car);
• mechanical and electrical failure; and
• tyre damage from punctures or blow-outs.
A comprehensive policy may also extend cover for the policyholder to drive a vehicle not
belonging to them, so long as it is not hired to them under a hire-purchase agreement. This
cover only extends to third party liability and does not include damage caused to the vehicle
Chapter 2
being driven.
The policy may also extend to include personal accident, medical expenses and personal
effects.
Question 2.2
What is the difference between third party, fire and theft cover and
comprehensive cover?
A1E Extensions
Extensions to a motor policy are widely available, and may be included as part of the core
product or offered as additional add-ons for a slightly increased premium (or a combination
of both). For instance, many motor policies contain benefits for personal accident as
standard, but legal expenses cover is often offered as an added extra, in return for an
increased premium. Examples of the optional extensions available include:
• breakage of glass (on a non-comprehensive policy – it is usually covered by a
comprehensive policy);
• personal belongings and clothing (in addition to the limited standard cover provided by a
comprehensive policy);
• young additional drivers (these may be added as occasional users, but if they are one of
the main drivers then the additional premium charged would be based on their age and
experience);
• loss of use at a fixed amount per day or the provision of a courtesy/hire car;
• additional personal accident benefits;
• foreign use, that is the provision of cover over and above the minimum required by the
EU Directives;
• racing, competitions, rallies and trials;
• caravans and trailers (usually third party cover whilst attached to the insured vehicle);
• breakdown cover (for instance the provision of helplines or a certain amount of cover for
the costs of roadside assistance);
• legal assistance; and
• joint policies.
This list is not exhaustive.
A1F Exclusions
There will be general and market exclusions in addition to the specific exclusions. These
include exclusions such as:
• contractual liability, for situations where the liability would not exist but for the terms of a
contract;
• war risks;
• use other than as specified in the certificate of insurance;
• riot and civil commotion;
• terrorism; and
• sonic bangs (i.e. damage caused by pressure waves from sonic/supersonic aircraft or
other aerial device).
A2 Motorcycle insurance
Refer to
Private motor insurance covered in Private motor insurance on page 2/2
This includes any mechanically propelled cycle, and is also subject to the Road Traffic Act
provisions. The same levels of cover are available. The policy format is the same as that for
private motor insurance, with the following differences:
Chapter 2
• there is usually no automatic cover for theft of accessories or spare parts unless the
motorcycle is also stolen;
• the liability section generally indemnifies the insured (or their personal representatives in
the event of their death) and others who were permitted to drive the motorcycle or who
used it for social, domestic and pleasure purposes; and
• there is no personal accident, medical expenses (beyond emergency treatment fees) or
personal effects cover.
There are extensions available for the payment of additional premium, such as:
• accessories or spare parts;
• trailers;
• driving other cycles;
• more than one cycle insured; and
• invalid carriages.
The policy exclusions are essentially the same as for private motor insurance.
A3 Commercial vehicles
This is a form of commercial insurance and is dealt with here for convenience. However, you
should be aware of the distinction with personal motor insurance.
The main types are:
• goods-carrying vehicles;
• passenger-carrying vehicles;
• agricultural and forestry vehicles; and
• vehicles of special construction, e.g. ambulances, cranes, fork-lift trucks.
The insurance is primarily concerned with the risks that attach to the vehicles themselves
whilst being driven, parked or carried by sea or air within the UK.
Refer to
Private motor insurance covered in Private motor insurance on page 2/2
There is usually a standard policy wording, which is then modified depending on the type of
vehicle insured. The range of cover is largely the same as for private motor insurance.
However, the cover varies from it in that certain benefits are excluded, e.g. driving other cars,
personal accident and personal effects cover. It also differs in respect of the use to which the
vehicle is put.
The third party liability section provides unlimited indemnity for death or bodily injury to
third parties. There would be a limit of, for example, £5m for third party property damage.
The following are often included or are available as extensions of cover.
Loading or unloading cover for third party liability can also be applied to accidents whilst loading and
unloading
Indemnity to driver usually anyone may drive on the insured’s order or with their permission
Indemnity to user the insured may allow others to use the vehicle for social, domestic or pleasure
purposes
Indemnity to passengers indemnity for their acts of negligence is covered
Legal costs the policy can usually be extended to cover legal costs
There is a fairly extensive portfolio of optional extensions available at an additional premium,

e.g. medical expenses, windscreen cover, loss of use etc.
Limitations are typically the same as for private motor insurance.
Mention should also be made here of fleet insurance. Fleet insurance can be used to cover
a number of vehicles under one policy, for example all of a business’ company cars or a fleet
of trucks and vans. Generally, the cover available is similar to that offered under private
Chapter 2
motor policies; however, other covers are often included, for example:
• contingent third party insurance (i.e. third party only cover for where an employee is using
their own vehicle on the property of the insured’s business and their own insurance is not
operative);
• joint insured clause or cross liabilities clause (i.e. two or more named insureds are treated
as separate policyholders if one has a claim against the other);
• occasional business use (as per the contingent extension but for comprehensive cover);
• roadside assistance; and
• helplines.
B Household insurance
A household insurance policy is bought by householders to provide protection for both the
building itself and its contents. This cover can be bought as one all-inclusive policy, but
buildings cover and contents cover can also be bought as separate policies. Here, we will
look briefly at buildings and contents insurance.
Question 2.3
A tenant who rents a property may only require contents insurance, because they
have no insurable interest in the building.
a. True. □
b. False. □
There is no such thing as a ‘standard’ household policy, both cover and wordings vary
depending on the customer’s choice and the cover offered by particular insurers.
B1 Buildings insurance
The definition of ‘building’ includes not only the main structure of the building, but also
garages, sheds, greenhouses, outbuildings, swimming pools, tennis courts etc. Anything you
would normally leave behind on moving from the house is part of the building, e.g. double
glazing, fitted kitchens and bathrooms. The cover generally available is as follows.
Fire, lightning, explosion and earthquake
Riot, civil commotion, strikes, labour or Cover usually excludes loss or damage if the building is unoccupied
political disturbances, malicious damage for more than 30 or 60 days, malicious damage is usually subject to
or vandalism an excess
Storm or flood Usually subject to an excess
Falling trees or branches Though damage to walls, gates, fences or hedges will be excluded
Escape of water With an unoccupied exclusion (30 or 60 days) and with an excess
Escape of oil With an unoccupied exclusion (30 or 60 days) and with an excess
Theft or attempted theft With an unoccupied exclusion (30 or 60 days) and with an excess
Impact Collision into, or impact of, road vehicles, animals, aircraft (or other
aerial devices) and things dropped from them
Subsidence, ground heave or landslip Usually with a large excess. (Subsidence is the movement of the
land on which the building stands due to movements in
underground workings, e.g. mines. Ground heave results when
previously dry ground suddenly takes in water and swells, e.g. after
a drought. Landslip is a small landslide)
Breakage or collapse of television or radio receiving aerials, aerial fittings and masts
Accidental damage to drains, pipes, cables or underground pipes
Accidental breakage of glass and sanitary fixtures

Legal fees, architects’ and surveyors’ Incurred whilst reinstating the building after suffering loss or
fees, cost of debris removal damage
Loss of rent
Chapter 2
Accidental damage As an optional extension
B2 Contents insurance
The term ‘contents’ means household goods and personal effects of every description that
belong to the insured or to a member of the family living in the property. It includes cash and
stamps (that are not part of a collection) usually up to £250, and any fixtures and fittings
belonging to the insured. The risks covered are essentially the same as for buildings
insurance, but with the following differences:
• theft, or attempted theft, of cash, currency, bank notes and stamps may be excluded if it
does not involve forcible and violent entry or exit;
• theft, or attempted theft, while the building is lent, let or sub-let in whole or in part may be
excluded if it does not involve forcible and violent entry or exit; and
• accidental damage cover: certain contents are excluded, e.g. clothing, money and
stamps, plants etc.
There are usually limits on single articles of value (e.g. 5% or 10% of the total sum insured)
and a valuables limit (e.g. one-third of the total sum insured). In other words, the maximum
sum insured for an individual article will be regarded as being no more than 5% or 10% of
the total sum insured. Valuables, taken together, will not usually be covered for a sum
greater than one-third of the total sum insured. However, they can be disclosed and insured
separately. Most household policies can provide cover for specified articles that are not
within 5% or 10% of the total sum insured.
The following extensions are usually included automatically:
• temporary removal to another premises (with restrictions);
• accidental breakage of mirrors and glass or furniture; and
• loss of rent.
Other extensions can be included for the payment of an additional premium, for example:
• accidental damage to entertainment equipment;
• accidental damage during removal; and
• the cost of replacing keys and door locks after the loss or theft of keys.
Typical exclusions may be as follows:
• property more specifically insured elsewhere;
• medals and coins, unless specifically insured;
• drones or aircraft;
• motor vehicles; and
• livestock (other than horses).
All household policies also cover legal liability to third parties for accidental injury or
accidental damage to material property, usually with a limit of £1m or £2m per claim, as
follows.
Buildings Liability of the owner and also their liability incurred under the Defective Premises Act
1972 for faults in property that the insured used to own or occupy
Contents Liability of the occupier for property in other premises that they use for temporary holiday
accommodation
Consider this…
What else, beyond those things we’ve already listed, might a householder wish to be able
to claim for?
The most common extensions to the household policy are as follows:

• Personal possessions (sometimes known as ‘all risks’): usually only given in conjunction
with contents cover and is for personal belongings taken outside the property. There will
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usually be specified and unspecified items.

• Money (e.g. cash, cheques, postage stamps and travel tickets) and credit cards each with
a limit of indemnity, specific conditions (e.g. reporting the loss to the police and card
issuer within a certain time) and exclusions.
• Bicycles, with usually a limit per bicycle and with a lock or storage clause.
• Freezer contents, covering their damage as a result of a change in temperature or
contamination by refrigerant fumes.
• Caravans, covering the accidental loss or damage of the caravan itself and all its
equipment, all risks cover for clothing and personal effects and liability incurred in
connection with it.
• Small craft, i.e. vessels not exceeding five metres and having a design speed no faster
than 17 knots (20 mph). It covers the craft and its equipment, personal effects, salvage
and liability to third parties and passengers subject to specific conditions.
• Sports equipment.
• Personal accident and hospital cash benefit.
• Creditor insurance, i.e. the inability to keep up credit instalment payments.
• Domestic animals.
• Legal expenses.
Each of these have specified cover and benefits, with exclusions and usually an excess. For
example, legal expenses cover provided by a household policy typically provides cover for
the following:
Recovery costs For legal action taken to enforce the legal rights of the insured against third
parties
Civil defence costs For the defence of certain types of civil claims not covered by other forms of
insurance
Prosecution defence costs For the defence of certain criminal charges which may arise from unwitting
acts of the insured
Employment dispute costs For the pursuit of a claim on behalf of the insured against their employer
through the Employment Tribunal, e.g. for unfair dismissal
C Gadget insurance
A fact of modern life means we all own many gadgets, such as smart phones, tablets,
laptops or e-readers. Some insurers have created new gadget insurance products,
whereby it is possible to insure specific gadget items against loss, damage or theft, rather
than having them covered by a traditional household policy. Some of these policies also
provide travel insurance cover as an add on, or even household cover specifically including
gadgets. Bicycles can also be covered.
Cover can be arranged on a month by month basis, with different gadgets swapped in and
out of cover.
As we move into an increasingly connected world the popularity of such policies will grow,
especially with the younger generations.
The polices can be bespoke but the main features and restrictions for gadget insurance can
be summarised as follows:
• Mobile phones that can't be repaired are usually replaced rather than compensated by
cash payment, as a fraud prevention measure.
• Mobile phones normally need to be new or refurbished in the UK and second hand
phones are often excluded.
• Cover can extend to include loss or damage if the phone is with a family member.
Other typical exclusions include:

• loss or theft from a car, unless locked away out of sight;
• if left unattended outside the home;
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• cosmetic damage, superficial scratches, dents that don't impact the function of the phone;
• gradual deterioration of performance;
• peripheral extras such as chargers, cases and other accessories; and
• loss of data.
Another gadget worthy of a mention is a personal drone, something which is becoming more
popular as the cost of such items reduces. Drone insurance provides cover against damage
to a drone, or against claims made by someone whose property the drone may accidentally
damage. So, if control of the drone was lost and it fell on to someone's car, it would be
covered for both the damage to the drone and for the claim from the driver.
Some home insurance policies may include gadget cover or personal possessions cover,
both of which could protect a drone or other gadget at home or away from the home.
However, not all home policies cover drones, so it may be worth investing in a specific drone
insurance policy.
There are two ways of paying for drone insurance. The traditional, annual policy or a new
method is known as pay-as-you-fly (PAFL).The traditional annual policy splits payments into
monthly instalments, whereas the PAFL model charges for a specific use, or, alternatively a
period, such as a week at a time.
Activity
Carry out some research into modern insurance policies such as for gadgets to fully
understand the cover and exclusions provided. Think about how such policies might
develop as we move forward into an autonomous and connected world.
D Travel insurance
Consider this…
What risks can you think of that are associated with travelling?
There are many risks associated with travel. A trip may be cancelled because of sickness or
delayed by an industrial dispute. Luggage may be lost, damaged or delayed. Connections
may be missed because of late running public transport. The traveller may become ill or
suffer an accident while away.
Travel insurance is designed to cover such risks and most travel policies cover the
following:
• Personal accident benefits: usually between £10,000–£25,000 for death, loss of eyes or
limbs, or permanent total disablement. Hazardous activities are generally excluded but
can be underwritten for an additional premium.
• Medical and associated expenses, e.g. the cost of treatment, being brought home or
having to stay away longer than planned: usually up to £1m.
• Loss of deposits, i.e. if the holiday is cancelled due to necessary and unavoidable holiday
cancellation.
• Loss of, or damage to, baggage, personal effects and money.
• Personal liability for accidental injury to third parties or damage to their property.
• Delayed baggage.
• Hospital cash benefits, i.e. a daily amount of cash whilst the insured is in hospital.
• Travel interruption, that is the extra costs involved when public transport fails to deliver
you on time to make your connection or take the trip booked.
• Travel delay.
In addition to the ‘standard’ cover, the following optional extensions are usually available:
• Failure of tour organiser;
• Lack of services or amenities at the hotel because of industrial action lasting at least 48
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hours;
• Loss of passport;
• Legal expenses associated with pursuing claims for compensation for death or injury; and
• Hazardous activities, such as quad biking, jet skiing etc.
There are general exclusions, such as pregnancy and childbirth, physical or mental defect,
suicide, confiscated luggage, damage to fragile objects etc. Policies can be sold to
individuals or groups and may be sold on a ‘single trip’ basis, a ‘multiple trip’ basis or an
‘annual basis’. They may provide cover for specific countries, regions or for any location in
the world.
E Pet insurance
If your pet is like one of the family you will want to make sure they are protected if they fall ill
or go missing. Pet insurance is available to cover:
• dogs;
• cats;
• rabbits;
• horses;
• birds
• exotic pets (for example, snakes, turtles and lizards).
Most policies on the market cover only dogs and cats and a specialist insurer may be
required for any other animal.
Main features of cover of pet insurance products
Vets fees • Accidental injury.

• Illness.
• Physiotherapy.
• Dental treatments.
• Alternative treatments.
Death
Lost and found cover • Theft.

• Straying.
Liability (dogs only) • Damage to third party property.

• Injury or death of a third party.
.
Boarding fees • The cost of kennel, cattery or other boarding fees if

you have to go into hospital. Some insurers also
pay out if a friend or family member looks after your
pet. Most policies pay out once you have been in
hospital for more than four days.
Foreign travel
There are four main types of pet insurance and each offer a different level of cover for vet
treatment:
• Accident only policies. This is the most basic policy and only covers your pet for
treatment that is needed following an accidental injury. It may also offer a lower maximum
claim limit for vet fees than other policies, but it will be the cheapest to buy.
• Time limited policies. This type of policy lets you claim for a specific condition for a set
period of time, usually 12 months. When this period is up your insurer will not pay out for
that condition and you will need to pay for any ongoing treatment yourself.
• Maximum benefit policies. This covers a condition up to a set limit, for example £5,000.
Once you have claimed up to this limit your insurer will not pay out for any further claims
for the same condition.
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• Lifetime policies. You will be able to claim up to a set amount, for example £10,000, for
any condition every year of your pet's life. Lifetime policies are usually the most
expensive option, but offer the most comprehensive cover.
The following are rating factors for pet insurance:
• The age of the pet. Older pets are more likely to fall ill, so their insurance costs more.
• Pre-existing medical conditions. If the pet has any medical issues, most insurers will
not cover them, and those that do will charge more to cover the risk.
• Cost of the pet. Pedigree pets cost more to cover than crossbreeds, because they are
more expensive to buy and can suffer from hereditary conditions.
• Type of pet. For example, small pets like rabbits are cheaper to cover on average than
dogs and cats because they cost less to buy and their vet fees will be lower.
F Extended warranties (and breakdown

insurance)
If, for example, you purchased a new washing machine, it is probable that the manufacturer
will provide a guarantee (or warranty), which will usually last for twelve months. It is,
however, possible to buy an extended policy to extend this period for two, three or even five
years. Extended warranties, issued by insurers and sold by some large authorised retailers,
cover the cost of repairs following electrical and mechanical defects.
Policies are also available to cover all an insured’s electrical products. There is usually a
condition that the repairs must be carried out by an authorised repairer.
The following exclusions apply to an extended warranty policy:
• negligent handling and/or failure to comply with manufacturer’s instructions;
• risks normally covered by a household contents policy;
• war etc.;
• the cost of repairs to bulbs, aerials, external wires, knobs, handles, driving belts etc.; and
• deliberate damage by the insured.
G Commercial property insurance

Apart from commercial motor insurance, all the policies considered so far have been
personal insurances for the individual. In this section we move on to look at commercial
policies, which commercial policies insure businesses.
G1 Fire and special perils insurance

The insurance market has a ‘Standard Fire Policy’ (using a form of wording recommended
by the Association of British Insurers) as the basis for its wordings. The policy provides
standard cover, and then ‘extra’ perils (known as special perils) can be added. It is now
common to issue policies covering fire and special perils as standard.
Standard fire cover is made up of three parts:
1. Fire (excluding explosion resulting from fire, earthquake or subterranean fire, and the object’s own
spontaneous fermentation or heating)
2. Lightning
3. Explosion (restricted to explosion of boilers or gas used for domestic purposes only)
The special perils that may be included are as follows (each is preceded by ‘damage caused
to the property by…’):
• explosion: namely those emanating from chemical reactions producing suddenly
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expanding gas;
• the crashing of an aircraft or other aerial device, other than that resulting from fire
(excluding sonic bangs);
• riot and civil commotion, either for fire caused by riot and civil commotion or for any
damage so caused;
• malicious damage;
• earthquake;
• subterranean fire;
• spontaneous fermentation or heating of the property itself;
• storm, i.e. damage caused by some form of atmospheric disturbance;
• flood;
• escape of water (commonly referred to as ‘burst pipes’ cover);
• impact by vehicles or animals belonging to or controlled by a third party (though this can
be extended to apply to those owned or controlled by the insured or its employees);
• sprinkler leakage; and
• subsidence, ground heave and landslip (with special exclusions).
Standard market exclusions
The standard market exclusions for the whole policy are as follows:
• war risks;
• radioactive contamination/explosive nuclear assemblies;
• pollution or contamination;
• marine policies;
• ‘more specifically insured’ clauses (i.e. where there is a more specific policy in force
covering the peril in question); and
• ‘consequential loss’ exclusion, i.e. loss following and consequent upon a loss proximately
caused by an insured peril.
G2 ‘All risks’ insurance

It was generally realised that uncertainty of loss is not restricted to events brought about by
fire and special perils. Nor is it limited to events occurring on or about the insured’s
premises. The Association of British Insurers (ABI) therefore has developed a recommended
wording for ‘all risks’ policies. This adds special perils to a basic fire policy and then adds the
‘all risks’ element, with its exclusions.
In essence, all loss or destruction of or damage to the property insured is recoverable as
long as:
• it has occurred accidentally in respect of the insured; and
• the cause is not specifically excluded.
There are no optional extensions: everything is covered, unless specifically excluded.
The exclusions can be divided into four groups as follows.
1. Absolute exclusions war, pollution, contamination and consequential

loss
2. Gradually operating exclusions e.g. corrosion or rust, wind or rain damage to

property in the open
3. Aspects of cover which can be written into the e.g. money, glass and subsidence
policy for additional premium
4. Property or risks more appropriate to another e.g. motor vehicles or aircraft

class of business
G3 Theft insurance
There is no standard wording for policies of theft insurance. Under the Theft Act 1968 a
person is guilty of theft if they dishonestly take property belonging to another, with the
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intention of permanently depriving the other of it. Insurers add a phrase saying that it must
include force and violence, either in breaking in or out of the insured premises. This means
that entry by a key, a trick or concealment on the premises while open, and leaving without
forcible exit would not be covered. If a key were obtained by threat or force, cover would
normally apply.
Common extensions are as follows.
• Breakage of glass (if not insured specifically elsewhere).
• Replacement of locks.
• Temporary removal.
• Index linking the sum insured (with premium adjustment at the end of the policy period).
• Extended or full theft: i.e. the ‘forcible and violent entry’ phrase is deleted.
Exclusions are as follows.
• Collusion, e.g. plotting and agreement between the thief and employee(s), though this
can be included, subject to the underwriter’s agreement and an additional premium.
• Fire and explosion (insured under the standard fire policy).
• Cash, bank notes etc. (this should be covered under a money policy).
• Livestock (again, these will be more specifically insured elsewhere)
Cover is often sought on a first loss basis, i.e. for an amount that is less than the total value
of the subject matter of the policy. This is because the insured recognises that a thief would
be selective in what they steal. A small premium discount would usually be given.
G4 Glass insurance
The standard policy covers destruction or damage to all fixed glass, including windows,
doors, fanlights, showcases, mirrored glass and glazed partitions. It usually includes an
extension to cover the cost of boarding up damaged glass until it can be replaced. Cover is
‘all risks’, but scratching or chipping is usually excluded. It may be extended, for an
additional premium, to include damage to storefront contents because of broken glazing, and
damage to washbasins and sanitary fittings in hairdressing salons.
Damage by fire, lightning and explosion is generally excluded (these perils are covered
under a standard fire policy). An excess is usually applied to avoid small claims.
G5 Money
The definition of money under a money insurance policy includes cash, coins, bank and
currency notes, cheques, postal and money orders, and current postage stamps.
A policy covers the risk of loss or damage to or destruction of money on an ‘all risks’ basis. It
includes damage to safes or strongrooms caused by theft or attempted theft and provides
cover against loss of cash or currency while in transit due to accident. The insurer can also
pay for the cost of replacement or repair of a safe or strongroom in the event of theft or
burglary. It can be extended to include:
• personal accident due to assault; and
• credit cards (which are not covered by a standard money policy).
The principal specific exclusions are losses due to:
• error or omissions in accounting and book-keeping;
• the dishonesty of an employee that is not discovered within seven days;
• damage arising outside the UK, Isle of Man or the Channel Islands; and
• a safe or strongroom being opened by a key left on the premises whilst closed for
business.
H Pecuniary insurance
H1 Legal expenses insurance
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These policies cover the costs to firms or companies arising out of the need to take action in
the courts or to defend an action brought against them. They also cover the cost of the
insured’s and their employees’ time spent in court.
A standard policy will be subject to a limit of £25,000 to £100,000. It typically consists of five
main sections as follows.
1. Employment cover Covers the cost of defending unfair dismissal or racial or sexual
discrimination claims plus any awards made against the insured if
unsuccessful
2. Criminal prosecution defence Covers the cost of defending an action against the insured, usually
cover under Health and Safety legislation. Fines are not covered as this
would be against the public interest.
3. Property disputes cover Covers the cost of representation for legal disputes with a neighbouring
property owner or regarding purchase or sale of the insured property
4. Motor cover Covers legal costs relating to motor vehicles, e.g. personal injury,
uninsured loss recovery and defending motor prosecutions
5. Patents Covers the cost of defending the insured against an action for breach
of registered designs, copyright and trademarks, and associated
damages
Refer to
Covered in Contents insurance on page 2/7 and Uninsured loss recovery services on
page 4/10
Legal expenses insurance is also available to individuals and is often offered as an optional
extension to a household insurance policy. It is also sometimes sold alongside a motor policy
where it will indemnify the insured for the cost of defending a claim or pursuing uninsured
losses.
In all cases the costs and expenses must have been approved by the insurer before the
action starts. The cover does not extend to meet the cost of any fines imposed or the
defence of any deliberate criminal acts committed by the insured. Also, claims made
between husband and wife are generally excluded.
H2 Business interruption insurance

Business interruption insurance covers a business for the actual or potential loss of earnings
and the additional expenses incurred as a result of a material loss covered under property
insurance.
Consider this…
Why do you think business interruption insurance could be required?
Property insurance only covers material loss following damage or destruction but that
damage may have consequences for the insured’s ability to carry on its business, resulting in
a financial loss.
The consequences of physical damage (material loss) to an insured’s business premises are
as follows:
• Earnings may reduce or stop altogether following property damage.
• Certain overheads will still need to be paid at their full level.
• There may be increases in certain costs just to keep the business operating.
All these are covered by business interruption insurance, as well as the cost of paying the
charges of accountants employed to help present the claim.
An indemnity period is chosen by the insured, usually 12, 24, or 36 months. Cover will begin
with the occurrence and end not later than the maximum indemnity period chosen. Cover is
restricted to the time the business was actually affected.
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There are three items insured under a business interruption policy:
• gross profit;
• wages; and
• accountant’s (or auditor’s) fees.
Policies are based on a sum insured representing the gross profit for the indemnity period
chosen. Gross profit represents turnover (adjusted for opening and closing stock) less the
expenses that vary in direct proportion to any reduction in turnover (called specified
working expenses, e.g. raw materials). The payroll element is usually insured in full,
although a lower rate is applied to this element.
There will usually be a material damage warranty. This requires that a property policy,
covering the physical damage for the incident, should be in place before the business
interruption policy comes into operation. In practice, the two policies will usually be linked
and provided by the same insurer.
Question 2.4
It is necessary for a property policy covering the physical damage to be in place
before the business interruption policy come into operation.
a. True. □
b. False. □
The most common policies are:
Fire and special perils The standard perils are extended to include non-domestic boilers, and included
under special perils are six engineering special perils not covered by the material
damage policy (although because of the material damage warranty the material risk
will need to be covered by an equivalent engineering policy)
‘All risks’ Insurers often issue a combined material damage and business interruption policy
Engineering The perils covered are usually either:

• failure of the public utilities supply; or
• sudden and unforeseen damage from any accidental cause not specifically
excluded
Certain optional extensions are available for an additional premium. These generally apply to
locations other than the insured premises. Cover may be for the same perils as at the
insured premises or may be more limited. Examples are:
• specified suppliers: cover is extended to those suppliers whose ability to supply is
important to the business’ ability to function;
• unspecified suppliers: extends the cover to any supplier;
• specified customers: based on an estimate of the maximum trading to each customer;
• transit: i.e. the property of the insured whilst in transit;
• prevention of access: i.e. where damage to a neighbouring property may prevent access
to the insured premises; and
• public utilities: i.e. damage to electricity, water, gas or telecommunication supplies,
causing an interruption in supply to the insured.
Example 2.1
XYZ Garages carry out repairs to motor vehicles. All its tyres are supplied by Tyres ‘R Us.
If there was a fire at Tyres ‘R Us that prevented it from supplying tyres then this would
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have serious consequences for XYZ’s business. XYZ decide to extend its business
interruption cover to Tyres ‘R Us.
XYZ Garages has a large contract with a local car dealership to service all its second-
hand vehicles before they go on sale. The income from this contract makes up a large
proportion of its profits. Therefore, XYZ decide to extend its cover to this specified
customer.
H3 Creditor insurance
Creditor insurance covers an insured’s inability to continue credit instalment payments in the
event of redundancy or unemployment. Cover would be limited (for example, 24 months),
and would generally exclude the first month of any period.
I Liability insurance
Everyone has a duty of care to those who they come into contact with on a day-to-day basis.
In the event of a breach of this, a party (whether an individual or a corporate body such as a
firm) can be liable to pay damages (compensation) to another who suffers loss or damage
arising from their negligence (lack of care). Even if found not liable, a party may have to pay
the costs of taking legal action or advice. Covering such damages and costs is the purpose
of liability insurance, and in this section we will deal with the various types.
I1 Employers’ liability
The Employers’ Liability (Compulsory Insurance) Act 1969 states that almost every
employer in the UK must be insured against its liability for the bodily injury or disease of its
employees that has happened in the course of their employment. A certificate of insurance
must be displayed at each place of business and this can be done electronically on condition
that all employees have access to it. The Employers’ Liability (Compulsory Insurance)
Regulations 1998 increased the minimum limit for the sum insured to £5m.
The most important provisions of an employers’ liability policy are as follows.
Legal liability Bodily injury as a result of the employer’s negligence or breach of statutory duty is
covered
Damages For loss of (and future loss of) earnings, and for pain and suffering and loss of
amenity
Claimant’s costs and That is costs (usually legal fees) involved in the claimant substantiating their claim,
expenses plus any award of cash and damages by the court
Definition of ‘employee’ ‘Any person who is under a contract of service or apprenticeship with the insured’.
This is usually extended to include, for example, self-employed persons, work
experience students
Arising out of and in the The time a person is considered to be at work is usually counted from the moment
course of employment they pass through the ‘boundary gates’
Trade or business Usually extended to cover the insured’s ancillary activities which directly form a
part of the business
Territorial limits Usually the UK, the Isle of Man, the Channel Islands or while temporarily outside
these territories
Period of insurance Provided the injury or the cause of the disease occurred during the period of
insurance, insurers are liable even if the policy has expired
Defence costs and The costs incurred by the insured when defending a claim
expenses
Additional person(s) This refers to any director, partner or employee of the insured in their personal
insured capacity, for actions brought against them for which the insured would be entitled
to indemnity under the policy. This cover may be offered as an optional extension
under some policies
Cover may be limited by restricting the definition of ‘business’ and excluding certain kinds of
work, machines and/or processes. However, as this is a compulsory class of insurance, the
insurer cannot refuse to deal with a claim on these grounds. It merely obtains a right of
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recovery against its insured once it has made a payment.
I2 Public liability insurance

A public liability policy covers all legal liability that is not specifically excluded. It provides an
indemnity to the insured for legal liability to third parties for damages (including claimants’
costs and expenses). This is for bodily injury, death, disease or illness, and for any loss of, or
damage to, third party property, which happens in connection with the business insured
under the policy during the period of insurance.
Question 2.5
Can you think of three examples of where a claim could arise under a public liability
insurance policy?
The legal liability covers not just negligence, but also nuisance, trespass and liability under
statute.
Claims handlers should consider the following.
Accident the occurrence was not a deliberate act or omission of the insured
Injury to persons there must be some form of physical or medical impairment and/or
Loss of or damage to property damage to third party property, but may exclude intangibles (e.g. copyrights) or
indirect economic loss
Consequential loss e.g. when a vehicle has been damaged by a roof tile falling from the insured’s
premises, the insured may be liable for the cost of a hire car for the third party
whilst their vehicle is being repaired, and this would be covered
Limit of indemnity usually, a limit per occurrence and in the aggregate
A number of exclusions apply, and these are:

• injury to employees (this would be covered under an employers’ liability policy);
• property belonging to the insured (covered under a property policy);
• product liability (as this is more specifically covered under a product liability policy);
Refer to
Products liability and professional negligence covered in sections Product liability
insurance on page 2/18 and Professional indemnity insurance on page 2/18
• professional negligence;
• contractual liability where a liability would not exist if it were not for the existence of the
contract;
• cost of rectifying defective work;
• deliberate acts, i.e. not ‘accidents’;
• injury or damage caused by the insured’s motor vehicles;
• injury or damage caused by the insured’s vessels and craft;
• lifts, elevators and boilers (covered under an engineering policy);
• war risks; and
• radioactive contamination.
Question 2.6
Make sure you understand why each exclusion is inserted into the public liability
insurance policy.
I3 Product liability insurance

The standard product liability policy covers legal liability for bodily injury or third party
property damage which arises out of goods or products manufactured, constructed, altered,
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repaired, serviced, treated, sold, supplied or distributed by the insured. Cover is available as
a standalone product, but is more usually packaged and combined with public liability cover.
• Cover is for consequential loss following actual injury or damage.
• Financial loss is not usually covered as standard, unless accompanied by bodily injury or
loss of or damage to property. However, a financial loss extension may be purchased by
the insured to cover financial loss that does not accompany bodily injury or damage to
third party property. This is called ‘pure financial loss’.
• The basic cover is dependent on an element of accident.
• The injury or damage should occur during the period of insurance, although some
standalone product liability insurance may be written on a claims-made basis. Where this
is the case, the trigger for the claim attaching to the policy is when the claim was made,
rather than when the loss occurred.
Refer to
Claims-made basis covered in Professional indemnity insurance on page 2/18
• A yearly aggregate limit of indemnity is usually specified.
There are a number of exclusions that you would expect to find in a product liability
insurance policy. These are:
• contractual liability;
• damage to the actual product(s) supplied; and
• faulty design or formula.
I4 Professional indemnity insurance

This covers professional people’s liability for injury, damage or financial loss to their clients or
the public that comes about as a result of a breach of professional duty, or from their
negligent acts, errors or omissions in their professional capacity.
Question 2.7
Try to think of some examples of where a professional person may give advice
which, when followed, leads to someone suffering loss or damage.
With professional negligence, the courts may award damages to the claimant for pure
financial loss.
It is usual for the policies to offer cover on a claims-made basis. This means that the policy
applies to claims made against the insured during the period of insurance rather than
claims occurring during the policy period.
Dishonesty of the insured will usually be excluded.
J Health insurance
Health insurance can be broken down into three types as follows.
Personal accident provides payments in the event of accidental death or bodily injury
Sickness provides payment for disablement due to sickness
Medical expenses provides cover for individuals who seek medical treatment outside the NHS when
they are ill
A personal accident and sickness policy is a benefit policy as opposed to a policy of

indemnity. That is, it is a contract to pay a sum of money should a defined event occur,
whether or not the insured sustains a direct financial loss.
Personal accident and sickness policies can be purchased as stand-alone policies, but are
often ‘add-ons’ to travel, motor or household insurance.
You can purchase as much benefit cover as you can afford. Should you have an accident
Chapter 2
that is covered under the terms of the policy, you would receive benefits in accordance with
the actual cover purchased. Because they are benefit policies and not policies of indemnity,
even if you have more than one policy, contribution will not be an issue.
However, insurers are eager to ensure that the benefit is no more than normal earnings as, if
it were, this could provide an inducement to remain off work. Consequently, they will
specifically ask about the existence of other policies on the proposal form. In this way, they
can check that the overall benefits provided by all the policies are set at realistic levels.
Question 2.8
Which two, out of the three following statements about benefit polices are correct?
a. A benefit policy will pay a set amount for a loss, agreed at the commencement of
the policy.
b. Medical expenses is an example of a benefits policy.
c. Sickness insurance will pay out for an unlimited period, should you be unable to
work through illness.
J1 Personal accident insurance
Refer to
See also Policy benefits on page 2/20
Accident cover pays lump sums in the event of death or specified injuries. It pays weekly
benefits for up to 104 weeks if temporarily totally disabled due to an accident (and reduced
benefits if temporarily partially disabled). An annuity would be paid in the event of permanent
total disablement. There is also a personal accident cover which provides a stipulated
amount to be paid as a lump sum in the event of death or injury, e.g. £10,000 for total or
partial loss of sight.
J2 Sickness insurance
Sickness cover provides a weekly benefit for up to 104 weeks if the insured is disabled from
following their usual occupation due to sickness or disease. Cover usually excludes any
sickness contracted within the first 21 days of the start of the policy period and is subject to a
franchise.
A franchise refers to a period of time or an amount of money under which a policy would not
come into force. No benefit or indemnity would be paid for periods or amounts falling below
this threshold. However, unlike an excess, once this period or amount is exceeded then the
whole period or amount is covered.
For a sickness policy the franchise is usually seven days. An insured who is sick for less
than seven days receives no benefit, but an insured who is sick for more than seven days
receives benefit for their entire period of sickness.
Example 2.2
Bob Jones takes out a sickness policy with a seven-day franchise. Three months later he
falls ill and is laid low for six days after which he returns to work. No benefit is paid to him
by his policy.
Eva Wilkes takes out a similar policy. Three months later she too falls ill. She is quite
poorly for two weeks (i.e. 14 days) after which she returns to work. Eva receives benefits
from her policy for 14 days of sickness.
J3 Policy benefits
The policy benefits provided under personal accident and sickness policies usually include
payments on the event of any of the following.
Chapter 2
Death usually within twelve months of the event giving rise to the claim
Total loss of sight in one or both eyes
Permanent total usually a capital sum or an annuity is paid, but often not until 12 or 24 months after
disablement the accident as it may take this long to decide whether the disability is permanent
and total
Permanent partial that is, a permanent disablement that stops the person getting on with a substantial
disablement part of their normal business
Temporary total usually a weekly benefit is paid for a maximum of 104 weeks
disablement
Temporary partial this only applies following an accident (i.e. not for sickness)
disablement
Medical expenses incurred for treatment or appliances given or prescribed, up to a fairly low limit
J3A Exclusions
There are a number of typical exceptions, for example:
• the insured being under the influence of, or being affected by, alcohol or non-prescription
drugs;
• the consequences of a pre-existing infirmity or disease;
• self-inflicted injury or disease including suicide; and
• childbirth, pregnancy, venereal disease and/or AIDS.
J4 Medical expenses
Medical expenses insurance covers members of the public, either individually or in group
schemes, against most of the expenses of undergoing in-patient or out-patient treatment in
private hospitals. These policies are often sold as group schemes to businesses as an
employment benefit for staff and their families. Some policies allow for a cash benefit to be
paid if the insured person prefers to accept NHS in-patient treatment.
There is a wide range of products available on the market. Basic cover is likely to have many
exclusions (for example, the treatment of pre-existing conditions) and lower 'per treatment'
limits. More expensive cover and group cover will be wider, have considerably fewer
exclusions and significantly higher 'per treatment' limits.
Conclusion
You should now have an understanding of the different types of insurance in the market and
the attributes of each. We can now start to focus on how claims are handled. We will start in
the next chapter by looking at general claims administration and some of the key
considerations when handling particular claims.
Key points
Chapter 2
Motor insurance
• Private motor insurance is compulsory in the UK.

• It can take the form of Road Traffic Act only, Third party only, Third party, fire and theft
and comprehensive.
• The same levels of cover are available for motorcycles, which are also subject to the
Road Traffic Act.
Household insurance
• Buildings insurance covers the main structure of the building along with garages,
sheds, greenhouses, outbuildings, swimming pools, tennis courts etc.
• Contents insurance covers household goods and personal effects belonging to the
insured or their family living in the property.
Travel insurance
• Covers the risks associated with travel, such as cancellation, delay, lost luggage and
accident and sickness while away.
Creditor insurance
• Creditor insurance covers an insured’s inability to continue credit instalment payments

in the event of redundancy or unemployment.
Property insurance
• Fire and special perils insurance consists of the market’s standard fire policy with extra
perils added.
• With ‘all risks’ insurance, everything is covered unless specifically excluded and certain
exclusions are standard across the market, e.g. war risks.
• Insurers expand the Theft Act 1968 definition of theft to include ‘with the use of force
and violence, either breaking in or out of the insured property’.
Pecuniary insurance
• Legal expenses insurance covers the cost to firms and individuals arising out of the
need to take or defend an action in the courts.
• Business interruption insurance covers the impact on the business of physical damage
to its premises.
• A material damage warranty states that property insurance, covering the physical
damage, must be in place before the business interruption policy will operate.
Liability insurance
• Employers’ liability insurance meets the legal requirement that employers in the UK
must be insured against their liability for the bodily injury or disease of their employees,
arising out of their employment.
• A public liability policy covers all legal liability not excluded for bodily injury, death,
disease or illness and for any loss of or damage to third party property, which happens
in connection with the business insured during the policy period.
• Products liability covers the legal liability for bodily injury, or third party property
damage which arises out of goods or products made, altered, repaired or sold by the
insured.
• Professional indemnity insurance covers professional people’s liability for injury,
damage or financial loss to their clients or the public arising out of a breach of
professional duty or negligence.
Key points
Extended warranties (and breakdown insurance)
Chapter 2
• Extended warranties, issued by insurers and sold by some large authorised retailers,
cover the cost of repairs following electrical and mechanical defects.
Gadget insurance
• Gadget insurance is a modern insurance cover, allowing short term cover for electronic
tablets and other technology, often linked to travel and household cover.
Pet insurance
• Provides cover for domestic pets against illness, vets' fees, loss and liability to third
parties.
Health insurance
• Health insurance covers personal accident insurance, sickness insurance and medical
expenses insurance.
Question answers
2.1 You should find that the cover provided will depend on the type of policy it is. By and
Chapter 2
large the cover will match the descriptions given in Motor insurance on page 2/2.
There may well be differences as motor insurers adapt their cover to gain a
competitive edge.
2.2 The most fundamental difference between third party, fire and theft cover and
comprehensive cover is that in a comprehensive policy the insured’s own vehicle is
covered for damage or loss over and above that caused by theft, fire, lightning or
explosion.
2.3 a. True.
2.4 a. True.
2.5 Examples could include:

• a sign hanging from an insured’s premises may fall down and injure a passer-by;
• a customer could slip on a wet floor, hurting themselves;
• a loose roof tile could blow from the insured’s building, damaging a vehicle
parked on the street.
The list is endless – any potential legal liability could have been named.
2.6 Many of the exclusions are inserted because there are more specific policies
available to cover these risks.
2.7 Examples could include an architect designing a house incorrectly or a stockbroker

recommending some shares in a disastrous company.
2.8 a and b.
Self-test questions
Chapter 2
1. How many levels of cover are available for private motor insurance?
a. Three. □
b. Four. □
c. Five. □
2. Accidental or malicious damage is covered under which level of cover for private
motor vehicles?
a. Third party only. □
b. Comprehensive. □
c. Road Traffic Act cover. □
3. Personal accident policies are not contracts of indemnity.
a. True. □
b. False. □
4. Which of the following is not a scenario covered under a personal accident policy?
a. Death. □
b. Loss of sight in one/both eyes. □
c. Permanent total disablement. □
d. Temporary partial disablement. □
e. Fractured leg. □
5. Buildings cover only includes the physical structure of the property being insured.
a. True. □
b. False. □
6. Which of the following are not basic sections of cover available under a travel
insurance policy?
a. Baggage, personal effects and money. □
b. Hazardous sports and pursuits. □
c. Travel interruption. □
7. Which of the following perils is not covered by a standard commercial fire policy?
a. Fire. □
b. Lightning. □
c. Earthquake. □
d. Explosion. □
8. Which of the following is covered under an employers' liability policy? (Select all that
apply.)
a. Legal liability for damages for bodily injury, disease, illness or death of an □
Chapter 2
employee whilst working.
b. Liability for costs and expenses. □
c. Property damage owned by an employee. □
9. Professional indemnity insurance can include cover for deliberate fraud committed by
an individual.
a. True. □
b. False. □
10. Which of the following is an exclusion under an extended warranty product?
a. Damage or breakdown occurring six months after purchase. □
b. Mechanical defects in the product. □
c. Deliberate damage caused by the insured. □
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Claims considerations
3
and administration
Chapter 3
outcomes
Introduction
A Claims staff 3.1
B Service standards and managing customer expectations 3.2
C Parties to a claim 3.3
D Estimating and reserving 3.4, 7.4
E Fraud 3.5
F Regulation of claims handling 3.6, 3.8
G Disputes and complaints 3.7
H Fair treatment of customers 3.6
Conclusion
Key points
Question answers
Self-test questions
Learning objectives
• describe the role of the claims department;
• explain the importance of service standards and managing customer expectations
accordingly;
• understand the different parties to an insurance claim;
• explain estimating and reserving policies and their implications;
• explain the procedures used to discourage and detect fraudulent claims;
• explain the consequences of fraud;
• describe the regulatory and legislative environment that applies to claims handling;
• describe the mechanisms for dispute and complaint resolution; and
• describe the concepts of good faith and the duty of fair presentation.
Introduction
Now that we have established what a claim is and taken a brief look at the different types of
insurance available, we can start to look at how an insurer responds to a claim. We stated in
chapter 1 that the claims department is the ‘shop window’ of the insurance company as it is
really only when a policyholder comes to make a claim that they find out the value of the
insurance they have been paying for. In this chapter, we will look at some of the things that
the claims department needs to consider when handling the claims it receives.
Chapter 3
Key terms
Claims handler Customer service Disputes Estimating

Fair treatment of Fraud detection Incurred but not Incurred but not
customers enough reported reported (IBNR)
(IBNER)
Reserving Service standards Third-party claims
A Claims staff
The claims department plays an important role in shaping the opinion policyholder has of
their insurer. Furthermore, the claims department is a vital component in ensuring the proper
management of pooled funds.
For these reasons, it is vital that the claims department is efficient, and is staffed by
competent and professional claims handlers.
Consider this…
What is the role of a claims handler?
To summarise, the role of a claims handler is to:

• deal with all submitted claims quickly and fairly with all claims submitted;
• settle claims with the minimum of wastage or avoidable overpayment (this is also known
as leakage);
Refer to
Leakage covered in Leakage (or overpayment of claims) on page 7/3
• estimate accurately the final cost of outstanding claims; and
• distinguish between genuine and fraudulent claims.
This overview embraces the two-pronged function of the claims department and in this
chapter, we shall deal with these issues in greater detail.
B Service standards and managing customer

expectations
Question 3.1
Whatever job you are currently doing, there may well be targets and goals.
What targets are set in your job?
Customer service has become a dominant issue for a number of reasons. These include
the following.
Chapter 3 Claims considerations and administration 3/3
Consumer awareness Consumers are more aware of their increased rights and insurers have had to react
accordingly. They also have a much stronger voice with the rise of social media
platforms, such as Twitter and Facebook, and are becoming more vocal about
perceived poor service. Consumers are more likely to share a bad experience
online, which could have damaging consequences for an insurer’s reputation.
Expectation of service Customers are ever-increasingly expecting value-added services, driven largely by
insurers’ marketing campaigns. Service can be used to sell products over price,
although most consumers will opt for price in the first instance.
Competition Insurers cannot expect to compete with other insurers if they are not satisfying their
existing customers’ needs. In addition, there are new disruptors entering the market
Chapter 3
which, through the application of new technology and techniques, may be able to
provide a better customer service experience and have a greater ability to provide
the service the consumer expects.
These increasing consumer demands have led to improved customer service and an
increase in the skills and professionalism of the claims handlers providing it.
As with any department or firm, a claims department will have a philosophy that will embrace
its service standards, i.e. how it intends to deal with the claims presented to it by its
customers. In addition, every insurer will have an approach to key claims issues.
The service standards, as documented within the claims philosophy, will usually have a
general section setting out the broad approach and covering the following:
• the quality of service aimed for; and
• how valid claims will be handled.
These will then be further developed, covering such issues as:
• the nature of the claims service at each stage of the claims process;
• the speed of the claims service; and
• the economic efficiency of the claims service.
The service standards should balance the need to treat the customer fairly, efficiently and
sympathetically with the need to only pay claims that are valid.
While it is good practice to maintain quality service standards, consumers are likely only to
measure their experience against their own perception of what good looks like. This
perception could come from an experience of a different sector, or even a previous claim
with a competitor. Insurers need to be able to adapt to, and ideally stay ahead of, the ever-
changing demand of public expectations, rather than simply refer to a published set of
standards. The publication of a claims philosophy can, however, act as a strong statement of
the service the insurer intends to provide, and creates a degree of accountability should the
customer experience not match the expectations created.
Consider this…
What are the benefits of providing good quality customer service?
Good customer service can come in many different shapes and forms. Typically, it
incorporates efficient and prompt notification, investigation and settlement of a claim. It is
usually considered to involve treating the customer fairly, with empathy and as a fellow
human being.
Providing good customer service does not only benefit the customer, the insurer also
benefits. The main benefits of quality customer service are that it:
• encourages customer loyalty: it is a lot cheaper to keep customers than it is to gain new
ones;
• attracts new customers;
• attracts and keeps high-quality employees through increased job satisfaction;
• marks the company out from its competitors;
• improves a company’s profitability;
• increases productivity; and
• improves the working environment.
If a customer’s claim is not handled according to their expectations it can lead to severe
dissatisfaction. It can lead to protracted disputes which are costly for insurers.
C Parties to a claim
Consider this…
Who or what is a ‘third party’ in respect of insurance claims? And who are parties one
and two?
Chapter 3
Before we deal briefly with third party claims negotiation, it will be useful to define who is a
‘third party’.
The first party would be the person or company insured by a particular insurance company (i.e. the
policyholder)
The second party can be viewed as the insurance company insuring the first party
The third party refers to anyone else involved in a loss event, e.g. in a motor accident a third party
could be another vehicle owner, property owner, a passenger or a pedestrian
Handling third party claims is an extremely important part of the work of a claims
department. For instance, a motor policy will include cover for personal injury to, and
damage to the property of, third parties. If an insurer is notified of a claim by its insured and
they indicate that there is third party property damage or injury, the insurer must start to take
the necessary steps for handling these third party claims as soon as possible.
The third party does not, however, have a contractual relationship with the insurer. This has
the following consequences:
• The third party must, legally, pursue their claim against the insured, not the insurance
company (which will then indemnify its client).
• In practice, the claim is likely to be presented to the insurer by the claimant or their
representative
• The third party’s expectations of the level of claims service may be greater than those of
the insured because they may be hostile (they are, after all, the victim of the insured’s
negligence), and may see the insurers as the insured’s agent.
• The third party may not identify with the insurer, and so may be more prone to
exaggerating their claim.
• The amount of pressure a third party can exert on the insurer to respond quickly will
usually be less, as the insurer owes no loyalty to the claimant.
• Conversely, a well-handled third party claim may result in that claimant moving their own
policy to the insurer at renewal.
• A third party will not be fully compensated in the event of contributory negligence (i.e.
when they’re partly to blame for what happened).
• A third party will not be liable for any excess or deductible.
• The recovery of legal costs will generally be more common as a third party is more likely
to use the services of a solicitor. If the third party is successful in their claim the insurer
will usually be obliged to pay their legal fees, unless the size of the claim does not enable
recovery of legal costs.
Other issues that arise when managing third party claims are:
• third party claims are liability claims and could be more complex in comparison to other
claims; and
• a third party’s final option in a dispute is litigation and they may be more willing to issue
court proceedings if they are not managed fairly.
While there is no contractual obligation to do so, it is common and good practice for an
insurer to manage the needs of a third party to the same standards as are applied to a
paying policyholder. This will ensure the claims handling process avoids disputes and
delays, and may lead to increased business in the longer term.
D Estimating and reserving

Refer to
Reserving also covered in chapters 5 and 7
Reserving is the process that a company carries out in order to assess the level of funds
that are required to meet current and future claims liabilities. It is a key indicator of whether a
company is financially solvent.
Chapter 3
Claims reserving is required for internal and external reporting purposes and for monitoring
financial performance. It is used to assess the:
• overall financial performance of the company, as the claims reserve will affect the net
profit and net worth of the company;
• relative profitability of the various classes of business; and
• adequacy of premium rates.
So, how does an insurance company arrive at a reserve figure? In other words, how do
insurers estimate the future cost of claims?
Estimating is done on a case-by-case basis. Insurers place an estimate on each individual
claim file, usually split into categories to reflect the sections of the policy being claimed
against, e.g. accidental damage (AD), third party damage (TPD) and third party injury (TPI).
In household claims the estimate may be allocated against the peril claimed against, e.g.
escape of water, fire or theft.
In essence, in order to establish the size of reserve that is required:
• a value is placed on each claim; and
• an allowance is then made for direct claims expenses, e.g. the fee charged by a loss
adjuster who has been called on to use their expertise in establishing a claim.
Reserves are regularly reviewed to ensure they continue to reflect the likely cost of the claim.
There are various methods used to produce a 'global' claims reserve, i.e. a reserve covering
the whole book of business, but these methods fall outside the scope of this syllabus.
It is vital that underwriters, actuaries and claims managers are involved in reserving reviews.
This is because the reserving specialist will require their input on the book of business
written and details of any unusual characteristics.
The objective of claims reserving is to estimate the future cost of claims. The insurance
market and the processing mechanism operating within it involve delays, such as the ones
between the:
• incident occurring and the notification of that claim to the insurer; and
• notification of a claim and the settlement of that claim by the insurer.
It is because of these delays that an insurance company needs to set up reserves for
unsettled or unnotified liabilities.
D1 Outstanding claims reserve

The outstanding claims reserve contains all the reserves allocated to each individual claim
by its claims handler. It is the aggregation of individual claim reserves, covering the cost of
claims that have been incurred and reported to the insurer.
D2 Incurred but not reported (IBNR) reserve

As the name incurred but not reported (IBNR) reserve suggests, the claim has been
incurred by the insured but has not yet been reported to the insurer, who consequently
knows nothing about it. There is a possibility that the insurer may incur a liability to pay the
claim, but as the insurer is not aware of the matter it is impossible to reserve for it
individually.
The amount to be reserved to take account of this situation is calculated using various
statistical techniques. These are based on past experience of claims, in conjunction with
actuarial modelling, along with a number of other sources of information, e.g. legislation,
market knowledge and judicial developments.
D3 Incurred but not enough reported (IBNER) reserve

The incurred but not enough reported (IBNER) reserve covers shortfalls in provisions for
outstanding claims reserves. This could occur, for instance, where amounts reported are
understated, or where the insurer has insufficient information on which to decide what would
be adequate reserves.
D4 Other reserves
Chapter 3
There are a number of other reserves to be considered while on this topic, such as the
following.
Equalisation reserves These are required by law and are designed to smooth fluctuations in loss
ratios (i.e. the ratio of premiums to claims) for certain classes of business
Catastrophe reserves These are set up to cover a large number of related individual losses
arising from one event (e.g. hurricane)
Unearned premium reserve and The unearned premium reserve is that element of the premium for which
unexpired risk reserve insurance cover has not yet been provided. For example, if only six
months of a policy period has expired at year end, only half the premium
has been ‘earned’. An unexpired risk reserve is only needed where a loss
is foreseen in relation to the unearned premium reserve
Provision for claims handling To cover the anticipated future costs of settling claims; it includes direct
expenses costs (e.g. loss adjusters’ fees) and indirect costs (e.g. office expenses)
Re-opened claims reserves This occurs where the claim is closed but then the underlying
circumstances of the claimant deteriorate. This often occurs with personal
injury claims, which have to be re-opened later with a suitable reserve
E Fraud
Consider this…
What constitutes insurance fraud?
Insurance fraud can be illustrated by the following examples:

• inventing a loss event that never took place, e.g. a burglary at home;
• exaggerating the number of items stolen during an otherwise honestly reported break-in;
• deliberately creating an insured event, e.g. throwing paint on a carpet at home; and
• exaggerating the effects of an insured event, e.g. claiming compensation for whiplash
after an innocuous car accident where no injuries were sustained.
It is difficult to quantify insurance fraud because it can go undetected. However, quantifying it
by collecting data on the types and amounts of fraud is becoming increasingly important.
This is because identifying and quantifying the effects of fraud is the first step towards
eliminating it.
E1 Fraud prevention
Fraud prevention is best undertaken at a strategic level and the Insurance Fraud Bureau
(IFB) was established in 2006 to lead the insurance industry’s collective fight against
Insurance fraud. It acts as a central hub for sharing insurance fraud data and intelligence,
using its position at the heart of the industry and access to data to detect and disrupt
organised fraud networks.
It uses a wide range of data and intelligence to achieve two primary objectives, to:
1. help insurers identify fraud and avoid the financial consequences; and
2. support police, regulators and other law enforcement agencies in finding fraudsters and
bringing them to justice.
The IFB also administers the Insurance Fraud Cheatline, which is run in association with
Crimestoppers. This provides the public with a free and confidential tool to report suspected
fraud. This can then be investigated, either by the IFB or the police.
Another fraud prevention tool available to insurers is the Insurance Fraud Enforcement
Department (IFED) of City of London Police. This is a unique team of police officers and
investigators, funded by a partnership with insurers through the ABI and Lloyd’s of London. It
provides a specialist unit dedicated to tackling insurance fraud, especially high volume and
organised criminality, as well as opportunist fraud.
Chapter 3
On the Web
www.insurancefraudbureau.org
www.cityoflondon.police.uk/CityPolice/Departments/ECD/IFED/
Technology is being harnessed in the drive towards fraud detection. This includes the use
of pooled claims databases where insurers can share information with a variety of other
insurers. With this practice, insurers can identify claimants who put in repeat claims by
matching their new claims details against those already held.
These databases include the following:
Insurance Fraud Register This is an industry-wide register of known insurance fraudsters

administered by the IFB on behalf of ABI members. It holds details of
proven fraudsters to help prevent future fraud being committed
IFB Insurance Fraud Intelligence Hub An IFB initiative, developing an industry wide counter fraud sharing
(IFiHUB) platform, where intelligence about fraudsters can be shared in real
time.
Motor Insurance Anti-Fraud and Theft This contains details of all total loss and theft claims. Insurers can
Register (MIAFTR 2) therefore check whether a total loss or theft of a vehicle is being
claimed for more than once
Motor Insurance Database (MID) This was set up by the insurance industry and contains details of all
registered vehicles in the UK and the related insurance details. This
assists the police in tackling motor vehicle crime by identifying
uninsured drivers
Claims and Underwriting This database is shared by insurers across the country and contains
Exchange (CUE) information on personal lines claims from the previous three years.
Subscribing members submit their claims data on individual claimants
and check the true claims history of those individuals. Its aim is to
eliminate multiple claims on parallel policies held by a single insured.
The register covers domestic buildings and contents, motor, and
personal injury/illness incidents reported to insurers, which may give
rise to a claim. In addition, it is compulsory for claimants’ solicitors
bringing personal injury claims in the MoJ/Claims Portal to carry out
checks against the database via askCUE
Art Loss Register Founded by the insurance industry and the art world in response to
increasing art theft, its operation relies on subscriptions from insurers.
Its objectives are to:
• increase the recovery rate of stolen art and antiques; and
• deter theft by making the resale of stolen articles more difficult.
The Register is available to the insurance industry, the art trade, law
enforcement and customs agencies, collectors and museums
E2 Fraud detection
The claims handler plays a vital part in detecting fraud. Methods of detection vary across the
classes of business, but there are many common indicators. Examples of these include:
• claims made soon after a policy has been taken out;
• frequent change of insurer, which gives the impression that the claimant is trying to
disperse the information held about them by frequent changes;
• uncharacteristic increase in the level of cover, e.g. a request to add accidental cover
halfway through the policy term;
• financial difficulties, which may not be immediately apparent but may come to light. For
instance, when bank statements are provided to substantiate a loss of cash claim;
• prevarication by the insured;
• excessive pressure to settle;
• inconsistencies in the story given;
• lack of co-operation (a genuine claimant has nothing to hide and would want their loss to
be remedied as soon as possible);
• poor or missing documentation, e.g. a total lack of receipts to substantiate purchase; and
Chapter 3
• perfect documentation, which appears to be ‘too good to be true’ to the experienced

claims handler.
Other measures within the insurance industry have also combated fraud, whilst actually
being implemented to enhance customer service and cut costs, for example:
• completing claims forms over the telephone: individuals often find it harder to lie directly,
as opposed to when merely filling in a form;
• claims settlement by replacement rather than cash: if a perpetrator claimed for a ‘stolen’
television to get cash, it would be frustrating for them to receive a replacement, which
they would have to sell to get the cash (the fraud would still be successful, but this acts
as a deterrent); and
• the use of cognitive behaviour tools to listen for inconsistencies in voice and action during
the claims process.
It is most important for insurers to detect and eliminate as much fraudulent activity as they
can in order to maintain a profitable account. Most of the larger insurers now employ one or
more in-house fraud detection teams. These tend to be staffed by insurance fraud detection
experts who are often people with experience in the surveillance or security services and the
police.
E3 Consequences of fraud
Consider this…
What are the consequences of fraud?
If a fraudulent claim is paid, it will have an impact on all the various parties concerned:
The insurer The cost of fraud is enormous. According to the Insurance Fraud Bureau,
general insurance claims fraud exceeds £2.1bn per year. If individual insurers
fail to take action on this, it will have an impact on their bottom line (profit),
claims costs will rise, meaning premiums will too, making them less
competitive. They may even get a reputation as a ‘soft touch’, which may lead
to genuine insureds avoiding them whilst attracting an ever growing number of
fraudulent claims
Policyholders Genuine policyholders will be affected by the commensurate increase in

premiums, not just the fraudsters
Fraudulent claimants If they get away with it once, the temptation will be there to continue this
practice in the future
There have been many cases heard in law over the question of fraud and the consequences
for the claimant who is proved to be fraudulent.
The case of Konstantinos Agapitos v. Ian Charles Agnew (2002) dealt with the issue at
some length. The judge decided that not only would a fraudulent claim fail completely, but
that if a claimant instituted an authentic claim that was subsequently found to be
exaggerated, this must also fail in its entirety. He quoted Lord Hobhouse’s statement from
the case of Manifest Shipping Co. Ltd v. Uni-Polaris Shipping (2001) (the ‘Star Sea’
case), where he said:
The fraudulent insured must not be allowed to think: if the fraud is successful, then
I will gain; if it is unsuccessful, I will lose nothing.
However, this case has now been superseded by the more recent Supreme Court decision in
Versloot Dredging BV v. HDI-Gerling Industrie Versicherung AG and others (The DC
Merwestone) (2014).
Initially, the Court of Appeal decided this case in line with Agapitos, so the whole claim failed
because of the use of a fraudulent device being present in the pleaded claim. The Supreme
Court, however, took a different view. It decided that an insured can tell lies in the
presentation of a claim but still make full recovery from an insurer, provided the lies were
immaterial or collateral ones and that the claim is otherwise genuine as to liability and
quantum. The logic behind the decision is that neither party benefitted or was prejudiced by
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the lie.
The case in question centred on an immaterial lie relating to irreparable water damage
caused to the ship’s engine when a pump failed. The actual cause of the loss was an
undetermined water leak. However, the ship’s captain in his statement said that the crew had
failed to investigate a water alarm. In fact, there had been no alarm, but this was immaterial
to the loss, which would have ruined the engine whether an alarm had sounded or not.
Because this lie was ‘immaterial’, the Supreme Court decided the claim should succeed.
This now puts commercial insurance contracts on a par with the views of the Financial
Ombudsman Service whose position has been that the historic precedent was unnecessarily
harsh. Their view is that, where the fraudulent act or omission makes no difference to the
insurer’s ultimate liability under the terms of the policy, it should not entitle the insurer to
‘forfeit’ the policy or reject the claim.
Question 3.2
Why is it important that insurers are seen to be prosecuting fraudulent claimants,
through defending civil proceedings and on occasion bringing contempt
proceedings? (Select all that apply.)
a. To show the fraudsters that crime does not pay.
b. To protect the premiums invested for genuine customers.
c. To protect the integrity of their genuine customers.
E3A Insurance Act 2015
Refer to
Insurance Act 2015 covered in more detail in Insurance Act 2015 on page 3/12
The Insurance Act 2015 came into force in August 2016. Whilst it largely applies only to
commercial insurance, it does include provisions addressing fraud for both consumer and
commercial insurance contracts.
Section 12 of the Act seeks to clarify the insurer’s position. If a fraudulent claim is made, the
Act allows the insurer to treat an insurance contract as terminated from the time of the
fraudulent act.
Following termination:
• the insurer will remain liable for any prior legitimate claims arising before the
fraudulent act;
• the fraudulent claim and all subsequent legitimate claims will be invalid;
• the insurer may recover any payments in respect of the fraudulent claim(s); and
• the insurer will be entitled to retain any premium paid.
The Act does not seek to define what a fraudulent claim is, so there is no distinction between
someone who presents a completely fraudulent claim (i.e. for an event which never
happened) and someone who suffered a genuine loss but has used a fraudulent device to
increase the prospect of payment.
The Act does, however, make a distinction between a ‘fraudulent claim’ and a ‘fraudulent
act’; the latter being the behaviour that makes the claim fraudulent. This is an important
distinction since the insurer is entitled to terminate the cover from the date of the ‘fraudulent
act’ (not discovery of it) and this may be at a different time from when the claim is submitted.
Many policy fraud conditions state that in the event of fraud ‘all benefit of the policy is
forfeited’, which allows insurers to recover past claim payments, even if legitimate. In
contrast, the Act does make it clear that legitimate claims occurring prior to the fraudulent
act continue to be payable and so no such right of recovery in respect of previous claims is
permitted.
E3B Criminal Justice and Courts Act 2015
Under s.57 of the Criminal Justice and Courts Act 2015 (CJCA) (which came into force in
April 2015) defendants can request that, where part of a personal injury (PI) claim is found to
be ‘fundamentally dishonest’, the whole claim be struck out. This is designed to address the
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situation where a personal injury claimant has significantly exaggerated the extent of their
injuries but, even when the dishonesty is discovered, still receives the genuine element of
their claim through the courts.
What amounts to fundamental dishonesty will not always be completely clear, as the
legislation does not include any detailed guidance, and there have been relatively few
recorded court cases from which to develop a clear understanding of how the rule operates.
Nevertheless, this is a positive development in that it should discourage claimants from
exaggerating their personal injury claims.
F Regulation of claims handling

Two organisations regulate financial institutions:
• The Prudential Regulation Authority (PRA) is part of the Bank of England. The PRA is
responsible for the prudential supervision of systemically important firms operating in the
industry, such as banks and insurers.
• The Financial Conduct Authority (FCA) is responsible for the prudential regulation of
smaller firms such as insurance brokers as well as the business conduct of all firms. It
focuses on generic, industry-wide issues, rather than firm specific issues.
Refer to
FCA covered in Financial Conduct Authority (FCA) regulation on page 7/6
These two bodies have different objectives and operate separately. However, they work
together, sharing information and data.
Standards relating to the handling of claims are set out in the Insurance: Conduct of
Business Sourcebook (ICOBS), which falls under the responsibility of the FCA.
F1 Insurance: Conduct of Business Sourcebook (ICOBS)

The ICOBS rules on claims handling apply to both consumer and commercial customers.
The insurer remains responsible for claims handling, even if they have outsourced this
function. This is particularly relevant in the current climate where insurers are delegating
more underwriting and claims authority and outsourcing parts of their business.
The main purpose of the rules is to ensure that customers are treated fairly. As such, claims
must be handled fairly and settled promptly. The intention is to ensure that customers are
provided with appropriate information on the claims handling process and to ensure conflicts
of interest are disclosed and managed, without any detrimental effect on the policyholder.
The rules make a distinction between consumers and commercial customers. In respect of
both categories, insurers must not turn down claims unreasonably. If an insurer or an
intermediary finds itself involved in a conflict of interest, it must manage the conflict fairly. An
example of such a conflict of interest is where a motor or liability claim involves several
parties, some or all of which are insured by the same insurer.
In respect of consumers, ICOBS considers it to be unreasonable for claims to be refused for:
• misrepresentation, which is not a qualifying misrepresentation under the Consumer
Insurance (Disclosure and Representations) Act 2012 (CIDRA); and
Refer to
Consumer Insurance (Disclosure and Representations) Act 2012 covered in Consumer
Insurance (Disclosure and Representations) Act 2012 on page 3/11
• in respect of a general insurance contract, a breach of warranty or condition, unless the
circumstances of the claim are connected with the breach.
The only exception to this is where there is evidence of fraud.
The insurer must provide reasonable guidance on how to make a claim and give appropriate
information on its progress. Once settlement terms are agreed, the claim should be settled
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promptly.
Firms should retain records for as long as is relevant for the purposes for which they were
made and their own business needs. In deciding how long this should be, ICOBS requires
firms to take account of what information the FCA might request. They are also required to
consider what will be needed to deal with complaints and queries from customers as to how
claims have been settled and why.
On the Web
The whole of ICOBS chapter 8, which deals with claims handling, can be found at:
www.handbook.fca.org.uk/handbook/ICOBS/8/.
F2 Consumer Insurance (Disclosure and Representations)

Act 2012
Before the passing of the Consumer Insurance (Disclosure and Representations) Act 2012
(CIDRA), the key piece of insurance legislation was the Marine Insurance Act 1906. Under
this Act, all purchasers and sellers of insurance were obliged to act with utmost good faith
and disclose all material facts to one another.
Be aware
Utmost good faith can be defined as the requirement of all parties involved in negotiating
an insurance contract to fully disclose all material facts to each other whether they are
asked for them or not.
Material facts are those that would influence an underwriter as to whether they should or
should not accept the risk or impose special terms.
In practice, this was usually a burden for the policyholder because they were required to
appreciate all the facts that an underwriter may want to know. There was no duty on the
underwriter to ask questions of the policyholder who was taking out a policy of insurance.
This position was changed by the CIDRA. Policyholders are now categorised as
‘consumers’ or ‘commercial customers’ depending upon their status.
A ‘consumer’ is defined as ‘the individual who enters into a consumer insurance contract, or
proposes to do so.’ In the context of a consumer insurance contract, a consumer must be ‘an
individual who enters into the contract wholly or mainly for purposes unrelated to the
individual’s trade, business or profession’.
Under CIDRA it is the duty of consumers to take reasonable care not to make
misrepresentations to insurers before a contract of insurance is entered into. In other words,
this modifies the previous position of consumers’ duties of utmost good faith by removing the
obligation to disclose all material facts. Consumers need now only respond honestly, and
with reasonable care, to questions asked of them by insurers.
Qualifying misrepresentations
The Act defines a qualifying misrepresentation as either:
• deliberate or reckless: the consumer knew that it was untrue or misleading or knew that it
was relevant to the insurer and did not care; or
• careless, i.e. it was not deliberate or reckless.
The burden of proving that a misrepresentation is qualifying lies with the insurer. The
responses available to the insurer are as follows.
The misrepresentations were deliberate or reckless The misrepresentations were careless
The insurer may avoid the contract. The remedies are based on what the insurer would
have done had the consumer taken care:
• if the insurer would not have entered into the
contract it can avoid the policy but must return the
premium
• if the insurer would have entered the contract on
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different terms it can treat the contract as if those

terms had applied
• if the insurer would have entered into the contract
but charged a higher premium, the claim amount
can be reduced proportionately
F3 Insurance Act 2015

The Insurance Act 2015 received Royal Assent on 12 February 2015 and came into force on
12 August 2016. It seeks to extend the reforms made previously to consumer contracts of
insurance by the Consumer Insurance (Disclosure and Representations) Act 2012 . The Act
amends the Marine Insurance Act 1906, which, as we have seen, required proposers of
insurance and insurers to act with utmost good faith and disclose all material facts to one
another.
The Insurance Act amends insurance law in three main areas:
• the pre-contractual duty of disclosure and the effect of misrepresentations at that stage;
• the effect of warranties contained in the policy; and
• insurers’ remedies for fraudulent claims.
Most of the Act’s provisions apply to commercial (non-consumer) insurance policies,
introducing parallel changes to those already implemented under CIDRA for consumer
insurances. The only changes introduced that apply to both non-consumer and consumer
insurances are those concerning insurers’ remedies for fraudulent claims, which were not
covered by earlier legislation.
Be aware
Non-consumers are defined as policyholders who enter into insurance contracts wholly
or mainly for the purposes of their trade, business or profession.
The Act makes wide-ranging reforms to the law relating to non-consumer insurance
contracts which, among other things, will make it harder for insurers to refuse claims as a
result of technical breaches by the insured.
The duty to volunteer information is being retained (unlike the position for consumer
insurances) and the commercial proposer has to make a fair presentation of the risk.
F3A Duty to make a fair presentation of the risk
Section 3 of the Act modifies the duty of utmost good faith that underlies insurance contracts
by introducing the new duty of ‘fair presentation’.
This means that proposers must either:
• disclose to insurers ‘every material circumstance’ which the insured knows or ought to
know; or
• provide the insurer with ‘sufficient information’ to put a prudent insurer on notice that they
need to make further enquiries into those ‘material circumstances’.
The disclosure must be made in a manner that ‘would be reasonably clear and accessible to
a prudent underwriter’ – in other words it is not acceptable to simply ‘dump’ undigested and
disordered data on the insurer relating to the risk presented. In addition, the disclosure
should be one in which ‘every material representation as to a matter of fact is substantially
correct and every material representation as to a matter of belief is made in good faith’.
Sections 4, 5 and 6 of the Act set out in some detail provisions explaining what exactly is
meant by ‘knowledge’ of material circumstances. These differ according to whether the
insured is an individual or organisation, as is shown in the table below. Note that it is not just
actual knowledge, but also constructive knowledge that is assumed by the proposer, i.e.
information that they ought to know, having made a reasonable effort to find it out.
Individual Organisation
Knowledge is not limited to the insured’s own Relevant knowledge is that of anyone who is part of the
knowledge, but is deemed to include anything known by insured’s ‘senior management’ or who is ‘responsible for
a person who is ‘responsible for the insured’s the insured’s insurance’. For example, a risk manager.
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insurance’. This could include the insured’s insurance
broker.
The insured is not required to disclose a circumstance if the insurer knows it. For this
purpose, the insurer knows something if it is known to one or more of ‘the individuals who
participate on behalf of the insurer in the decision whether to take the risk, and if so on what
terms’. In practice, this is most likely to be the underwriter, but may also include claims
personnel.
The Act provides that an insurer ‘ought to know’ anything which:
• an employee or agent of the insurer knows and ought reasonably to have passed on to
the underwriter; or
• where the relevant information is held by the insurer and is readily available to the
individual.
An insurer is ‘presumed to know’:
• things which are common knowledge; and
• things which an insurer offering insurance of the class in question to insureds in the field
of activity in question would reasonably be expected to know in the ordinary course of
business.
These changes mark a shift in English insurance law. It will justify insurers taking a more
active approach to assessing the risks they underwrite, rather than a passive role in relying
on the insured and their broker to provide all relevant information.
Remedies for non-disclosure
Prior to the implementation of the Insurance Act, an insurer would be entitled to avoid the
whole contract where the proposer had failed to disclose all material information. The
undisclosed information did not need to relate to a loss; instead, the insurer simply had to
show that it was unknown to the insurer and was material to the risk.
The Act still preserves the insurer’s right to avoid a policy where fraud is involved. However,
apart from circumstances involving fraud, the Act distinguishes between breaches of duty
that are deliberate or reckless and those that are innocent or negligent:
Deliberate or reckless Innocent or negligent
An insurer will only be entitled to avoid a policy entirely Where the breach is neither reckless or deliberate, the
where the breach of duty of fair presentation is remedies provided in the Act are less severe. They are
‘deliberate or reckless,’ and where the insurer can show intended to be proportionate and to reflect what the
that they would not have entered into the contract had insurer would have done if they had known of the
they known the information or would only have done so undisclosed information before entering into the
on different terms. The insurer may also retain any contract.
premiums paid.
So, an insurer can only repudiate a claim and avoid a policy entirely where they can show
that they would not have written the policy at all.
Be aware
Note the contrast where the breach has been deliberate or reckless. In these
circumstances, the insurer will have the right to avoid the contract, should they wish to do
so, even if it can be shown that the insurer would still have offered terms for the risk had
they known of the full disclosure.
However, should an insurer wish to do this, the onus is on it to prove that the breach was
deliberate or reckless and this could be very difficult to prove. Case law will need to be
developed over the years to give clarification to the question of what a deliberate or
reckless breach entails.
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Where the insurer would have accepted the risk subject to additional terms, exclusions or
excesses, the contract is treated as having been entered into on those terms.
Where the insurer would have accepted the risk, subject to an increased premium, the Act
allows the insurer to reduce claim payments in proportion to the actual premium paid,
relative to the premium which should have been paid.
F3B Warranties
Case law has established that a breach of warranty automatically terminates cover from the
date of breach and effectively cancels the insurance. This is regardless of whether the
breach was material or related to the loss. In addition, subsequent remedying of the
breach still renders the policy terminated from the date of the breach, unless or until the
insurers convey that they are not relying on the breach.
Sections 9 to 11 of the Insurance Act make the effect of a breach of warranty less severe.
Breach of warranty
Under the Act, a breach of warranty simply suspends (rather than completely terminates)
the insurer’s liability under the contract until such time as the breach is remedied. The
insurer has no liability for any claim under the policy whilst cover is suspended, but once the
breach is remedied, full cover under the policy is resumed.
Example 3.1
Position prior to Insurance Act 2015
In the context of commercial motor insurance, a haulier who failed to comply with a
warranty that their vehicle be securely locked and immobilised when left unattended would
effectively have no cover under their insurance, even after returning to their vehicle.
Position after Insurance Act 2015
In the same circumstances, the haulier breaching the warranty whilst the vehicle was left
unattended would not be covered under the policy whilst the warranty is being breached,
since cover is suspended. However, on return to the vehicle full cover automatically
resumes.
Basis of contract clauses

The Act also prohibits ‘basis of the contract’ clauses (as is already the practice for consumer
contracts). It is not possible for business insurers to contract out of this change.
Such clauses had the effect of converting pre-contractual representations in a proposal form
into warranties. This meant that the insurer could be discharged from liability if the proposal
form contained any statement that was inaccurate, even where it was immaterial to the loss
and in no way induced the insurer to enter the contract.
Irrelevant warranties
Similar considerations will also apply to conditions precedent or exclusion clauses, provided
that they relate to a particular type of loss or the risk of loss at a particular location or time.
The Act establishes that insurers should not be entitled to avoid a claim where the insured’s
breach did not relate to the loss.
Where an insured does not comply with a warranty or other term that relates to a particular
type of loss, or the risk of loss at a particular location or time, the insurer may not rely on
non-compliance with that contractual term by the insured. This is so long as the insured is
able to show that non-compliance with the term could not have increased the risk of loss that
actually occurred.
Consequently, there must be some relationship between the breach of a term of the
insurance contract and the actual loss in question. However, a direct causal link between the
breach of the term or warranty and the loss is not required.
F3C Contracting out and transparency requirements
Different provisions as to contracting out apply depending upon whether the insured is a
consumer or non-consumer:
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Consumers Non-consumers
The Act applies in relation to the provisions on The Act allows commercial parties to contract out of the
fraudulent claims, and Clause 15 operates to prohibit new provisions by agreeing alternative terms, with the
contracting out so as to place a consumer in a worse exception of basis of contract clauses which will remain
position than would have been the case under the Act. ineffective.
To successfully contract out, the insurer needs to satisfy certain transparency requirements.
Insurers must ensure that any terms that would put the insured in a worse position than
before the Act, are clear and unambiguous as to their effect, and sufficiently drawn to the
insured’s attention before the policy is entered into. In determining whether this requirement
has been met, the insured’s characteristics and the circumstances of the transaction will be
taken into account.
F3D Summary
The Act came into effect on 12 August 2016 and made a number of significant changes to
the previous law regime. It:
• transfers some of the responsibility of disclosure from the insured by imposing a duty of
enquiry on the insurer;
• introduces proportionate remedies for non-disclosure;
• gives the insured the opportunity to remedy a breach of warranty by resuming
compliance; and
• allows the insured to challenge an insurer’s defence of breach of warranty by showing
that the breach could not have increased the risk of the loss in question occurring.
Whilst the Act does allow the parties to opt out of most of these new rules, any opt-out must
satisfy the transparency requirements and may therefore be challenged on those grounds.
F3E Enterprise Act 2016
The Enterprise Act 2016 amends the Insurance Act 2015 by adding in provisions relating to
compensation for late payment of claims. The key provisions are:
• it is an implied term of every insurance contract that sums due must be paid in a
reasonable time;
• reasonable time includes time to investigate and assess the claim;
• what is reasonable depends on all the circumstances, but includes the type of insurance;
the size and complexity of the claim; compliance with regulation; factors outside the
insurer’s control (such as delay by the policyholder);
• the insurer will not breach the implied term by disputing the claim provided the dispute
was genuine; and
• breach of the term will result in the insurer paying damages to the insured, as well as the
original indemnity payment and interest.
The ‘late payment’ term applies to all policies incepted, renewed or amended from May
2017. This includes contracts caught by CIDRA.
Refer to
See Consumer Insurance (Disclosure and Representations) Act 2012 on page 3/11
on CIDRA
Whilst this is an amendment to the Insurance Act, which we have previously seen only
affects commercial contracts, the Enterprise Act will apply to all insurance contracts, so
including those currently caught by CIDRA.
G Disputes and complaints

No matter how efficient a claims department is, or how well it explains its actions to its
customers, there will be situations where the customer is not happy with the outcome of their
claim. It may have been turned down for reasons that seem valid to the insurer, but that the
customer feels it is unjustified or unfair. The claim may have been agreed but the customer
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remains unhappy about the amount of settlement they have been offered. Systems and
structures have been put into place to deal with such situations and these are considered in
this section. The policy document outlines the complaints procedure to be followed if a
dispute arises. When these processes fail, the policyholder has further options to explore
and we will also consider these in this section.
Regulated firms are required to nominate a senior individual (someone in a governing
function, like a director, chief executive or partner) to have responsibility for the complaints
handling function within the firm.
The published complaints procedure only applies to the insured person and not any third
party. However, we will examine here ways in which disputes between insurers and third
parties can be dealt with, without resorting to litigation, which is the ultimate resolution for a
third party dispute.
G1 First party disputes

G1A Financial Ombudsman Service (FOS)
The Financial Ombudsman Service (FOS) is a free, independent and impartial service that
deals with unresolved disputes. Membership is compulsory for all authorised firms, including
intermediaries.
The full rules and guidance relating to the handling of complaints, and on the operation of the
FOS, are contained in the FCA Handbook in the Dispute Resolution: Complaints (DISP)
sourcebook. The FCA requires all firms to have a written complaints procedure. This
procedure must include a notification to the complainant that they have the right to take the
complaint to the FOS if they are not satisfied with the firm’s final answer.
The FOS only deals with disputes from eligible complainants. The list of eligible
complainants includes:
• consumer;
• micro-enterprise with fewer than ten employees and a turnover or balance sheet total of
no more than €2m*;
• charities with an annual income of less than £6.5m;
• trustees of trusts with a net asset value of less than £5m;
• consumer buy-to-let (CBTL) consumer;
• small businesses with an annual turnover of less than £6.5m and fewer than 50
employees or a balance sheet total of less than £5m; or
• guarantors.
*(This value is in euros as ‘micro-enterprise’ is an EU-defined term.)
Before a complainant can take their complaint to the FOS they should have exhausted the
internal complaints procedures within the organisation or intermediary, and still be
dissatisfied with the outcome. Any legal proceedings that are under way must be withdrawn
prior to the complainant approaching the FOS as the FOS will not become embroiled in legal
proceedings.
The complainant can refer their complaint to the FOS within the earliest of:
• six months of the date on the firm’s letter advising the claimant of its final decision
regarding the complaint;
• six years after the event complained about; or
• three years after the complainant knew, or should have known, that they had cause for
complaint.
Once these have expired, the organisation or intermediary can object to the FOS taking on
the complaint on the grounds that it is ‘time-barred’. The FOS is able to consider complaints
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outside these time limits in exceptional circumstances, such as cases involving pension
transfers and opt-outs. It can also review cases outside the time limits if the organisation
agrees.
The FOS can require the parties to the complaint to produce any necessary information or
documents and failure to do so can be treated as contempt of court. All authorised firms
must co-operate with the FOS. The FOS must investigate the complaint and aim to answer
the complaint within three months. It may give the parties an opportunity to make
representations and then hold a hearing. Most disputes handled by the FOS are resolved
through mediation or informal adjudication by a caseworker or adjudicator. However, both
parties have a right of appeal to the initial outcome, in which case one of the panel of
ombudsmen will make a final decision.
The FOS will reach a decision based on what is fair and reasonable in all the circumstances,
taking into account the law, FCA rules and guidance and good industry practice, including
relevant ABI statements and codes of practice. The FOS is not bound by the law or legal
precedent and will make a judgment on the merits of each case. The aim is to ensure that
customers are treated fairly and that the law is not used as an excuse to avoid paying fair
claims. However, the FOS does aim to be consistent in the way it deals with particular types
of complaints.
Redress can be awarded in two ways:
• A ‘money award’, telling the firm what specific sum of money it should pay the customer
to cover any financial losses they have suffered as a result of the problem they have
complained about. The maximum monetary award the FOS can require a firm to make to
a complainant is £355,000 for complaints referred to the FOS on or after 1 April 2020
about acts or omissions by firms on or after 1 April 2019. The FOS may recommend a
higher figure, if appropriate, but this will not be binding on the firm. Lower figures exist for
complaints arising from earlier dates.
On the Web
You can view the figures here: www.financial-ombudsman.org.uk/consumers/expect/
compensation.
• A 'directions award' telling the firm what actions it needs to take to put things right for its
customer. This could include, for example, directing the business to:
– pay an insurance claim that had earlier been rejected;
– calculate and pay redress according to an approach or formula set by the regulator;
and/or
– apologise personally to the customer.
The decision (with reasons) must be notified in writing to the complainant and the
respondent (the firm about which the complaint is made). The complainant must then accept
or reject the decision within the time limit specified by the FOS.
If the complainant accepts the decision it is binding on the respondent. If the complainant
rejects the decision it is not binding and they are free to pursue the matter in court. If the
complainant does not respond to the FOS’s decision letter it is treated as a rejection and the
respondent is not bound by the decision.
The FOS is funded by both:
• a general levy paid by all firms; and
• a case fee payable by the firm to which the complaint relates.
G1B Arbitration
Many insurance contracts contain an arbitration clause. This means that if the customer feels
that the amount offered in settlement of their claim is incorrect or unjust, they have the option
of referring their dispute to arbitration.
Insurers prefer arbitration to litigation because it allows disputes to be settled in private by
someone who has expertise in the subject of the dispute. A court of law, on the other hand,
is a public arena (with the risk of bad publicity) and the judge may have no particular
expertise in the issues surrounding the dispute. However, the cost of arbitration is usually
higher than the cost of litigation.
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Once a customer has decided to resort to arbitration it is usual for them to write to their
insurer stating the following:
• the names and addresses of the parties;
• a brief description of the dispute and how they would like to see it resolved; and
• who they think the arbitrator should be or how they should be chosen.
There only needs to be one arbitrator, but as many as three can be appointed. One will be
chosen by each party, with the third being chosen as chairman. It is possible to have two
arbitrators, but this contains the risk that they will not be able to agree.
The arbitration, otherwise known as the tribunal, will allow each side to present its case and
respond to its opponent’s case. They will act fairly and impartially at all times. In return, both
parties must co-operate fully with the tribunal.
The arbitrator has the same powers as the courts to order the parties to do something, or to
stop doing something and to order specific performance of a contract or rectification. It is
possible to challenge the findings of the tribunal, but only on certain specific grounds. The
arbitrator’s decision is final on all questions of fact.
The powers of the arbitrator(s) and the processes to be followed are governed by the
Arbitration Act 1996.
G2 Third party disputes – alternative dispute

resolution (ADR)
Alternative dispute resolution offers another way of settling disputes, without resorting to
litigation. It is most commonly used for third party disputes prior to the commencement of
legal action but can also be introduced as part of the litigation process as well. There are two
broad options to consider, depending on the nature of the dispute.
G2A Adjudicative options
Parties determine the choice of process but lose control of the outcomes, as determination of
the dispute rests with an individual neutral to the parties and the dispute.
Arbitration
• May be agreed by the parties post dispute, but the parties will need to agree the terms of
the arbitration agreement (in writing).
• Principal problem with this approach is inflexibility. The individual neutral to the
agreement to arbitrate cannot be bound by the arbitrator’s decision.
Adjudication
• Required by statute in all disputes over construction contracts.
• Covers disputes between policyholder and sub-contractors.
• A determination is made by an independent party within 28 days.
Expert determination
• A purely technical dispute may be appropriate for expert determination.
• Agreement is needed in terms of reference, process and expert to be used.
• An example could be technical disputes over computer specifications or valuation of
shares.
• The decision is legally binding on the parties.
G2B Non-adjudicative options

In a non-adjudicative dispute resolution, the parties retain control of the process and the
outcome of the resolution.
Negotiation
• Most disputes are resolved through negotiation. This would be the starting point for any
dispute resolution.
Joint settlement/round table meetings
• Common place in personal injury cases where the parties come together round the table
Chapter 3
to discuss options to resolve the case.
• Commonly used for quantum disputes, where liability is admitted but the amount of the
claim is disputed.
Mediation
• A facilitated decision.
• Parties do not meet but the dispute is heard simultaneously by the mediator who goes
between two rooms, seeking common ground between the parties in dispute.
Early neutral evaluation/expert evaluation
• Used to provide an early view on the case (for example, as to whether liability may attach
to a party).
• A voluntary procedure which is not binding on either party.
Conciliation
• Often used in employment cases, industrial disputes, etc.
• Compulsory for employment tribunals.
• Provided by approved agencies (for example, ACAS).
H Fair treatment of customers

H1 Regulatory environment
Regulation of the fair treatment of customers is the responsibility of the FCA. All regulated
firms must be able to demonstrate that they are consistently treating their customers fairly.
To achieve this, firms need to focus on delivering six customer outcomes as follows.
• Outcome 1: Consumers can be confident they are dealing with firms where the fair
treatment of customers is central to the corporate culture.
• Outcome 2: Products and services marketed and sold in the retail market are designed
to meet the needs of identified consumer groups and are targeted accordingly.
• Outcome 3: Consumers are provided with clear information and are kept appropriately
informed before, during and after the point of sale.
• Outcome 4: Where consumers receive advice, the advice is suitable and takes account
of their circumstances.
• Outcome 5: Consumers are provided with products that perform as firms have led them
to expect, and the associated service is of an acceptable standard and as they have been
led to expect.
• Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to
change product, switch provider, submit a claim or make a complaint.
Be aware
The FCA continues to provide guidance on vulnerable customers including what makes a
vulnerable customer and how insurers need to treat them in the claims handling process.
Details of their current guidance can be accessed here: www.fca.org.uk/publication/
guidance-consultation/gc19-03.pdf.
H2 Application to claims handling

Further guidance, with specific application to claims handling, is given in Chapter 8
of ICOBS.
An insurer should document its approach by defining its customer base and setting out
procedures to ensure that it:
• handles claims promptly and fairly;
• provides reasonable guidance to help a policyholder make a claim and appropriate
information on its progress;
Chapter 3
• does not unreasonably reject a claim; and

• settles claims promptly once settlement terms are agreed.
Motor vehicle liability insurers have to comply with more onerous regulation. This includes
specific conditions for appointing claims representatives and adhering to specific rules
regarding the handling of motor vehicle liability claims for claims involving UK policyholders
occurring within the EEA, but outside UK jurisdiction. In the event of a breach of some of
these rules, the firm may be obliged to pay penal interest on compensation offered to injured
parties. You should familiarise yourself with section 8.2 of ICOBS.
All insurance intermediaries must manage conflicts of interest fairly and it is best practice for
insurance intermediaries to document their conflict of interest procedure.
The Consumer Rights Act 2015

The Consumer Rights Act 2015 came into force on 1 October 2015. Although the Act
brings in a number of provisions with regards to the supply of services, FCA rules on the
claims handling process will prevail in most cases.
The main impact for claims handlers are the requirements in the Act to ensure that any
policy exclusions are clearly identifiable and understandable to the average consumer,
and not hidden away in policy documents.
The Act also has a requirement to ‘perform a service within a reasonable time’. This
legislation adds another dimension for insurers to consider, in addition to the ICOBS
requirement that claims should be managed ‘promptly’, and the new implied term
introduced by the Enterprise Act 2016.
Conclusion
We have considered who it is that handles claims and what customers might expect when
their claim is being handled. We have developed this to look at the options available if there
is a dispute about the claim and how to identify if the claim is fraudulent. All claims must be
handled within the regulatory context and, specifically the treating customers fairly
requirements and the rules in ICOBS. In the next chapter we will look at the specific
considerations that relate to different types of insurance.
Key points
Claims personnel
• Claims staff need to be competent and professional and deal with claims quickly, fairly
and with the minimum of overpayment.
Service standards and managing customer expectations
Chapter 3
• A claims department will have a philosophy that will embrace its service standards.
• This will detail the quality of service aimed for and how valid claims will be handled.
• The service standards will balance the need to treat the customer efficiently and
sympathetically with the need to only pay valid claims.
• If a customer’s claim is not handled according to their expectations it can lead to
severe dissatisfaction and protracted disputes.
Third party claimants
• The third party refers to anyone involved in a loss event who is not either the insured or
the insurer.
• Third parties do not have a contractual relationship with the insurer and this influences
their behaviour and how they need to be handled.
• Claims involving third parties are more complex compared to other claims and are
more likely to involve litigation.
Estimating and reserving
• Claims reserving is the process that a company carries out in order to assess the funds
that are required to meet current and future claims liabilities.
• Various methods are used to establish the overall reserve, with individual estimates
usually carried out on a case-by-case basis.
• To establish the size of reserve required a value is applied to each claim and an
allowance is added for direct claims expenses.
• Reserves are reviewed regularly to ensure they are reflective of potential liabilities and
costs.
• The incurred but not reported (IBNR) reserve covers claims where the loss has
occurred, but has not yet been reported to the insurer. The amount to be reserved is
calculated using statistical techniques.
• The incurred but not enough reported (IBNER) reserve covers shortfalls in provision for
outstanding claims reserves.
Fraud
• Fraud prevention is best undertaken at an industry-wide level and a number of

databases exist to enable insurers to share information and detect fraud.
• The claims handler plays a vital part in detecting fraud and there are a number of
indicators to help them to identify when fraud is taking place.
• The Insurance Act 2015 allows insurers to terminate the contract of insurance from the
date of the fraudulent act. It is not always possible to fully repudiate a claim should
fraud be established and proved.
Regulation of claims handling
• The ICOBS rules on claims handling apply to both consumer and commercial
customers.
• The insurer remains responsible for compliance, even if it has outsourced claims
handling.
Key points
• No claim should be rejected unreasonably, but there are specific rules as to what is
unreasonable with regard to claims from consumers.
• The insurer must provide guidance on how to make a claim and appropriate
information on its progress.
• Once settlement terms are agreed, the claim should be settled promptly.
• Conflicts of interest must be managed fairly.
• Under the Consumer Insurance (Disclosure and Representations) Act 2012,
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consumers have a duty to take reasonable care not to make misrepresentations.

Should they make a misrepresentation, the response available to the insurer depends
on whether the misrepresentation was deliberate or reckless or simply careless.
• The main areas of insurance law amended by the Insurance Act 2015 are the pre-
contractual duty of disclosure and the effect of misrepresentations at that stage, the
effect of warranties contained in the policy and insurers’ remedies for fraudulent
claims.
Disputes and complaints
• Alternative dispute resolution is another way of settling disputes without resorting to the
law or arbitration. The two main methods are mediation and conciliation.
• The Financial Ombudsman Service is an independent mechanism for dealing with
disputes arising from business with consumers, small commercial enterprises, charities
and trusts.
• An arbitration clause is included in many insurance policies allowing disputes over
quantum to be brought before arbitrators rather than the courts.
Fair treatment of customers
• All regulated firms are expected to treat customers fairly.

• Firms must focus on six customer outcomes in order to demonstrate that they are
treating their customers fairly.
• For claims handling the fair treatment of customers means that all claims must be
handled promptly and fairly.
Question answers
3.1 You will have answered from your own experience. However, an example taken
from a call centre could be that 90% of incoming calls are to be answered within
three rings.
3.2 a, b and c. Insurers should be seen to be prosecuting fraudulent claimants for all
the reasons stated.
Chapter 3
Self-test questions
1. Which of the following are reasons why customer service has become so important
in recent times? (Select all that apply.)
a. Increased consumer awareness. □
b. Insurers are all the same. □
c. Greater expectations of service. □
Chapter 3
d. Increased competition. □
2. In relation to insurance claims, what is a 'third party'?
a. Anyone else involved in an insurance claim, apart from the insured and the □
insurer.
b. The insured policyholder. □
c. The insurer. □
3. What is a reserve?
a. The amount of money paid on a closed claim. □
b. The amount of money needed to be paid to a customer to settle their claim. □
c. An amount equal to the total expected cost of settling the claim, including □
customer/claimant payments and expenses/fees.
d. The amount of money needed to pay staff and suppliers. □
4. There are four main forms of insurance fraud?
a. True. □
b. False. □
5. What is the Motor Insurance Anti-Fraud and Theft Register (MIAFTR)?
a. A database of people who have made fraudulent claims for total loss or theft. □
b. A database of vehicles which have been declared as being a total loss of stolen □
following a claim.
c. A database used by the police to record stolen or unroadworthy vehicles. □
6. Which of the following is not a way for a third party to seek to resolve disputes and
avoid litigation?
a. Arbitration. □
b. Expert determination. □
c. Adjudication. □
d. Financial Ombudsman Service. □
e. Mediation. □
7. How many outcomes must an insurer deliver to ensure the fair treatment of
customers?
a. Three. □
b. Four. □
c. Six. □
d. Eight. □
Chapter 3
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Claims handling
4
procedures and related
claims services
Chapter 4
outcomes
Introduction
A Personal insurance 4.1, 4.2, 4.5
B Commercial insurances 4.3, 4.4
C Related claims services 4.1, 4.2, 4.3, 4.5
D Civil Procedure Rules 4.6, 4.7
Conclusion
Key points
Question answers
Self-test questions
Learning objectives
• know claims handling procedures for motor, household, gadget, travel, extended
warranties, commercial, pecuniary and health policies.
• describe the additional product services available, and explain how they are used as part
of the claims handling process; and
• describe the key points relating to the Civil Procedure Rules and Ministry of Justice Portal.
Introduction
Chapter 2 dealt with the various classes of insurance, and the cover available for each class.
This chapter will deal with class-specific claims matters to provide an insight into the varying
characteristics of the claims processes.
We will demonstrate that each class of business will result in claims being notified, but each
will call for a different response from the insurer. For example, a simple rear-end collision
motor claim in which no-one was injured. This could be settled in a few days if the insurer
were proactive. Compare this to a fatal accident under a liability policy, which may take years
to resolve and would require a different level of sophistication and expertise.
The claims process can be summarised using the following flowchart.
Figure 4.1: Claims process flowchart
Response to Claim
Chapter 4
Notification Review
claimant investigation
Claim Claim
Review Recoveries
settlement negotiation
The chapter will be split into:

• personal lines (i.e. insurance of the person and their belongings); and
• commercial lines (i.e. insurance of businesses).
Key terms
Authorised repairers Claims-made basis Losses-occurring Rehabilitation

basis
Risk control Uninsured loss
recovery
A Personal insurance
We will deal here with:
• private motor claims – cars and motorcycles;
• health – personal accident and sickness;
• household – contents and buildings;
• travel;
• pet; and
• extended warranties.
A1 Private motor claims – cars and motorcycles

The considerations for both cars and motorcycles will be the same, subject to certain policy
differences.
There are seven aspects to the claims process.
Chapter 4 Claims handling procedures and related claims services 4/3
1. The insured is bound by the claims notification policy condition to report all accidents. This applies whether
or not they intend to claim or expect a third party to claim against them.
2. At notification, the insured may be required to complete an accident report form (ARF) which could be done
over the telephone or internet.
3. When the insurer has received the necessary information, it will set up a file. In practice, this is likely to be
electronic and no longer a physical paper file.
4. If a claim is to be made, the insurer will firstly establish whether a policy is in force and whether the insured
is entitled to an indemnity. Depending on the nature and size of the claim it may be investigated. This could
be done as a desktop exercise by the insurer or else a claims investigator or loss adjuster may interview
the drivers and witnesses, as well as visit the accident scene. If there is a valid claim, repairs to the
insured’s vehicle will take priority. The repairs are often carried out at the insurer’s own authorised repair
centres.
5. If there are claims under other sections of the policy (for example, for property in the vehicle that was
damaged in the accident), these are reviewed as necessary.
6. A third party may claim for damage to their vehicle or there may be damage to other property, such as a
boundary fence or hedge. The third party will generally be required to submit estimates for the repair or
Chapter 4
replacement of the damaged items, which the insurer will consider and either approve or renegotiate. It will
establish who was at fault or ascertain the degree of negligence by each party. If the insured is at fault, the
insurers may offer to proactively handle the third party claim as a way of controlling costs.
7. If a third party is injured in the accident, claims can be complex and costly to settle. The degree of
negligence must be established before consideration is given to the extent of the injury, the medical
prognosis, and other relevant considerations (e.g. whether the claimant was unable to work, or had
required care whilst incapacitated). A claims handler must be able to analyse this information and place an
accurate valuation against the injuries in line with current damages awards made by the courts in order to
negotiate settlement of the claim.
Where the insured has non-comprehensive cover (i.e. third party, fire and theft, third party
only or RTA only), they must still report the incident to their insurer as one of the claims
conditions. However, the insurer will take no further action in respect of any damage to the
policyholder’s own property, because they have no cover for this. The insurer would only
deal with third party claims, subject to liability. The insured would have to make a claim
against the responsible party or their insurer where they would be dealt with as the ‘third
party’ as discussed above.
Refer to
Subrogation is covered in chapter 6
Where an insured has comprehensive cover and has a claim against a liable third party, their
insurer would utilise the subrogation condition in the policy to recover the costs they have
incurred.
Question 4.1
Think back to your earlier studies. What rights does the subrogation clause give the
insurer?
A2 Health claims
Health claims are those regarding personal accident and sickness policies. The handling of
such claims is vastly different from those under indemnity policies. This is because they are
benefit policies and the settlement figure has already been agreed at policy inception.
When a health claim is submitted, the insurer will check that a valid contract was in force and
that the policy conditions have been met. The appropriate supporting evidence must be
provided and this includes the following. If the insured:
• has died as a result of an accident or sickness, there may be a coroner’s inquest and a
post-mortem examination, and a death certificate must be provided;
• suffered the loss of a limb or limbs, sufficient proof must be provided; and
• is temporarily or permanently disabled, they must provide a medical certificate and be in
the care of a registered doctor.
The insurer may wish to involve its own medical representative to confirm the extent of any
illness or disablement.
Question 4.2
Why are personal accident and sickness policies always benefit policies rather than
indemnity policies?
A3 Household claims
A3A Contents
Household contents are divided into two categories:
Durable goods Things like household furniture, refrigerators and freezers, etc.
Consumer goods Less durable items that are likely to wear out more quickly, such as curtains, towels
Chapter 4
and clothing
Most insurers will state in their policy wordings that claims for durable goods are generally
settled on a ‘new for old’ basis. This means that damaged goods will be replaced by new
items, rather than the claim being settled on an indemnity basis.
Claims for consumer goods are generally settled as new for old or on the basis of the cost of
replacement, less wear and tear, according to their age. A claims settlement on this latter
basis is more likely to lead to disagreements between the insurer and the policyholder,
unless the policyholder’s expectations are well managed.
A3B Buildings
Claims under the buildings section of the household policy are usually settled by repairing
the buildings. Practically speaking, the indemnity sum for the loss or damage to the buildings
has been calculated as the cost of repair or reinstatement at the time of loss less an
allowance for betterment. Usually a loss adjuster is used to provide an expert’s opinion as to
any substantial damage.
Betterment arises when certain aspects of the repaired property are in a better condition
than they were before the loss (for example, the installation of new wiring) or the repaired/
replaced article is better than the original one was when new, e.g. double glazing replacing
an old single-glazed window.
Question 4.3
Think back to the definition of ‘indemnity’. Why is an allowance for betterment
subtracted from the indemnity sum?
A4 Travel claims
The processing of travel claims will depend on which section of the policy the claim is
covered. Claims for:
• personal accident or sickness benefits. The considerations that apply to health claims
generally apply;
Refer to
Health claims discussed in Health claims on page 4/3
• travel interruption or delay. The insurer can make its own enquiries with the travel
authorities or ask that the insured obtains the necessary proof;
• medical and associated expenses. Usually authorised prior to treatment so that costs
can be controlled, and emergency medical expenses claimed after treatment are
scrutinised prior to payment; and
• baggage, personal effects and money. The insurer will usually request proof of
purchase for the items claimed for, together with confirmation that the loss has been
reported to the necessary authorities.
A5 Extended warranties
Claims under extended warranty policies are unlike those we have already discussed. A
claims ‘settlement’ would result in the covered appliance being repaired or replaced.
Because there is no cash incentive to be gained, these policies are not subject to fraudulent
claims as frequently as other classes, like household or motor insurance may be.
It is very seldom that a claim form is even required, and a telephone call to the issuing
company is usually the only action required by an insured. The issuing company will then
instruct a repairer to attend the insured’s premises and carry out the necessary repairs,
which can sometimes be subject to an excess.
A6 Pet insurance
Pet insurance is available to cover injury, loss or illness of a domestic family pet (such as, a
cat or dog). A typical policy will cover vet's fees required following accidental injury or illness,
as well as cover for theft of the pet, boarding fees and even euthanasia costs.
Chapter 4
In the case of dogs, the policy can be extended to cover liability caused by the animal,
should it bite or cause injury to another person.
B Commercial insurances
This section will cover:
• property claims – fire and special perils, all risks, theft, glass, and money;
• pecuniary claims – legal expenses, and business interruption;
• liability claims – employers’, public, products, and professional indemnity; and
• commercial vehicle claims.
B1 Property claims
B1A Fire and special perils
In the event of loss or damage, the insured has a duty to:
• notify the insurer immediately;
• mitigate their losses, i.e. carry out, or permit to be carried out, any reasonably practical
action to prevent further damage;
• deliver to the insurer full information about the property lost, destroyed or damaged and
the amount of damage, in writing; and
• provide proof of loss (e.g. a builder’s estimate for repair) and, if required, complete a
statutory declaration of the truth of the claim.
The insurer would then establish the following.
1. Whether the policy is in force
2. Whether the claim is valid (i.e. an insured peril caused the loss)
3. Whether the policy covers the loss
If the claim is large, the insurer will usually appoint an independent loss adjuster. The loss
adjuster investigates the loss and prepares a report recommending the amount payable
under the terms of the policy. They investigate the cause of the loss as well as its extent, and
ensure that the insured has complied with any related endorsements or warranties. The loss
adjuster also advises on any recovery prospects.
The insured may appoint a loss assessor to act on their behalf and negotiate with the
adjuster and/or the insurers.
Sometimes, a monetary payment is made. Otherwise, the insurer may exercise its options by
reinstating the building or replacing, repairing or restoring the property, as appropriate.
B1B All risks claims

The procedure for claims here is the same as that described for fire and special perils
insurance. For larger claims, an insurer usually appoints a loss adjuster who will ensure that
the claim is valid and negotiate settlement on the insurer’s behalf.
B1C Theft claims
For theft claims, the insurer requires the insured to notify the appropriate authorities, i.e. the
police, of the theft. Insurers often request a copy of the police report and, especially with
larger claims, appoint a loss adjuster or, if fraud is suspected, a specialist claims investigator.
The insurers then usually liaise with the police so that, if the stolen goods are recovered, the
insurer can claim them as salvage.
B1D Glass claims
It is usual for insurers to have approved repairers for these claims. As there is little financial
incentive to be gained and claims can rarely be ‘overstated’, when the insurer has satisfied
itself that the claim is covered, repairs will usually be authorised. The invoice from the
Chapter 4
repairer will be sent directly to the insurer. Glass claims are usually subject to an excess to
avoid small claims.
B1E Money
When the insurer has completed its standard investigations in respect of cover, it will request
proof of loss, including:
• proof that the money, cheques or stamps etc. were on the premises;
• details of the occurrence; and
• confirmation that the matter has been reported to the authorities.
There is great scope for abuse here, and insurers will want assurance that there is no fraud
involved. If necessary, specialist investigators will be enlisted to assist their enquiries.
B2 Pecuniary insurance
B2A Legal expenses
Claims under such policies are different from other claims. This is because an insurer can
assess its potential liability before the claim commences. The insured has an obligation to
notify their insurers before action is commenced and the insurer can then take any steps it
deems appropriate. This includes things such as appointing its own solicitors and, if
appropriate, co-operating with the insured in attempting to reach a settlement before the
court action starts.
B2B Business interruption (BI)
Business interruption insurance covers the insured’s loss of profits following damage to their
property caused by the action of an insured peril.
Consequently, there is always a property damage proviso in a business interruption policy,
i.e. the underlying property must be insured before an interruption policy is issued. Both
policies are usually with the same insurer and the BI claim will be run in conjunction with the
property damage claim.
BI claims are unique, in that at the proposal stage questions are asked about how the
proposer will react in the event of a claim.
Examples of such questions would be:
• have they got alternative premises;
• how soon can they get up and running; and
• is there a detailed disaster recovery plan?
The insurer can ‘participate’ in the claim here because, unlike any other type of claim, the
indemnity period selected (usually 12, 24 or 36 months) represents the maximum length of
the claim. The insurer can, and often does, have representation to minimise the loss.
B2C Creditor insurance

Creditor insurance provides protection to the policyholder in the event that they are unable to
repay a loan due to their death, disability or losing their job. Therefore, before settling any
claims on a creditor insurance policy the insurer will require:
• proof that the insured is not working; and
• evidence of the payments that the insured needs to make.
B3 Liability claims
Liability losses are claims arising out of legal liability for incidents involving injury to third
parties (including employees) or damage to their property.
The Employers’ Liability Compulsory Insurance Act 1969 made employers’ liability
insurance compulsory in the UK. This insurance covers indemnity against bodily injury or
disease sustained by the insured’s employees arising out of, and in the course of, their
employment. It is common for this policy to be combined with a public liability policy.
Chapter 4
Employers’ liability claims are a particular concern in industries with a high incidence of
accidents or disease, e.g. mining.
Public liability policies cover loss of or damage to third party property and/or third party injury
caused by the insured’s negligence or breach of statutory duty. This is often combined with
product liability insurance, which provides the same cover, but for losses arising out of the
sale or supply of the insured’s product.
Professional indemnity policies protect the insured against their legal liability towards third
parties for injury, loss or damage arising from their own professional negligence, or that of
their employees. Liability usually arises from breach of contract, though it can also arise from
negligent misstatements or a breach of the common law duty of care.
It should be noted that professional indemnity insurance is generally written on a claims-
made basis. This means that provided a claim is made during the period of insurance, it
does not matter when the event leading to the loss took place. For this reason, it is important
for professional indemnity claims adjusters to consider whether the policy was in force at the
time the claim was made against the insured. The exact claims notification required depends
on the policy terms.
It is also common for product liability policies to be written on a claims-made basis, though it
can be written on an occurrence basis too. Public and employers’ liability policies are usually
written on a losses-occurring basis.
Example 4.1
Joe Brown is a solicitor. He has the following insurance history:
• In 2016 he had professional indemnity (PI) insurance with XYZ Insurance and public
liability (PL) insurance with the same company;
• In January 2017 he moved both his PI and PL insurance to ABC Insurance.
His PL policy is written on a losses-occurring basis and his PI policy is on a claims-made
basis.
In October 2016, two incidents occur:
• a client, Jane, trips over a loose carpet tile in his office, badly injuring her knee; and
• as a result of his bad advice another client, Bob, loses a lot of money.
In March 2017 two claims land on Joe’s desk: one from Jane desiring compensation for
her injury and one from Bob demanding compensation for his loss. Joe takes the following
action:
• because his PL policy is on a losses-occurring basis he contacts XYZ Insurance as its
policy was providing cover at the time the incident leading to the loss took place; and
• because his PI policy is on a claims-made basis he contacts ABC Insurance as this is
the policy in force at the time the claim is made.
Simply put, the issue is as follows.

For policies written on a claims-made basis the When was the claim made?
questions are:
Was it in accordance with the policy terms notified to the insurer?
Did insurance cover exist at that time?
For policies written on a losses-occurring When did the loss occur?

basis, the questions are:
Did insurance cover exist at that time?
Once the insurer is satisfied that the loss is covered within the policy period a full
investigation will be carried out.
This will include:
• investigating what work was being carried out and whether it was included within the
business description on the policy schedule;
• obtaining all relevant documentation; and
• interviewing any witnesses.
Chapter 4
From 31 July 2013, the MOJ/Claims Portal was extended to incorporate employers’ and
public liability claims with a value up to £25,000, where the accident date is on or after
31 July 2013. For claims up to £10,000, the maximum amount recoverable for legal costs by
successful claimant solicitors is £900 plus VAT. For claims between £10,000 and £25,000 it
is £1,600 plus VAT, assuming the claim does not leave the process, nor proceed to litigation.
These procedures do not apply to employers’ liability claims involving multiple claimants
alleging disease type injuries, such as noise induced hearing loss (although the Civil Justice
Council has recommended that fixed costs are introduced for noise induced hearing loss
claims).
In practice, the insurer negotiates directly with the third party or their representative. The
insured must immediately pass any claim made against them to their insurer, in accordance
with the policy terms.
For third party property damage, insurers investigate the facts of the case and reach a
decision on liability. This includes:
• a request for a written report of the negligence alleged against the insured;
• evidence to support the amount of the claim; and
• if required, an inspection of the damaged property.
Claims involving personal injury usually come from the third party’s solicitors, who will obtain
a medical report on the injury. Damages are paid to the claimant under two headings as
follows.
Special damages General damages
Those losses that can be quantified (e.g. medical Less tangible losses, such as compensation for pain,
expenses, future loss of earnings) suffering and loss of amenity (PSLA) and loss of use of
vehicle
Some cases proceed to court. Once in court a judge may:

• make a decision that allows for a reassessment after a period of time;
• award a single lump sum payment;
• allow a structured settlement, which provides an income to the claimant over a period of
time; or
• allow a periodic payment which provides pre-determined sums at certain dates in the
future.
B4 Commercial vehicles
Refer to
Private motor claims discussed in Private motor claims – cars and motorcycles on page 4/
2
The claims considerations here are essentially the same as for private motor vehicles.
However, the insured will often arrange and pay for the repairs and then submit the invoice
to their insurers for settlement, net of the excess. Many commercial vehicles require
specialist repair, which may not be available at the insurer’s authorised repairer.
C Related claims services

There are a variety of services that can be utilised in the claims handling and settlement
procedures. In this section, we will deal with the following, and their impact on the
procedures:
• legal helplines;
• authorised repairers;
• uninsured loss recovery services;
• legal costs service;
• risk control/advice; and
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• rehabilitation.
C1 Legal helplines and advice

A legal helpline is an advisory and/or assistance service provided by telephone. They are
usually free to the user, and often operate 24 hours a day. The emphasis is on immediate
practical action, which has the benefit of meeting customer expectations.
Helplines offer two main services:
• advice and assistance in respect of potential claims. This is especially relevant to the
legal advice services offered in conjunction with legal expenses insurance; and
• advice only (usually legal advice).
Advisers will guide a policyholder through the legal process in a practical way. Calls may be
made on common legal issues (such as boundary disputes) or more complex contractual
implications and obligations. The helpline can help the insured pursue or defend a claim.
The three main elements in the majority of cases are as follows.
• Does the party in question have the basis of a claim in law?
• What legal rights are involved?
• What is the best way to enforce such legal rights if pursuing a claim?
Legal helplines often act as the first notification of loss (FNOL) stage for claims under legal
expenses insurance policies. This is because advisers will have an understanding of the
cover provided and whether there is a claim which can be settled by the insurer. Such
services may also be provided online, via websites and chat facilities.
Refer to
Outsourcing considered in Outsourcing companies on page 5/10
Helplines are often outsourced to specialist providers because of their experience,

economies of scale and IT specialisation.
C2 Authorised repairers
Insurers will often negotiate with various suppliers and/or repairers to provide services at a
discounted rate, and at an agreed standard. This benefits the provider, the insured and the
insurer.
Example 4.2
Mo has a household policy covering breakage of windows. A window is broken in an
accident. Mo notifies the insurer, which has an agreement with a glazing service. The
insurer confirms that the claim is valid and so a glazier visits Mo’s premises and repairs
the window. The glazier submits the invoice directly to Mo’s insurer.
Such contractors or suppliers are termed approved or authorised repairers.

Motor insurance has the most prevalent use of approved repairers. Private motor insurers
have a panel of authorised repairers and, when a claim is reported, insurers usually provide
their insured with the details of such repairers in their area.
Consider this…
What are the principal benefits of a panel of approved repairers to motor insurers?
The main benefits of using approved repairers are:

• convenience;
• cost (a price reduction on labour and parts will normally be negotiated); and
• competence (as mentioned, approved repairers are vetted first and continuing quality
control and monitoring takes place).
Chapter 4
Tow-ins may also be arranged through approved repairers if a vehicle is not driveable. The
use of equipment such as digital cameras mean that an insurer’s engineer need not attend
the repairer’s premises to ‘inspect’ each vehicle and authorise repairs. The repairer will email
the photograph or video clip of the damage to the insurer, which can then authorise the
repair. However, spot checks and audits are common. As advanced technology is becoming
more commonplace, artificial intelligence tools being introduced to assess if the vehicle is
repairable.
C3 Uninsured loss recovery services
Consider this…
What are ‘uninsured losses’?
Uninsured losses are those losses that an insured may suffer that are not directly covered by
a policy of insurance relevant to an insured event.
Example 4.3
Mr Preston is stationary at a red traffic light when Mr Norris drives into the rear of his car.
Mr Preston is insured comprehensively with Zooropa Insurance, with an excess of £100.
Zooropa does not provide courtesy cars to its clients.
Zooropa Insurance will arrange for the repairs to Mr Preston’s vehicle (assuming all policy
terms and conditions have been met), but Mr Preston will need to pay his £100 excess to
the garage when picking his vehicle up.
Assuming liability was not in dispute, Mr Preston would have a right of recovery against Mr
Norris (Mr Norris would look to his own insurers for indemnity, but the right of recovery is
against Mr Norris) for his excess of £100. This is an uninsured loss, as it is not covered by
his insurer.
Consider this…
What other uninsured losses could arise as a result of the above circumstances?
Other examples could be:

• the cost of a hire vehicle;
• loss of use (where a replacement vehicle cost was not incurred);
• personal injury;
• loss of earnings; and
• the cost of alternative transport, e.g. buses, trains.
This list is by no means exhaustive, and you should try to think of others.
Some insurance intermediaries provide help with recovering uninsured losses, but practices
vary widely.
Most insurers and intermediaries offer legal expenses insurance, which provides for the
instruction of solicitors to recover uninsured losses. This is usually purchased with a motor
policy to provide cover for these occurrences. The wordings of such policies vary, but
typically they provide an indemnity for legal expenses incurred in pursuing an uninsured loss
claim, where reasonable prospects exist. There is usually an indemnity limit on the level of
legal costs which the policy will cover, for example £50,000.
Uninsured loss recovery is a service that sits alongside the claims recovery carried out by
an insurer’s claims handlers. An insurer’s recovery team will usually only try to recover the
outlay they incurred.
However, that does not mean that the two are always exclusive. An insurer may agree to
attempt to recover an insured’s policy excess from a liable third party or their insurers. In
practice, a liable third party insurer will often issue an excess cheque at the same time as an
outlay cheque.
A final consideration is the issuing of proceedings through the courts to recover losses. A
single event can only support one cause of action. Therefore, if a solicitor was to issue
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proceedings in respect of a client’s uninsured losses, they would necessarily need to include
their client’s insurer’s outlay.
In some scenarios, where insurers agree, their outlay will not be included in the proceedings,
so as not to escalate legal costs. Insurers agree, on a case by case basis, to abide by any
court decision and agree to reimburse outlays on the basis of the judgment given.
C4 Legal costs services

In most situations, the cover provided by a legal expenses insurance policy is appropriate for
any legal costs associated with an incident likely to give rise to a claim. This is termed
‘before the event’ (BTE) cover.
Other organisations, such as accident management companies and solicitors, may offer a
service to recover uninsured losses. They sometimes provide replacement vehicles and
pursue personal injury claims. These are usually on a ‘no win, no fee’ basis where, if the
claim is successful, the accident management company is entitled to a percentage of the
recovery. These agreements are called ‘conditional fee agreements’ (CFAs).
The Access to Justice Act 1999 set out the rules on recoverable costs so far as legal costs
cover is concerned and introduced the concept of ‘after the event’ (ATE) legal expenses
cover.
ATE legal expenses cover effectively underwrites the possibility that the court action will be
unsuccessful. A premium is paid to an insurer and the policy guarantees payment of the
legal costs associated with the prosecution of the claim. An ATE policy can sit alongside a
conditional fee arrangement.
At one time, if the claim was successful, the premium for the ATE cover could be recovered
from the defendant. However, the Legal Aid, Sentencing and Punishment of Offenders
Act 2012 (LASPO), prohibited the recovery of the ATE insurance premium from the paying
party and introduced qualified one way costs shifting as a balancing measure. Qualified
one way costs shifting prohibits the recovery of costs from the losing claimant, apart from in
limited circumstances, e.g. where they are found to have been fundamentally dishonest. This
means that a claimant has a minimal cost risk when taking a genuine claim to a court
hearing as, should they not succeed, they would not have to pay the defendant’s legal costs
(as was technically the case previously). Their own legal costs are also likely to be met by
their ATE legal expenses policy if the claim is unsuccessful.
A conditional fee agreement (a ‘no win, no fee’ agreement) is one in which a solicitor and
client agree to share the risk of litigation by arranging a success fee, calculated as a
percentage of the solicitor’s legal fees, which will be payable by the client in the event of
success. This is capped at 25% of general damages. A damages based agreement (DBA),
on the other hand, is an agreement under which the client agrees to pay a percentage of
sums recovered, not necessarily in lieu of costs. This is also capped at 25% of general
damages.
The Legal Services Act 2007 changed the law to enable a non-lawyer to own a legal
practice. This, in conjunction with the advent of the LASPO Act 2012, opened the door for
insurance companies to enter into alternative business structures with law firms. One result
of this is the creation of hybrid companies which allow insurers to refer their own customers
to a law firm which they have an interest in, for the purposes of pursuing uninsured losses,
such as credit hire and personal injury.
The Civil Liability Act 2018, when implemented (along with changes to the small claims track
(SCT) limit for personal injury claims) changed the landscape once more for some types of
claims.
C5 Risk control and advice

Companies use ‘risk management’ to control the risks that impact their business. Risk
control is one of the three main elements of risk management. The other two are risk
identification (which involves identifying the actual risks of loss that the company faces) and
risk measurement (which involves evaluating the cost to the company of a particular risk
coming into play). Risk control is concerned with minimising the adverse effects of an event,
if and when it occurs.
Risk controls may be either:
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• financial; or
• physical.
C5A Financial risk control
It is unlikely that a policyholder would be able to remove every possibility of a loss occurring.
Therefore, they need to make sure that money is available to meet the losses that do occur.
This they could do through:
• risk retention;
• risk transfer; or
• a combination of both.
Risk retention is when a policyholder decides to meet the cost of its losses itself. It can do
this in a number of ways. For example, by simply paying for losses out of its own cash flow
as (when losses occur), by setting up a captive insurance company or by building up a
separate fund which can then be used to meet the cost of any losses (self-insurance).
Risk transfer means that the responsibility for meeting the cost of any losses is passed on to
someone else. The purchase of insurance is the most common way to transfer risk.
C5B Physical risk control
Physical risk control refers to the practical techniques that are used to reduce the frequency
and/or severity of losses. It can be done through either:
• risk avoidance; or
• risk reduction.
Risk avoidance can often only be achieved by abandoning the prospective cause of a loss.
As the cause of the loss may be something inherent to the company’s business, this is
generally neither practical nor desirable. Risk reduction, however, can be achieved by taking
practical measures to reduce the frequency and/or severity of a loss. Examples of such risk
reduction measures would be the installing of sprinkler systems and fire breaks, establishing
fire drills, etc.
Consider this…
Think of some risk reduction measures that your company could make.
Advice on risk control is readily available from insurers, brokers and specialist risk
management companies, and is mostly used in relation to commercial insurance. Insurers
have a vested interest in controlling the risks that have been transferred to them and will
often deploy risk surveyors to provide technical advice to commercial policyholders. Often,
an insurer will only offer cover on the adoption of certain risk control measures that it has
identified as being necessary to reduce the impact of the risk. Alternatively, cover will be
offered at a reduced premium following the adoption of suggested measures.
C6 Rehabilitation
When a third party claimant has been injured and makes a claim against another who holds
liability insurance, the liability insurer may wish to consider helping the injured claimant to
recover by offering rehabilitation. This is because early intervention with rehabilitation can
improve a claimant’s long-term prognosis, especially for more serious and catastrophic
injuries.
The Personal Injury Pre-Action Protocol places requirements on insurers to consider
rehabilitation where liability attaches to a policyholder. Many insurers prefer to fund early
rehabilitation because improving the claimant’s long-term prognosis and assisting their early
return to work should reduce any future loss of earnings claim, to the financial benefit of the
insurer.
There are three options:
1. Medical This deals directly with the claimant’s injury or disease by traditional medical
methods such as surgery
Chapter 4
2. Vocational If a return to the claimant’s pre-accident job is not possible, then vocational
care helps them to find alternative employment and/or provides retraining for
other employment. For example, a bricklayer losing an arm may be retrained to
become a computer programmer
3. Qualitative This helps claimants to overcome their impaired capabilities to enable them to
lead as full a life as possible
Very few insurers have in house rehabilitation facilities, although there are a number of
independent firms offering these services to insurers.
D Civil Procedure Rules

The aim of the Civil Procedure Rules is to reduce cost, delay and complexity in the handling
of personal injury claims and to prevent litigation where possible. The underlying objective is
to encourage all parties to isolate the areas in dispute as early as possible.
The early settlement of disputes is encouraged through a combination of pre-action
protocols and active case management by the courts, together with cost penalties for
parties who refuse unreasonably to attempt negotiation or consider alternative dispute
resolution (ADR).
There are three ‘tracks’ in the courts, as follows:
• small claims;
• fast track; and
• multi-track.
There are also eight pre-action protocols (PAP) with strict timetables and penalties for non-
compliance.
These are:
• personal injury;
• clinical negligence;
• construction and engineering;
• defamation;
• professional negligence;
• judicial review;
• disease and illness; and
• housing disrepair.
Each of these contain different information, but they all have the same basic principles and
template letters. For example:
• a Letter of Claim from a third party’s solicitor must be acknowledged within 21 days of
receipt; and
• a three-month period thereafter in which to investigate the claim and make a decision on
liability.
D1 Personal Injury Pre-action Protocol

The introduction of the Personal Injury (PI) Pre-action Protocol (‘the Protocol’) in 1999 was,
perhaps, the most important reform to be introduced into English civil litigation in recent
times. All personal injury claims are managed by the Protocol. It sets out the rules that the
parties must adhere to in order to present and negotiate the claim, prior to issuing court
proceedings.
There is an additional ‘Low Value Protocol’ in place for cases valued in the Fast Track (up to
£25,000).
Chapter 4
D2 Low Value Personal Injury Pre-action Protocol

Currently, road traffic accident (RTA), employers liability and personal injury claims valued
between £5,000 and £25,000, RTA claims from vulnerable road users valued between
£1,000 and £25,000 and Employers Liability (EL) or Public Liability (PL) personal injury
claims valued between £2,000 and £25,000 are managed via an electronic portal (known as
the Claims Portal or MOJ Portal), which controls the submission and negotiation of claims
between claimants and defendants. Fixed costs apply to the various stages of the claim.
The staged process includes deadlines for the agreement of liability:
• Stage 1: which is 15 days for RTA, 40 days for PL, 30 days for EL; as well as a set 35-
day negotiation period;
• Stage 2: to agree quantum; and
• Stage 3: the court hearing process, where the court quickly decides on the damages,
either at an oral or paper hearing.
This process has reduced the time it takes for low value claims to be decided from over 18
months to around 9 months.
For soft tissue injury RTA claims presented under the Low Value Protocol there is an
accreditation process for doctors providing medical reports.
Claims which start in the Low Value Protocol but, for a variety of reasons drop out, will fall
back to the main PI Pre-action Protocol, where legal costs are also fixed for claims in the
Fast Track.
Figure 4.1 shows the flow of the process of using the Claims Portal.
Figure 4.2: Claims/MOJ process – basic flow
CNF sent to insurer through the MOJ Portal
Out of MOJ Process if

Stage 1 liability denied or no
15/30/40 days from receipt to decide liability [RTA/EL/PL] response within 15
days – back to PI PAP
Stage 2 Insurer must pay

Agree Quantum – Claimant sends Stage 2 Pack with medical Stage 1 costs within
reports and other documents 10 days of receiving
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S2 pack
15 days to consider offer – then a further 20 days for

negotiation
If claim is agreed within

Stage 2 period – pay
Stage 3
the claim and legal
Court Decision
costs within 10 days of
agreement
Court decision on quantum – either oral or paper hearing
D3 Small claims track

Thousands of actions are handled annually by the relatively informal procedures of the small
claims track in the courts. The small claims track is governed by the Civil Procedure Rules
1998 (CPR). The qualifying limit for the small claims track is £10,000 for property damage
claims.
Be aware
The Civil Liability Act 2018 received Royal Assent in December 2018. One of the
consequences of this Government policy change will see secondary legislation introduced
to change the limits for some personal injury small claims. The limit is expected to rise to
£5,000 for RTA claims with no immediate change for employers or personal liability
claims. Implementation of the Act and other secondary regulation has been delayed and,
at the time of publication, is due to be in force from April 2021.
The starting point for commencing proceedings in the small claims track is the N1 money
claim form, which is submitted to the court with the court fee.
It should be noted that cases allocated to the small claims track are exempted from some
procedures that would burden the parties with undue formality. It provides a speedy, effective
and proportionate method of dealing with claims of limited financial value.
Conclusion
In this chapter we have returned to look at the different types of insurance available. We
have built on our earlier knowledge to examine the particular claims issues associated with
each. A customer’s perception of their insurer is highly influenced by how their claim is
handled and the level of service. Competition from other insurers means that it is not enough
simply to pay the claims accurately and efficiently. Insurers seek to help their customers
further by offering other services, such as risk control advice and helplines. It is hoped that
these services will provide more opportunity for the insurer to demonstrate its quality to its
customers.
In the next chapter we will look at what you need to do when the claim actually lands on your
desk, for settlement.
Chapter 4
Key points
Introduction
• Each class of business will result in claims being notified.

• Each class will call for a different response from the insurer.
Personal insurance
• The insured under a motor policy is bound by the claims notification policy conditions
to report all accidents, whether they intend to claim or not.
• All personal injury claims come under the Personal Injury Pre-Action Protocol.
• For health claims supporting medical evidence will be required.
• Household contents are divided into durable goods and consumer goods. Damage to
Chapter 4
durable goods is usually settled on a new for old basis, whereas wear and tear is taken
into account when settling for damage to consumer goods.
• The indemnity sum for the loss or damage to buildings is the cost of repair or
replacement at the time of loss, less an allowance for betterment.
Commercial insurance
• For fire and special perils and all risks property damage claims the insurer would
establish whether the policy was in force, whether the claim was valid and whether the
policy covered the loss.
• Claims under legal expenses policies differ from others in that the insurer can assess
its potential liability before the claim has started.
• For a business interruption claim to be valid the underlying property insurance claim
must be valid first.
• Liability policies can be issued on a claims-made basis (e.g. PI) or on a losses-
occurring basis (e.g. EL and PL).
• Most small motor, employers’ and public liability injury claims are dealt with
electronically, via the Claims Portal.
Related claims services
• Help and advice lines offer policyholders assistance in notifying claims and advice/
assistance on any repairs necessary. Legal advice helplines also exist to offer legal
advice.
• Authorised repairers are contracted by the insurer to carry out repairs to the insured’s
property and are usually paid direct by the insurer.
• Uninsured loss recovery services assist policyholders claim against third parties for
losses not covered by their policy.
• Insurers, brokers and specialist risk management companies are all available to help a
business identify and control the risks it faces.
• When a third party claimant has been injured and makes a claim, the liability insurer
may wish to offer rehabilitation.
Civil Procedure Rules
• The Civil Procedure Rules encourage the early settlement of disputes through pre-
action protocols and active case management by the courts.
Question answers
4.1 In pursuit of a claim against a liable third party the subrogation clause gives the
insurer the right to stand in the place of the insured before paying their claim (this
enhances its common law right to claim against the third party for monies already
paid out to its insured).
4.2 The loss of a limb or health is something it is impossible to put a financial value on.
Therefore these insurances provide for the payment of a pre-agreed set sum.
4.3 The principle of indemnity states that the insured must be placed in the same
financial position after a loss as they enjoyed before the loss. Such improvements
to their property would increase the value of the property leaving the insured better
off than before the loss. This is against the principle of indemnity.
Chapter 4
Self-test questions
1. What is settlement on a 'new for old' basis?
a. Settlement without deduction for wear and tear. □
b. Indemnity settlement taking account of the item's age. □
c. Building a new house if the old one is damaged, for example, in a fire. □
2. Business interruption insurance is an example of a pecuniary insurance, often found
in commercial contracts.
a. True. □
b. False. □
Chapter 4
3. Who would appoint a loss adjuster and who would pay their fees?
a. A broker. □
b. A policyholder. □
c. An insurance company. □
4. What does it mean when a risk is underwritten on a claims-made basis?
a. Claims made in the policy year are covered only if they occurred in the same year. □
b. Claims made in the policy year are covered whenever they occurred. □
c. Claims are covered only if they are made in a specific period, set out in the policy. □
5. Which is not an example of a claims related service?
a. Legal helplines. □
b. Authorised repairers. □
c. Uninsured loss recovery services. □
d. Finance team. □
e. Legal costs service. □
6. What are the current parameters for the low value RTA claims portal?
a. £1,000–£25,000. □
b. £5,000–£25,000. □
c. £1,000–£10,000. □
d. £5,000–£50,000. □
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Claims handling systems
5
outcomes
Introduction
A Analysis of claims systems 5.1, 5.2
B Organisational structure 5.4
C Support services 5.3
Conclusion
Key points
Chapter 5
Question answers
Self-test questions
Learning objectives
• describe the key features, structure and objectives of a claims system;
• understand the importance of data protection legislation and enforcement;
• explain the integration of the claims function within the overall organisational structure;
and
• identify and outline the support services that may be used in the claims process, and
when and why each would be used.
Introduction
In this chapter we are going to look at claims handling systems. In the first instance we will
look at information technology (IT) in this context. However, as you will see, a company’s IT
strategy is not just limited to claims – it will encompass the whole organisation.
Logically, therefore, we will need to examine where the claims function sits within an
organisation and the impact this will have on the claims handling system.
Finally, we will look at the role of organisations, other than the insurer, that support the
handling of claims and thus must be incorporated into or managed by the claims handling
system.
Key terms
Disaster recovery Loss adjusters Loss assessors Organisational

structure
Outsourcing Risk managers Solicitors Surveyors
A Analysis of claims systems

Chapter 5
A1 Role of IT
We are going to deal in this section with the role of information technology (IT). We are going
to consider it with specific reference to claims handling and the development of an
appropriate claims management system.
IT relates to the storage, production (or processing) and communication of information.
IT already plays an important role in the insurance marketplace. However, if you reflect on
developments in the last few years you will realise that the role it plays in the future could
make the difference between success and going out of business.
While this section only discusses IT in relation to its claims management aspect, you should
always bear in mind that a company’s IT strategy will encompass its whole organisation. For
instance, underwriting information can and will be used in claims handling (and vice versa).
Insurance companies will also have ‘digital’ strategies for underwriting, selling and marketing
products, to meet the ever changing needs of the customer.
Insurers can benefit from the provision of better quality, faster and more relevant
management information in relation to their claims. Such provision will also help the insurers
to respond to and meet their customers’ expectations.
Effective control and planning depend on information (which is the data, ‘the raw material’)
being processed in such a way as to have some meaning to its recipient. A manager will use
this information to make informed decisions that are based on their experience and prior
knowledge.
An insurer’s claims management system must be designed with reference to a company’s
corporate claims philosophy and their claims management procedures. It should be able to
record appropriate information and process it in a way that is compatible with the company’s
overall objectives.
Increasingly, insurers and other technology providers are using online servicing through
electronic portals. An example of this was discussed in Low Value Personal Injury Pre-action
Protocol on page 4/14. Insurers also use technology to share data to aid decision making,
especially in motor claims, where electronic recoveries are possible using an online portal to
share information about the claim.
This demonstrates that IT is merely one element of a much bigger network. IT actually
controls the technical issues of the system that has been developed to meet an all-
encompassing objective.
Chapter 5 Claims handling systems 5/3
A2 Characteristics of claims and their impact on claims

handling systems
To understand the role of IT in claims handling, you need to be aware of some of the
characteristics of insurance claims. Characteristics such as the:
• volume of claims; and
• complexity of claims.
A2A Volume
Imagine how many insurance claims are made every day. There are thousands of insurers
worldwide and most individuals and businesses have insurance of one type or another. For
an individual insurance company there is likely to be a very large number of claims
transactions to be processed, including:
• claims reserving and estimating;
• claims payments; and
• recoveries (including reinsurance recoveries).
An insurer should have in place systems and controls that take account of foreseeable peaks
in demand. Such systems are necessary to allow the insurer to continue to deal with claims
promptly even in such circumstances.
A2B Complexity
Chapter 5
The following factors should be considered in an individual claims handling context:
• The claims process (notification, agreement and settlement) requires communication
between insurer and insured (and broker, if applicable) and could also involve loss
adjusters, legal experts and witnesses.
• The greater the number of co-insurers, the greater the complexity. (With commercial
insurances, especially bigger risks, there may even be hundreds of insurers.)
• Are brokers involved? If so, they will often handle the flow and/or production of
documentation.
• Almost all UK insurers require reinsurance to reduce their net commitment to an
acceptable level. Where a loss is reinsured, details of the claim will need to be passed to
the reinsurer.
• Some claims may be fraudulent, repeated or exaggerated and may require more detailed
investigation.
Many people can be involved in any one claim. This is particularly true of larger, commercial
claims. Complex systems need to be in place to ensure that the information is collated from
all the potential sources (e.g. witnesses, brokers, other insurers, loss adjusters) and is
analysed and passed on as appropriate (e.g. to the reinsurer, or the specialist claims
investigator). The claims handler will need to ensure that they are aware at all times of the
position of the claim as it passes through the system.
A claims system needs to be capable of:
• processing large amounts of data;
• processing it quickly;
• processing it accurately; and
• delivering information in a meaningful manner.
The application of IT must be accompanied by a review of present claims procedures and
practices and the employment of new methods of operation, if appropriate; and
A powerful, flexible and adaptable claims system is not a substitute for experienced people.
IT systems are only as good as the people who have programmed them. They can be
designed to carry out complex and important tasks and decisions, but will have certain
limitations. An effective IT strategy balances the efficacy of a comprehensive IT solution with
the skills and talents of experienced claims staff.
A3 Major components of a general insurance claims

system
The claims management system chosen by an insurance company will vary according to a
number of factors:
• the structure of the company;
• the type of business written; and
• management decisions about the extent to which their computer systems should be
developed.
Consider this…
All claims will have certain basic elements recorded. Can you list some of these?
For all claims, regardless of the class of business, certain information is typically recorded.
These include:
• the name of the policyholder;
• the policy number and claims reference;
• details of the claim, including dates;
• contacts;
Chapter 5
• payments; and
• reserves.
In addition to these elements, there will be details that were previously recorded at the
underwriting stage. These will be used in conjunction with the above. For example:
• a description of the risk;
• a description of the cover provided;
• supporting risk information; and
• whether there is more than one insurer and if so, the name of insurer, its share of the risk
and respective references.
A4 Using IT in claims handling

Before considering the benefits and difficulties of using IT in claims handling, the main aims
of using IT need to be considered. These are two-fold, to:
• reduce the cost of claims administration; and
• improve the service provided to the insured.
A4A Benefits of using IT
Consider this…
Think about all that you have learned about the claims process so far. Can you think of
any benefits that using IT would bring to that process?
What are the main benefits of using IT in respect of claims handling?

• Single data entry: this eliminates the duplication of effort and data. Less people involved
in the data entry process should mean fewer errors in data inputting.
• Reduced use of paper files: with the associated benefit of quicker distribution of claims
details, especially if there is more than one insurer. For example, in Lloyd’s files are often
shared among managing agents electronically and in many general insurance claims
departments there is no longer any reliance on paper files at all.
• Quicker claims settlement: this flows from the above, because the information is
distributed faster.
• Electronic authorisation of claims payments: this speeds up the claims settlement
process. It also results in a reduction of paperwork, minimises bank charges and prevents
unnecessary re-entry of data. In addition, some systems automatically generate cheques
or automatic transfers of money, thereby ensuring that money is paid quickly and in the
most efficient manner.
• Increase in communication channels: those such as email, social media and live chat
are all enabled by IT. They allow greater customer service, quicker communication and
more efficient claims handling.
• Portals and extranet services allow customers to self-serve and obtain real time
updates on the progress of their claim.
There are other less tangible or associated benefits for insurers hoping to gain a competitive
advantage, such as:
• the improved service should mean that more customers are retained;
• technical assistance and/or advice can be given to the claims handler via the IT systems,
e.g. the handler could be prompted to ask certain questions or adopt certain tactics for a
given scenario;
• streamlined administration, e.g. the use of online databases for replacement goods;
• the allocation of appointments by the computer system based on priority and/or the date
of loss notification (e.g. loss adjusters, customers etc.)
• automatic checking for fraudulent, exaggerated or repeat claims; and
• automated payment of loss adjusters’ fees.
Question 5.1
Chapter 5
In summary, what are the main benefits of using IT in claims handling?
These, then, are some of the benefits. But what difficulties arise with the use of IT in claims
handling?
A4B Difficulties in using IT
These are some of the difficulties associated with the use of IT in claims handling:
• If the emphasis is placed on IT as the only solution to claims handling, there may be an
increase in claims costs.
• Non-standard, large or more complex claims may not fit within the framework of the IT
system: a system has to be incredibly flexible to cover all eventualities.
• The system may be more difficult to operate, less flexible and more expensive than
initially considered.
• There may be a possible adverse cashflow effect: claims payments are speeded up, but
premium payment and reinsurance recoveries may not be.
• The delivery of a claims service arising from a centralised, electronic function may result
in claims being dealt with by process rather than observation. Personal service may be
reduced, removing flexibility and initiative.
• Productivity may increase, but this may result in contained, rather than reduced, costs.
• The system will need to be maintained and updated, which can be expensive.
A5 Data protection rules

The Data Protection Act 2018 (DPA 2018) came into effect in May 2018, to coincide with
the implementation of the General Data Protection Regulation (GDPR) and the Law
Enforcement Directive (LED) 2016/680/EC . It aims to modernise data protection laws to
ensure they are effective in the years to come.
Although the GDPR has direct effect across all EU Member States and organisations have to
comply with it, it does allow Member States limited opportunities to make provisions for how
it applies in their country. In the UK these have been included as part of the DPA 2018. It is
therefore important the GDPR and the DPA 2018 are read side by side.
The main elements of the DPA 2018 include the following:
General data processing

• Implement GDPR standards across all general data processing.
• Provide clarity on the definitions used in the GDPR in the UK context.
• Ensure that sensitive health, social care and education data can continue to be
processed to ensure continued confidentiality in health and safeguarding situations can
be maintained.
• Provide appropriate restrictions to rights to access and delete data to allow certain
processing currently undertaken to continue where there is a strong public policy
justification, including for national security purposes.
• Set the age from which parental consent is not needed to process data online at age 13,
supported by a new age-appropriate design code enforced by the Information
Commissioner.
Regulation and enforcement
• Enact additional powers for the Information Commissioner who will continue to regulate
and enforce data protection laws.
• Allow the Commissioner to levy higher administrative fines on data controllers and
processors for the most serious data breaches; being up to £17m (€20m) or 4% of global
turnover.
• Empower the Commissioner to bring criminal proceedings for offences where a data
controller or processor alters records with intent to prevent disclosure following a subject
access request.
Chapter 5
Who does the GDPR apply to? The GDPR applies to ‘controllers’ and ‘processors’. The
definitions are broadly the same as under the now superseded Data Protection Act 1998
(DPA 1998) – i.e. the controller says how and why personal data is processed and the
processor acts on the controller’s behalf.
The GDPR places specific legal obligations on processors; for example, firms are required to
maintain records of personal data and processing activities. A firm has significantly more
legal liability if it is responsible for a breach. These obligations for processors are a new
requirement under the GDPR.
Controllers are not relieved of their obligations where a processor is involved – the GDPR
places further obligations on controllers to ensure their contracts with processors comply
with the GDPR.
What information does the GDPR apply to? The GDPR applies to personal data.
However, the GDPR’s definition is more detailed, reflecting changes in technology and in the
way in which information is collected. It makes it clear that information such as an online
identifier – e.g. an IP address – can be personal data.
The GDPR applies to both automated personal data and to manual filing systems where
personal data is accessible according to specific criteria. This is wider than the DPA 1998’s
definition and could include chronologically ordered sets of manual records containing
personal data. Personal data that has been anonymised – e.g. key-coded – can fall within
the scope of the GDPR depending on how difficult it is to attribute the pseudonym to a
particular individual.
Sensitive personal data: The GDPR refers to sensitive personal data as ‘special categories
of personal data’. These categories include:
• race;
• ethnic origin;
• politics;
• religion;
• trade union membership;
• genetics;
• biometrics (where used for ID purposes);
• health;
• sex life; or
• sexual orientation.
Principles: Under the GDPR, the data protection principles set out the main responsibilities
for organisations. They are similar to those in the DPA 1998 with added detail. The most
significant addition is an accountability principle: the GDPR requires firms to show how they
comply with the principles – for example by documenting the decisions they take about a
processing activity.
Data Protection Principles

All personal data should be:
1. processed lawfully, fairly and in a transparent manner in relation to individuals;
2. collected for specified, explicit and legitimate purposes and not further processed in a
manner that is incompatible with those purposes;
3. adequate, relevant and limited to what is necessary in relation to the purposes for
which they are processed;
4. accurate and, where necessary, kept up-to-date;
5. kept in a form which permits identification of data subjects for no longer than is
necessary for the purposes for which the personal data is processed; and
6. processed in a manner that ensures appropriate security of the personal data,
including protection against unauthorised or unlawful processing and against
accidental loss, destruction or damage, using appropriate technical or organisational
measures.
Chapter 5
Lawful processing: For processing to be lawful under the GDPR, firms need to identify a
lawful basis before they can process personal data and document it. This is significant
because this lawful basis has an effect on an individual’s rights: where a firm relies on
someone’s consent, the individual generally has stronger rights, for example to have their
data deleted.
Consent: Consent under the GDPR must be a freely given, specific, informed and
unambiguous indication of the individual’s wishes. There must be some form of positive
opt-in – consent cannot be inferred from silence, pre-ticked boxes or inactivity, and firms
need to make it simple for people to withdraw consent. Consent must also be separate from
other terms and conditions and be verifiable.
Firms can rely on other lawful bases apart from consent – for example, where processing is
necessary for the purposes of an organisation’s or a third party’s legitimate interests. Firms
were not required to automatically refresh all existing DPA consents in preparation for the
GDPR, but if they rely on individuals’ consent to process their data, they must make sure it
meets the GDPR standard. If not, firms must either alter the consent mechanisms and seek
fresh GDPR-compliant consent or find an alternative to consent.
Rights: The GDPR created some new rights for individuals and strengthens some of those
that existed under the DPA. These are:
• The right to be informed.
• The right of access.
• The right to rectification.
• The right to erasure.
• The right to restrict processing.
• The right to data portability.
• The right to object.
• Rights in relation to automated decision making and profiling.
Data subject access request (DSAR): Under the GDPR, individuals have the right to
access their personal data. In a financial services firm, this would mean providing all the
records the firm holds on a particular client such as notes summarising conversations, any
recorded conversations and completed documentation.
Individuals can exercise this right by submitting a DSAR to the organisation concerned,
which can be made verbally or in writing. The organisation generally has one month to
respond to a DSAR, although it can take an additional two months in certain circumstances.
If the organisation fails to respond, the individual must complain to the organisation in the
first instance. If they remain dissatisfied after that, they can make a complaint to the
Information Commissioner’s Office. The first copy of an individual’s personal data should be
provided free, although charges are permitted for additional copies if the organisation feels
such a request is unfounded or excessive. Where this is the case, they can ask for a
reasonable fee to cover administrative costs.
Accountability and governance: Accountability and transparency are more significant
under the GDPR. Firms are expected to have in place comprehensive but proportionate
governance measures. Good practice tools such as privacy impact assessments and privacy
by design are now legally required in certain circumstances. Practically, this is likely to have
meant more policies and procedures for some organisations, although many will already
have good governance measures in place.
Breach notification: The GDPR places a duty on all organisations to report certain types of
data breach to the relevant supervisory authority, and in some cases to the individuals
affected.
Transfers of personal data to third countries or international organisations: The GDPR
imposes restrictions on the transfer of personal data outside the European Union, to third
countries or international organisations, in order to ensure that the level of protection of
individuals afforded by the GDPR is not undermined.
A6 Influence of customer expectations on the design of

systems
Chapter 5
Customer expectations should also be considered when choosing or developing a claims

system.
We can identify two types of ‘customer’ in this respect:
• the insurance company itself, as a customer of the supplier of the system (whether the IT
department is internal or not); and
• the general public and the businesses/organisations who are customers of the insurance
company.
Although the insured is the ‘ultimate’ customer, who may be attracted to the company
because of their state-of-the-art claims service; the business needs and associated
expectations of the insurer itself must be analysed. This is to ensure that the information
recorded and collated is of a nature and quality to match the needs and expectations of all
customers.
An insurer may expect the following from a claims management system:
• the ability to process large amounts of data;
• the ability to process data quickly and accurately; and
• the delivery of information in a meaningful manner.
The system should be flexible enough to deal with:
• claims notification;
• the involvement of loss adjusters and other experts as appropriate;
• the correct amount of claim detail appropriate for the class of business written (and the
likely types of claim expected); and
• the authority levels given to different staff grades, both in terms of reserving and the
making of payments.
However, as mentioned, the ultimate customer is the policyholder. The expectations of
the customer may have a large influence on the design of the system.
Often customers’ expectations will be surveyed before the design process begins and this
will establish the basic quality threshold. General expectations (for example, a quick
response and a quick settlement) can be assumed. It is in the more specific areas that
careful consideration is required.
Many companies are reluctant to introduce new, innovative procedures until accepted by the
public at large. New ideas are difficult to evaluate in terms of expectations. However,
customers (both personal and commercial) can have sophisticated knowledge of what they
want and what is available. Customers expect innovative, reliable and cost-effective
solutions from their insurers.
B Organisational structure
Insurance companies often have a complex structure. This is due to their size and
involvement in a varied number of activities. These activities include:
underwriting claims investigation and marketing investment

payment
Every company will require some form of organisational structure. This structure will then
enable the company to meet its stated business objectives in an efficient manner. There are
three main ways to structure a company’s departments. They can be structured by:
Function Division Or a blend of both

e.g. claims, underwriting etc. e.g. product, geographical area etc
B1 Functional structure
A structure based on function is the traditional form of insurance company organisation. It is
best suited to smaller companies with a limited range of products.
Chapter 5
Figure 5.1:
CEO
Board of Directors
Operational Head of Department
Human Finance IT Marketing Underwriting Claims

Resources
Consider this…
What are the advantages of this type of structure?
B1A Advantages and disadvantages

There are both advantages and disadvantages to operating this kind of company structure.
Advantages Disadvantages
Employees can specialise in their type of work because Inflexibility, for example, claims personnel tend to see
all those involved in the same or a related activity are in their role as purely claims handling and may not
the same department recognise the need for them to give feedback and
communicate with their underwriting and marketing
colleagues
Larger units may be more cost effective due to the It is difficult to co-ordinate the different functions, e.g.
uniformity of the procedures used there may be a lack of common interest between the
different functions
B2 Divisional structure
A divisional structure is adopted by most large multi-product companies. Each division is
partially autonomous to the extent of designing, producing and marketing its own products.
Figure 5.2:
Home Country Home Country International

Commercial Personal Division
Division Division
The degree of autonomy that each division is given depends on whether its operations are:
• centralised; or
• decentralised.
Centralised organisations retain authority at the top, with little delegation. With
decentralised organisations, there is more delegation, with divisional managers making
more decisions.
An insurer may have a centralised or decentralised claims settlement policy when it comes
to the relationship between its head office and its branch offices.
Chapter 5
The choice of system will depend on:

• the size of the company; and
• the type of business being written.
Very large claims settlements will usually be advised to head office, even within a
decentralised structure. This is because there are usually limits to the authority delegated to
the branches.
Centralised claims settlement methods have the following advantages and disadvantages:
The required level of expertise is available (which would There may be a lack of contact between policyholders
not always be the case at every office location) and local staff, which could have repercussions in
respect of customer retention
Accessing records (electronic and paper) and There will be an inevitable delay involved in advising
underwriting staff is easier head office and waiting for a response in respect of
significant underwriting and claims issues
C Support services
There are various external services available to an internal claims team, which can assist
them in their functions.
They are:
• outsourcing companies;
• loss adjusters;
• surveyors;
• solicitors;
• loss assessors;
• authorised repairers; and
• risk managers.
C1 Outsourcing companies
‘Outsourcing’ is using a skilled resource from outside the company to handle work
traditionally performed by in-house staff. Essentially, a function (or part of a function) is
delegated to a third party. This can be done by either sending the work out or by bringing the
resource into the company.
The reasons behind outsourcing are:

• the perceived cost benefits (i.e. the belief that the work will be done more cheaply than if
carried out in-house);
• to manage a specific issue (for example, a surge event); and
• to gain access to a wider skills base.
At the turn of the twenty-first century, many insurance companies started basing their call
centres outside of the UK. This is usually called ‘off-shoring’ or ‘near-shoring’. The perceived
cost benefits of doing this were even more marked than merely outsourcing to another,
cheaper part of the UK. Labour may be cheap, but allegations of exploitation and questions
of language and service levels tended to arise. As a result, customer satisfaction fell
markedly, as consumers found the service provided by this method was not good enough.
Consequently, most of these services, particularly where there is interaction with customers,
have now been returned to UK call centres and this in itself is often used as a marketing
benefit to the customer.
Let us take the opportunity to remind ourselves of the claims process by looking again at the
figure we introduced in chapter 4. This is shown again in this figure:
Figure 5.3:
Response to Claim
Notification Review
claimant investigation
Chapter 5
Claim Claim
Review Recoveries
settlement negotiation
Any, or all, of the claims functions can be outsourced. If a company chose to outsource the
whole process, along with the financial reporting and management of the operation, then
there would be no need for an internal claims department. However, internal responsibility for
claims would be retained by the insurer for compliance purposes. This is generally satisfied
by regular audit activity.
The outsourcing could be provided by:
• third party administrators;
• insurance company claims departments (i.e. to non-insureds);
• brokers;
• solicitors; and
• loss adjusters.
Consider this…
What are the advantages and disadvantages of outsourcing?
C1A Advantages and disadvantages
Strategy Concentration on core activities Loss of control

Better capacity to cope with an increase in Dependence on provider
workload
Costs This often results in cost savings Unforeseen problems

Extra co-ordination and audit costs
Service Through access to a wider skill base and/or May be a problem, especially in respect of
improved technology etc. customer retention
Staff Reduces the requirement for staff, and Loss of the opportunity to retain, and
avoids the peaks and troughs of workflow develop in-house expertise
and the loss of expertise
There are then potential gains and potential pitfalls in using an external skilled resource.
Both need to be analysed before any decision is made.
C2 Loss adjusters
Loss adjusters are experts in processing claims from start to finish.
Small claims are usually negotiated and settled by an insurer’s in-house claims staff. In the
case of larger claims or complex policy wordings, the investigation, negotiation and
recommendation for settlement is usually delegated to a professional loss adjuster.
The loss adjuster will investigate the cause of the loss and advise the basis for settlement. If
it is a cash settlement, they will recommend the amount payable. If the insurer is satisfied, it
will offer this sum to the insured, usually via the loss adjuster.
Their function is to negotiate a settlement, within the terms of the policy, that is fair to both
the insurer and the insured. Loss adjusters are independent, professionally qualified and
their fees are met by the insurers who instruct them.
Some adjusters are delegated to negotiate settlement of claims on behalf of the insurer,
without needing to seek specific authority on a case by case basis.
C3 Disaster recovery companies

A disaster recovery company is an organisation that specialises in ensuring business
continuity for a company in the event of an interruption to the normal flow of business. It is
Chapter 5
concerned both with the implementation of plans in the event of an interruption, and the
analysis before the event of a company’s requirements. Its function, therefore, would at
times overlap with a company’s normal risk management programme.
Disaster recovery companies are therefore often involved in:
• management analysis of the effect and impact of losing resources;
• identifying and evaluating operational risks that may impact operations;
• compiling recovery strategies;
• addressing specific emergency situations, for example, terrorist attacks, fire, significant
escape of water, etc;
• the actual work done to return business operations to normal, or as close as possible to
normal; and
• trials to assess the effectiveness of plans.
It should be noted that disaster recovery companies will usually address the complete
scenario of disasters, from the backing up and retrieval of information technology (IT)
systems, to the cleaning and restoration of individual pieces of paper from files that may
have been affected by soot from a fire.
C4 Surveyors
Surveyors act as the eyes and ears of the underwriter; they can equally be used by the
claims department post loss.
The surveyor will prepare a report of a risk that will include:
• a full description of the risk;
• an assessment of the level of risk;
• a measure of the maximum probable loss (MPL), i.e. what they consider to be the most
that could be lost should the insured event take place;
• recommendations on loss prevention; and
• the adequacy of the insurance being requested.
After a claim, a surveyor may be instructed to undertake a post loss survey. They will review
these aspects and report on the cause of the loss. The surveyor will give their view as to the
compliance, or otherwise, with any relevant policy conditions or warranties.
C5 Solicitors
A firm of solicitors can be used as a pre-litigation advice facility. It may also supply
specialised services, such as the negotiation of complex injury claims. A firm of solicitors is
often used to either issue court proceedings where negotiations have reached an impasse,
or to defend claims where proceedings have been issued against an insurer’s customer.
They may also be used for legal advice services, including policy wording interpretation and
reinsurance disputes.
Some insurers employ in-house solicitors and barristers or have a financial interest in a firm
of solicitors for cost reasons. They utilise external solicitors where there would be a conflict
of interest or for matters that their in-house team is unable to deal with.
C6 Loss assessors
As with loss adjusters, loss assessors are experts in dealing with insurance claims.
However, they are appointed by the insured to prepare and negotiate a claim on the
insured’s behalf. The loss assessor’s fees are payable by the insured themselves. It is
important to note that the loss assessor’s fees do not form part of the insured’s claim and
that loss assessors are not impartial: they represent the insured in order to maximise their
recovery from the insurer.
Question 5.2
'A loss adjuster is paid by the insurance company and works for it to manage the
cost of the claim down.'
a. True. □
Chapter 5
b. False. □
C7 Authorised repairers
Insurers will often utilise the services of an authorised repairer to rectify damage caused to
the customer's property, be it insured under any product where damage is covered and
repair is an option for indemnity to be provided.
Authorised repairers are contracted to the insurer, sometime exclusively, but more often as
part of a network used by many insurers. Terms will be agreed with the repairer, which are
advantageous, but provides the repairer with a guaranteed source of work. Insurers will
encourage their customers to utilise authorised repair services and will often attach benefits,
such as a free courtesy car for motor repairs as well as repair guarantees as they can
ensure these are provided, through the contractual terms negotiated with the repairer.
C8 Risk managers
Insurance risk managers are utilised by policyholders (usually commercial customers) to
scrutinise insurance claims and factors that can contribute to claims. Their objective is to find
ways to reduce the likelihood of an insurance claim by taking such actions as improving
safety protocols or installing new equipment that has better safety features. By determining
how a company can reduce their potential risks, they can help reduce the costs of their
insurance policies. In order to do their work effectively, they must be able to gather data,
review procedures, identify ways to reduce risk and develop a strategy for implementing
changes in the workplace. Other duties insurance risk managers may perform include
training staff about risk awareness.
C9 Experts used in the valuation of third party claims

Medical reporting experts
In fast track claims medical evidence is obtained at court direction, jointly for the insurer and
claimant's solicitor. However, in large and complicated multi-track claims, insurers and third-
party solicitors will often appoint their own experts to assist with the valuation of the injured
party's claim.
These opinions will be exchanged and compared, and the experts will be asked to consider
any area of disagreement, sometimes at a joint expert meeting.
If the experts cannot agree, and the claim cannot be settled out of court, the judge will
decide which two opinions is the most persuasive.
Other experts
Care experts Typically former nurses commenting on hours and

nature of care requirements.
Medical experts Specific to the type of injury and include neurosurgeons,

psychiatrists and other specialists.
Life expectancy experts
Accountants To review future lost wage claims
Accommodation experts To comment on suitability of housing needs for

claimants requiring alternative or adapted
accommodation after an accident.
Surveillance To verify claimant's injuries and claims concerning wage

loss are genuine.
Conclusion
An insurer’s claims handling systems need to be able to handle efficiently fluctuating
numbers of claims having varying degrees of complexity. They will need to gather
information from a variety of sources and work well with the organisation’s structure.
Consequently, an IT system will need to be robust and flexible, but will also need to
complement the skill and expertise of the claims handler.
Chapter 5
So far, we have looked at the background: the knowledge and structures that lie behind
effective claims handling as well as the all-important settlement process. In the next chapter
we will consider the systems required in order to manage the claims process from beginning
to end.
Key points
Analysis of claims systems
• A large number of claims transactions need to be processed at any one time and the
system should take account of foreseeable peaks in demand to ensure that claims
continue to be dealt with promptly.
• Claims can be complex, involving many different kinds of people.
• A claims system needs to be able to process large amounts of data quickly and
accurately and deliver information in a meaningful manner.
• The aims of using IT in claims handling are to reduce cost and improve service.
Organisational structure
• An insurance company structure can be based on function, which allows for staff
specialisation and can be cost effective.
• Alternatively, a company can have a divisional structure.
• Such organisations can be centralised, with authority remaining at the top and little
delegation to the divisions, or decentralised with more decision making authority
delegated to the divisions.
Chapter 5
Support services
• Outsourcing companies provide a skilled resource from outside the company which
performs tasks traditionally carried out in-house by the insurer’s own staff.
• Loss adjusters investigate and negotiate the settlement of large or complex claims.
• Disaster recovery companies specialise in ensuring business continuity for a company
following an incident. They consider such things as IT support, offer alternative
accommodation and restoration services.
• Surveyors act as the eyes and ears of the insurer, preparing a report on the risk under
consideration.
• Solicitors meet the legal needs of the insurer, including defending claims and issuing
proceedings. They can either be employed by the insurer or outsourced.
• Loss assessors are experts in dealing with insurance claims who are appointed by the
insured to help them with their claim.
Question answers
5.1 Administration is streamlined with a reduction in the duplication of effort and an
increase in processing speed. Information can be stored, collated and
communicated efficiently, resulting in claims being met promptly and customers
retained.
5.2 b. False.
Chapter 5
Self-test questions
1. What is the best descriptor of information technology, as used by insurance
companies?
a. The desktop machines used by claims handlers. □
b. The complete range of technologies used to store, process and transmit data. □
c. The physical servers used to store data. □
2. IT in claims handling is used to manage the volume and complexity of claims?
a. True. □
b. False. □
3. How many principles relating to the use of personal data are there within the Data
Protection Act 2018?
a. Four. □
□
Chapter 5
b. Six.
c. Eight. □
4. Which of the following are examples of sensitive personal data? (Select all that
apply.)
a. Ethnic origin. □
b. Politics. □
c. Religion. □
d. Health. □
e. Sexual orientation. □
5. A functional company structure is the traditional way for an insurance company to be
set up.
a. True. □
b. False. □
Claims settlement
6
outcomes
Introduction
A Claims settlement 6.1
B Reserving: the process 3.4
C Invalid and partially met claims 6.2
D Recovery 6.3
E Salvage 6.3
F Average 6.2
G Market agreements 6.3
H Excesses, deductibles and franchises 6.2
I Motor Insurers’ Bureau 6.4
Conclusion
Chapter 6
Key points
Question answers
Self-test questions
Learning objectives
• explain how claims can be settled;
• explain why a claim may be invalid or only partially met;
• describe the considerations relating to recovery; and
• describe the role of the Motor Insurers’ Bureau in respect of claims settlements.
Introduction
This chapter examines how claims are settled, how a reserve is set to cover the settlement
and the reasons why a claim may, or may not, be fully met. Sometimes an insurer can
recover the money it has paid out in settlement of a claim from a third party. How insurers
make agreements between themselves to smooth the process of claims settlement and to
reduce its cost will also be explored.
Key terms
Deductible Excess Franchise Recovery

Reserving Salvage Subrogation
A Claims settlement
Consider this…
When a claim has been notified, and assuming that all the parties have carried out their
respective duties, all that remains is for the claim to be settled. How is ‘settlement’
actually achieved?
There are four ways in which the claim can be settled. These are:
• payment of money;
• paying for repairs;
Chapter 6
• replacement; and
• reinstatement.
A1 Payment of money
The payment of money directly to the insured is the easiest and most common form of
settlement. It is simply a cash payment to the insured covering the amount of their claim.
A2 Paying for repairs

The insurer can also pay for repairs. This is very common with motor vehicle repairs (often
by using authorised repairers). An estimate would usually be provided to the insurer which
would then authorise repairs. If the repairs are extensive, an engineer may inspect the
vehicle first. The invoice would be sent directly to the insurer for settlement (minus any policy
excess).
A3 Replacement
Insurers can also arrange to replace damaged or lost goods. This is often the case with
glass insurance for instance, as glaziers frequently offer discounts to insurers. Replacement
can be used as a form of indemnity in the case of suspected fraud.
Question 6.1
We discussed the use of replacement to reduce fraud earlier in this study text. Can
you remember why offering a replacement for a stolen or damaged item would
discourage fraud?
A4 Reinstatement
The final option available to an insurer is to reinstate that which has been damaged by the
insured peril. For example, in the case of extensive damage to or destruction of a building,
insurers can take control of the repair and/or rebuilding themselves. This course of action is
seldom used as it carries onerous obligations for the insurer and, even if the sum insured is
exceeded, the insurer is responsible for paying the full amount.
Chapter 6 Claims settlement 6/3
A5 Key considerations
The following are considerations and comments to be regarded when making settlement:
• Replacement and reinstatement only apply if stated in the policy. Therefore, if they are
not offered by the policy as settlement options they do not apply and the insured only has
a right to financial compensation.
• Whichever method of claims settlement is selected, an explanation must be provided to
the insured of the usual way in which such claims are settled.
• There are circumstances, other than the authorised repairer example, in which an insurer
will pay someone other than the insured.
Example 6.1
Examples of where an insurer will pay some other than the insured include:
– paying a hire purchase company the amount still outstanding for a lost item with the
balance of the value paid to the insured;
– paying a mortgage company following severe damage to a property; and
– paying a doctor under a private medical insurance policy.
These must also be explained to the insured, before payment is made in order for the
insurer to comply with the FCA principle of the fair treatment of customers.
Question 6.2
Can you think of another circumstance in which the insurer would pay someone other
than the insured?
A6 Surge events
Chapter 6
Insurers are facing increasing numbers of what are known as ‘surge events’. This is where
an insured event causes a higher volume of claims than normal, placing greater demand on
the insurer’s claims resources. This could be as a result of a significant storm, a period of
prolonged rain leading to flooding or an exceptionally cold spell leading to increased claims
for burst pipes. Surge events are usually restricted to property claims, either residential or
commercial, but could also affect other classes of insurance.
Consider this…
Can you think of another type of insurance which could be affected by a surge in claims?
Travel insurance could be affected. One example occurred following the volcanic eruption in
Iceland in 2010 when the unusual ash cloud that formed led to the widespread cancellation
of flights across Europe. Insurers faced a surge in claims from people either stranded abroad
or unable to leave following cancellation of their flights.
Insurers need to be ready for a surge event as it is not easy to predict when it might occur.
Staff need to be trained to be able to handle claims they would not usually deal with, and
claim notification processes need to be adapted to cope with the number of calls, without
impacting the validation of claims.
Surge events are often localised and insurers will interrogate their databases in times of
surge and proactively contact customers in the affected area to establish if claims need to be
made. They will also send staff to local temporary offices near the affected area, to make the
process easier for the customer.
In times of surge, requesting documentation/quotes for repair is sometimes difficult. In these
situations, customer descriptions or photographs may be sufficient to validate the loss,
something that would be less acceptable in normal circumstances.
In a surge event, it is important for an insurer to prioritise customer needs and manage the
expectations of those with lower priority claims.
B Reserving: the process

Refer to
Reserving introduced in Estimating and reserving on page 3/5
We have previously dealt briefly with reserving, but here we will look at the reserving process
itself.
B1 Global reserving process

Global reserving is mainly the responsibility of the actuarial department of the insurance
company. It looks at the overall reserving process and its impact on the business as a whole.
It is also referred to as actuarial reserving.
The claims reserving process can be viewed as a flowchart as seen in this figure:
Figure 6.1: Claims reserving process
Checking data integrity
Collating historical data
Projection of claims
B1A Checking the integrity of the data

Chapter 6
The insurance company must ensure that individual case estimates are up to date and that
no processing backlogs exist. All the estimates should also be correctly coded according to
the type of business and the type of loss.
B1B Collating historical data
The data must then be collated into similar groups. Motor business, for example, can be
sub-divided into private and commercial, and these can again be divided into sub-classes.
However, the groupings should contain sufficient data to maintain statistical credibility.
The historical data should contain premiums earned, the number of claims and the amount
paid along with outstanding claims data. This data should be capable of being sorted by
underwriting, calendar, policy and accident year for reporting purposes.
B1C Projection of claims
The claims then need to be projected to establish the likely ultimate gross payout. A method
used to project claims is the Loss Development Factor Method which has the
following steps:
1. Setting out the data in the form of a table showing the development of premium, claims and incurred
claims (paid and outstanding) at each point in time. This data can be analysed and compared by accident,
underwriting, calendar or policy year (This is called ‘triangulation’)
2. Analysing the trend
3. Calculating the claims reserve
Various averaging techniques are then used to determine development factors for all
underwriting years combined.
The claims reserve for each accident year is then calculated by multiplying the cumulative
claims to date for that year by the development factors for the number of years which remain
undeveloped.
A detailed analysis of this method is beyond the scope of this course.
B2 Individual case reserves

A claims handler has a very important role, ensuring that (on a case by case basis) reserves
are accurate. The estimation of individual cases will have an impact on the global reserving
process.
Insurance companies have different strategies and philosophies on reserving and it is
important to understand what they are. They are usually documented within reserving
guides, published internally by the company.
Reserves are required for all aspects of the claim. These could include:
• damage to property (either own or third party);
• damages for personal injury (general damages);
• third party special damages; and
• legal costs (claimant and defence).
Information provided by loss adjusters, surveyors or engineers can assist in setting an
accurate reserve, as their reports will contain detailed costings to repair/replace the
damaged property.
It is important to consider possible policy or third party liability issues when setting a reserve.
For example, allowances can be made should the claim be settled on a split liability basis.
Reserves should be regularly reviewed to ensure they remain adequate. They should be
reduced as payments are made, but equally should be increased if extra information comes
to light, or if the claim becomes more complex. For example, should the claim involve
litigation, or be heading for a court trial, the legal costs could greatly increase and have a
significant impact on the reserve. Companies prefer to be conservative while making
estimates for claims reserve. However, being too conservative can also lead to having
reserves much more than required which is also not a best practice; hence there needs to be
a right balance.
Chapter 6
Reserves are usually entered onto the claims system, broken down according to policy cover
or section.
Refer to
This analysis described in Projection of claims on page 6/4
An alternative method of individual case reserving, employed by some companies, is factor

or flag reserving. This involves a factor being added to each claim, rather than a whole case
reserve. This is common in motor damage or small personal injury claims, and is used to
identify certain types of cases for trend analysis by actuaries. A ‘standard’ or factor reserve
of, perhaps £1,000 would be added to every claim of a certain type (for example, motor
accidental damage).
C Invalid and partially met claims

Consider this…
What circumstances can you think of where an insurer will refuse to pay a claim?
Refer to
Insurance Act 2015 covered in Insurance Act 2015 on page 3/12
There are a number of circumstances in which an insurer will refuse to pay a claim. This is
known as repudiation.
Examples of such circumstances are as follows.

• Cover was never in force.
• Breach of a material warranty.
• Breach of a policy condition.
• Fraud.
If this can be proven, all policy benefits will be forfeited from the date of the fraudulent act
and the insurer may keep the premium.
Cover was never in force A claim occurred outside the policy period, or was for damage to the
insured’s own car under a third party only motor policy
Breach of a material warranty A theft occurs while a burglar alarm has not been set, and there is a
warranty that it will be set (the emphasis here being on ‘materiality’)
Breach of a policy condition A claim was reported so late that the insurers were prejudiced in
respect of any recovery rights. If the policy condition in question is a
condition precedent, then prejudice does not have to be proven and
insurers can decline policy liability in respect of the loss, regardless as
to whether the insurers were prejudiced by the late notification or not
Fraud If this can be proven, all policy benefits will be forfeited from the date
of the fraudulent act and the insurer may keep the premium
Consider this…
The above examples show claims that are invalid, and no payment will be made by the
insurer. Can you think of examples where insurers will make a payment of less than a full
indemnity?
The following terms and conditions may mean that a claim may be only partially met:
Chapter 6
• A limit to the maximum amount recoverable. For example, by a sum insured (in respect
of property insurance) or by a limit of liability (in respect of liability insurances). If a loss
is greater than this sum or limit, the insured’s recovery is limited to that amount.
• The application of an average clause in the case of underinsurance on a property policy.
This occurs where an insured understates the value at risk and is charged a reduced
premium as a result. Any claim will be paid in proportion to the sum insured.
• The application of a compulsory excess or deductible (i.e. first amounts payable by an
insured, resulting in a less-than-full indemnity).
(In any of the above cases, the insurer must provide an explanation as to why there is a
difference between the amount claimed, and the settlement figure.)
• An ex gratia payment, which is a claim payment made by an insurer as a gesture of
goodwill, is made even though there is no obligation to pay. It may result in a loss being
only partially met.
D Recovery
An insurance contract is one of indemnity. The intention is to put the insured in the same
financial position after a loss as they were before it occurred. Therefore, an insured cannot
recover their loss from another source if their claim has already been settled by their insurer.
The insurer, therefore, has subrogation rights. These mean it can pursue any right of action
available to the insured, which may reduce the insurer’s loss. Essentially, the insurer ‘stands
in the shoes’ of its insured and avails itself of the rights and remedies open to the insured.
The insurer can pursue a responsible third party to recover from them any payments it has
made. There will usually be a condition in the insurance policy giving the insurer subrogation
rights before any payment is made, but the insurer cannot actually recover until it has made
payment. If a responsible third party has insurance covering their liability, their insurers may
make payment, but any right of recovery will be against the third party directly.
Recovery of payments is most clearly seen with motor insurance, and insurers will often
have whole departments dedicated to recovering monies from negligent third parties or will
outsource this role to a dedicated supplier.
E Salvage
Consider this…
In an insurance claims context, what does the term ‘salvage’ refer to?
Salvage is the damaged article that has been the subject of a claim. An important
consideration for the claims department on settling a claim is whether a damaged item (the
salvage) has any residual value.
Most insurers will have a condition in their policy wordings that on settlement of a claim, the
salvage will become the insurer’s property. The insured has no right to abandon the property
to the insurer: it is the value of the salvage to which the insurer is entitled.
When a motor insurance claim has been settled on a total loss basis, the insurers usually
keep the salvage and sell it through specialist salvage companies to minimise costs.
Alternatively, the insured may be allowed to retain the salvage. The claim payment will then
be reduced by whatever amount has been agreed to be the value of the salvage.
The same principles apply with property insurance. For example, if a carpet is damaged by
paint the insured may want to keep the carpet and cut it down to use it in a smaller room.
The insurer would then negotiate with the insured to pay a sum to retain the salvage (or
reduce the payment to the insured by that amount).
F Average
With property insurance, the amount payable by an insurer is limited to the sum insured (a
value declared by the insured at the start of the policy). This figure is then used by the
insurer to determine the insured’s contribution to the common pool (the premium).
Chapter 6
What happens when this declared figure is less than the actual figure at risk? It would mean
that the insured had contributed less to the premium pool than they should have done, which
would be unfair. Therefore, most property insurances incorporate an average clause (also
called a pro rata condition of average). This states that the insured is acting as their own
insurer for the difference between the actual value and the declared value and will bear an
appropriate proportion of any losses.
Example 6.2
If Mr Andrews owned a house worth £200,000 which he insured for £100,000, he is his
own insurer for 50%, i.e. the £100,000 that he has underinsured.
If his house burnt down (a total loss), he could only expect to recover half the value – he
has insured the balance himself.
He would receive 50% of £200,000, i.e. £100,000.
If the house sustained damage within the sum insured, the claim would be reduced by the
same proportion.
What if the figures were a little more complicated than those used in this example? It is for
such situations that we use a formula to calculate the claim, as follows:
sum insured
× loss
value of goods at risk
Example 6.3
Mr Brown’s house is valued at £500,000 and insured for £400,000 under a policy subject
to an average clause. If he suffers a £100,000 loss, how much will his insurers pay?
£400,000
× £100,000 = £80,000
£500,000
G Market agreements
Consider this…
Why do you think insurers have arranged agreements amongst themselves?
In the past, market agreements were introduced with one or more of the following aims
in mind:
• to reduce the cost of dealing with claims;
• to speed up the repair and claims settlement procedure; and
• to promote good relations between insurers.
These agreements, across the market, have largely been discontinued and replaced by
individual agreements between insurers.
G1 Bi-lateral agreements
Insurers now enter into bi-lateral agreements with others who operate in the same market.
By doing this they can engage with similar, like-minded insurers which may share the same
philosophy or underwrite a similar book of risk.
An example of this would be the motor insurance subrogation portal to which some insurers
subscribe. Insurers who operate the agreement, on a bi-lateral basis, enter details into the
portal of claims against another insurer as they are reported. If liability is agreed then (on
uploading details of its outlay) the ‘non-fault’ insurer will receive settlement electronically
from the ‘at fault’ insurer quickly and without further evidencing. This saves time spent in
seeking agreement on liability, validation and agreement of outlay, and even the cost of
writing letters, as everything is processed through the online portal.
Chapter 6
Example 6.4
Two insurers sign a bi-lateral agreement with each other and connect their IT
infrastructure to an online subrogation portal. On a daily basis, each insurer’s system
automatically uploads basic details of new claims reported where the other insurer is
involved. These details include the vehicles, driver and circumstances of the accident.
Within 24 hours, each insurer will respond electronically. They will either confirm that the
details match and that liability is agreed, or else, remove the case for manual review.
For cases remaining in the portal, once the non-fault insurer’s outlay is established, this is
uploaded to the portal, again electronically by the system, whereupon a settlement is
requested. It is paid by the at-fault insurer automatically and without delay.
The process involves little in the way of manual intervention, and so reduces the chance of
delay, error or backlog, meaning the insurers can improve efficiency.
G2 ABI Personal Effects Contribution Agreement

The purposes of the ABI Personal Effects Contribution Agreement are to:
• avoid adverse publicity and criticism of the insurance industry generated by insurers
referring policyholders to other insurers for payment of part, or all, of their claim;
• avoid costly and time-consuming handling and the payment of small contribution
amounts; and
• to set out rules for contribution between the participating insurers.
Question 6.3
What is contribution?
The agreement relates to subscribing insurers that transact household, all risks, motor, travel
and other defined personal insurances.
It deals with claims for the loss of personal effects covered by two or more policies and
applies regardless of any policy provisions to the contrary (e.g. non-contribution or ‘property
insured elsewhere’ clauses). The rules are:
• motor accidents and thefts: no contribution;
• specified items: generally no contribution;
• all other circumstances: contribution is required. Settlement will be made by the insurer
against whom the claim is made, and it may recover a contribution from other liable
insurer(s), provided that:
– the amount paid out by the insurer exceeds £200; and
– the other policy is not a motor policy.
Are no claim discounts affected? Usually, with non-motor policies, a discount provision will
not be prejudiced if a payment is made to another insurer in reimbursement under the
agreement terms, but this does vary between insurers.
H Excesses, deductibles and franchises

Excess
An excess is the first amount of each and every claim which is not covered by the policy.
When the claim is settled the amount of the excess is taken away from the payment made to
the insured. For example, a loss of £500 on a policy with a £100 excess would result in the
policyholder receiving £400 in settlement of the claim. Excesses can be either compulsory or
voluntary.
A compulsory excess is one that is applied by the insurer as a term of the policy. It reflects
the fact that a higher risk might apply.
In motor insurance, a compulsory excess may be applied to a young or inexperienced driver
Chapter 6
or to a named driver who had a poor driving record (accidents or motoring convictions)
These excesses may be as low as £100, but can be greater than £1,000, depending on the
level of risk being proposed and the insurer’s willingness to accept it.
In home insurance, a compulsory excess would apply to different perils, for example in
relation to claims for escape of water or subsidence. They may be used as a disincentive for
customers to make small claims. Such excesses in home insurance may be a few hundred
pounds. However, in the case of subsidence claims, which can cost many thousands of
pounds to rectify, the excess is usually at least £1,000.
A voluntary excess can be applied to a policy at the policyholder’s request. In return for
accepting the first proportion of any claim, the policyholder receives a discounted premium.
This is more common in motor insurance than home, although it is possible to have a
voluntary excess in any class of business. It would be for the insurer and policyholder to
agree what the excess would be and what discount would apply in return.
It is possible to have both compulsory and voluntary excesses applying to the same risk and
policy.
In liability policies, such as motor insurance, where the policyholder is not responsible for the
damage caused it is possible for them to recover their policy excess from the responsible
party. This would be deemed an uninsured loss. It is possible to purchase legal expenses
insurance to help recover such losses, and in such a scenario the services of an uninsured
loss recovery service would be employed.
Deductible
A deductible is, essentially, a large excess (though the term can have a more specialised
application in certain circumstances, which are beyond the scope of this course). An insured
(usually with a large commercial concern) may wish to restrict their cover to only large claims
and be its own insurer for smaller claims. The deductible would apply to the first amount of
each and every claim.
Example 6.5
A transport company owns a fleet of trucks and vans. It may elect to take a deductible of
£10,000, so effectively self-insuring for all losses, both first and third party, up to the limit
of the deductible for each and every claim. It would likely employ a risk manager or group
insurance manager to deal with any claims which fell within the deductible. In the event
that a claim exceeded the amount of the deductible, the insurer would step in and pay the
balance.
Franchise
A franchise is a threshold that is used to decide when a claim is to be paid. Once the claim
exceeds the level of the franchise, the claim is paid in full. If a policy had a franchise of £500,
and a claim occurred for £400, the insured would receive nothing. If the claim was for £600,
the insured would receive the full £600. A time franchise (i.e. in terms of hours or days) may
also be applied, usually in personal accident policies. Franchises are not as common as
deductibles and excesses, and are largely confined to commercial insurances.
Reinforce
Make sure you are clear about the differences between excesses, deductibles and
franchises, and know how they apply.
I Motor Insurers’ Bureau

The Motor Insurers’ Bureau (MIB) was established by agreement between the motor
insurance industry and the Government to provide compensation for the victims of uninsured
or untraced motorists. Under this agreement, a central fund was set up by the motor
insurance market to benefit the victims of motor accidents caused by such motorists.
Chapter 6
All motor insurers in the UK must join the MIB. Each member pays a levy to the fund in
proportion to the size of their motor account. The central fund is administered by the MIB, a
company limited by guarantee.
As well as compensating the victims of uninsured or untraced motorists, the MIB acts as a
guarantor of the existence of insurance for UK vehicles overseas and takes responsibility for
handling claims arising from foreign vehicles in the UK. The MIB is also the compensation
body responsible for handling claims from UK citizens who have been involved in accidents
elsewhere in Europe.
Refer to
Demands of RTA covered in Road Traffic Act only on page 2/3
Its primary function is to ensure that compensation is provided for innocent victims of road
accidents, when the demands of the Road Traffic Act 1988 (RTA) (that all vehicles should
have a certain level of insurance), have not been met. In other words, to help innocent
victims in situations where the accident concerned was caused by uninsured drivers or
untraced drivers. This is achieved by the implementation of the two MIB agreements, the
latest of which are:
• the uninsured drivers’ agreement dated 3 July 2017; and
• the untraced drivers’ agreement dated 10 January 2017.
On the Web
The latest versions of the agreements can be found at the MIB website:
www.mib.org.uk
I1 Article 75
When a motor insurance policy is taken out, the insurer acquires three separate sets of
obligations:
• contractual: under the terms of the policy;
• statutory: under Part VI of the Road Traffic Act 1988; and
• MIB: under article 75 of the MIB’s Articles of Association.
If an insurer decides that it cannot indemnify its insured, it must still consider its statutory
obligations under the Road Traffic Act 1988 (RTA) and subsequent regulations. It is very rare
for an insurer to be able to escape its liabilities under the RTA, but if it can it will almost
always retain a liability under article 75.
Article 75 is an agreement between the MIB and its members, i.e. the insurance companies
and syndicates. Under this article the insurers agree to accept liability in certain
circumstances, where they would not be liable under the RTA. For example, where an
insurer has voided a policy for misrepresentation or non-disclosure of a material fact and it
was entitled to do so.
In such circumstances the insurer will have no liability under the Road Traffic Act, but will
handle the claim as an article 75 insurer. If article 75 did not exist, all such claims would have
to be considered by the MIB.
When this happens, the offending vehicle is strictly uninsured and it is only because this
agreement between the MIB and its members exists, that the member is required to pay the
claim. It remains an uninsured claim and as such the insurer’s liability will be restricted to the
terms of the uninsured drivers’ agreement. However, any payment will be from the insurer’s
own funds and there will be no reimbursement from the MIB central fund. The insurer will
have subrogation rights against the policyholder, but in practice this is often difficult to
enforce, particularly where the policyholder is without funds.
Chapter 6
I2 Uninsured drivers’ agreement
If there is no insurer for the responsible party then the innocent victims’ claim will be
considered by the MIB central fund.
Under the uninsured drivers’ agreement, the MIB will compensate victims of a motor
accident where the at-fault motorist has no motor insurance policy in force. The agreement
applies where the vehicle and the motorist are identified and allows compensation in respect
of property damage and death or bodily injury. Damages for third party personal injury are
unlimited, but there is a £1,200,000 limit on damages for third party property damage.
Limitations on the uninsured drivers’ agreement are that:
• subrogation claims cannot be pursued against the MIB, e.g. claims from insurers who
have made a payment under a comprehensive policy;
• claims for the cost of repairing the victim’s vehicle, where it was itself uninsured, will not
be considered; and
• claims from passengers in vehicles will not be considered if they knew that the vehicle
was stolen or being driven without insurance.
I3 Untraced drivers’ agreement

The uninsured drivers’ agreement dealt with one potential weakness with the Road Traffic
Act, by securing compensation for the victims of motorists who had no motor insurance at
the time of the relevant accident. However, one loophole remained, namely that where a
victim of a motor accident could not identify the vehicle or the driver that was responsible for
the accident. In recognition of the problem of hit and run accidents, the MIB entered into the
first untraced drivers agreement with the Government in 1972.
The untraced drivers’ agreement operates in a wholly different manner from the uninsured
agreement. This is because the injured party cannot substantiate at law a claim for damages
since they are unable to name a defendant who they can sue and obtain a judgment against.
The victim has to submit a claim to the MIB, who will then investigate the matter and decide
whether or not to offer a payment. If an applicant (claimant) is unhappy with the MIB’s
decision, they may appeal to an independent arbitrator to make a final, binding decision.
Under this agreement the MIB will be liable to pay compensation in the following
circumstances:
• the claim is for death or bodily injury; and
• the claim is for property damage, where the vehicle that caused the damage is
unidentified and the MIB has paid compensation for a significant personal injury to any
victim of the same accident.
Claims for property damage are subject to an excess of £400. Subrogated claims are
excluded.
The application to the Bureau must be made in writing within three years of the accident for
injury claims, or six years for property claims, in line with the Limitation Act 1980.
Conclusion
In this chapter we have focused on actually handling a claim. You should now know what to
consider when deciding the validity of the claim and the facts to take into account when
deciding how to settle it and for how much.
Getting the claim amount wrong could be costly to your employer. Given that paying claims
forms a significant part of an insurer’s expenditure, it has been demonstrated that managing
these expenses is crucial to the insurer’s continued profitability.
In the final chapter we will look in detail at all aspects of managing the expenses of a claims
function as a whole.
Chapter 6
Key points
Claims settlement
• A claim can be settled through either the payment of money, paying for repairs,
replacement or reinstatement.
• Replacement and reinstatement only apply if stated in the policy and, in any event, a
full explanation of the method being used should be given to the insured.
Reserving: the process
• The insurer must ensure that the data to be used is accurate, up to date and correctly
coded as to its characteristics.
• The data should then be collated into similar groups, with sufficient data being retained
in each group to maintain statistical credibility.
• The claims then need to be projected to establish the likely ultimate gross payout using
a recognised method, such as the loss development factor method.
Invalid or partially met claims
• An insurer may refuse to pay a claim if cover was never in force, a relevant (or
material, as per the Insurance Act 2015) warranty and/or condition has been breached
or if there is fraud.
• An insurer may only partially meet a claim if the loss was greater than the policy limits,
if there was underinsurance and an average clause applied or if there is an excess or
deductible.
Chapter 6
Recovery
• The insurer has subrogation rights allowing it to pursue any rights of action available to
the insured, which may reduce the insurer’s loss.
Salvage
• Salvage is the damaged article that has been the subject of a claim and which,
generally, becomes the property of the insurer after the claim, who has to decide if it
has any residual value.
Average
• The average clause covers the situation where the declared value given by the insured
is less than the actual value at risk.
• It states that the insured is acting as their own insurer for the difference between the
actual value and the declared value and will bear an appropriate proportion of the
losses accordingly.
Market agreements
• Whole market agreements are, in the main, no longer in place. They have been
replaced with bi-lateral agreements between specific insurers with the aims of reducing
costs and speeding up the claims process.
Excesses, deductibles and franchises
• An excess is the first amount of each and every claim which is not covered by the
policy.
• A deductible is essentially a large excess, but can have more specialised meanings.
• A franchise is a threshold, which once exceeded means that a claim is paid in full, but
not at all if it is not reached.
Key points
Motor Insurers’ Bureau
• Established to compensate the victims of uninsured or untraced drivers.

• It operates two agreements: the uninsured drivers’ agreement and the untraced
drivers’ agreement.
• Even if an insurer avoids its liabilities under the RTA, it is unlikely to avoid those under
article 75 of the MIB’s articles of association.
Chapter 6
Question answers
6.1 If someone was fraudulently claiming for a ‘stolen’ item in order to raise cash, it
would be frustrating for them to receive a replacement, which they would then have
to sell in order to get the money.
6.2 Other circumstances would be those relating to liability claims when the insurer
would pay the third party any damages or compensation that had been awarded.
The insured would be indemnified by not having to pay them out of their own
pocket.
6.3 Contribution is the right of an insurer to call upon other insurers who are similarly,
but not necessarily equally, liable to the same insured to share the cost of an
indemnity payment.
Chapter 6
Self-test questions
1. How many ways can an insurer use to settle claims?
a. Three. □
b. Four. □
c. Five. □
2. How many steps make up the reserving process?
a. Three. □
b. Four. □
c. Five. □
3. In which of the following circumstances might a claim be only partially met? (Select
all that apply.)
a. The sum insured or limit of liability was exceeded. □
b. Application of an average clause. □
c. Application of excesses or deductibles. □
4. Which formula correctly explains average in a home insurance claim?
Chapter 6
a. (Sum insured/loss) x value at risk. □

b. (Value at risk/sum insured) x loss. □
c. (Sum insured/value at risk) x loss. □
5. The Motor Insurers' Bureau (MIB) was established by agreement between the motor
insurance industry and the Government to provide compensation for the victims of
uninsured or untraced motorists.
a. True. □
b. False. □
Management of expenses
7
outcomes
Introduction
A Role of the claims manager 7.1
B Leakage (or overpayment of claims) 7.2
C Monitoring financial performance 7.3
Conclusion
Key points
Question answers
Self-test questions
Learning objectives
• describe in detail the role of the claims manager;
• explain what leakage is and how to identify and reduce it; and
• explain the types of financial monitoring and how this can impact an insurance company
results.
Chapter 7
Introduction
Not only is the claims department the ‘shop window’ of the insurance company, it is also the
department with the largest expenditure. For this reason, it is imperative that the cost of
settling claims is accurate, carefully monitored and properly reserved for. If the claims
department regularly sets aside insufficient funds to cover the cost of claims, this could have
a negative effect on the profitability, and even the solvency, of the company. A similar effect
will be produced if claims are regularly over paid (this is called leakage).
The claims department costs the insurer money when it settles a claim (called indemnity
spend), but there is also the cost of running the claims department to consider. The role of
the claims manager is crucial in all these areas, so we will start this chapter by looking at the
areas the claims manager is responsible for.
Key terms
Ex gratia payment Financial Leakage Solvency margin

performance
A Role of the claims manager

The claims department creates and manages the largest amount of money spent by an
insurance company. Therefore, the position of the claims manager is vital to developing
operational excellence.
A1 Strategy
All insurers require a coherent approach to all aspects of claims management, including:
• a corporate claims philosophy;
• clear claims procedures, including reserving practices;
• if appropriate, a quality management system;
• an efficient use of information technology (IT); and
• the use of outsourcing, where appropriate.
Chapter 7
The strategy will be worked out at senior management level, but the claims manager will be
responsible for its day-to-day implementation.
In the context of a company’s overall approach to claims management, the claims manager’s
key tasks would be to:
• ensure the company’s strategic direction is followed;
• set business plans and objectives to ensure smooth operation of the plans;
• maintain a sufficiently senior status so that they are able to exert the influence the role
demands;
• have sufficient resources budgeted to the department to meet their objectives, and have
an effective departmental structure to ensure the work is done;
• ensure suitable links are maintained with other departments, including underwriters,
actuaries and claims support functions where, e.g. suppliers, best practice and
complaints may be managed;
• have suitable computer systems that produce effective, accurate reports and preferably
incorporate a workflow system;
• maintain best practice within the claims department; and
• be aware of current underwriting practice and reserving methodology.
Chapter 7 Management of expenses 7/3
A2 Cost
There are two main aspects to the claims manager’s responsibilities when it comes to
considering cost.
1. Overseeing the internal cost of running the claims department (claims expenses), the
largest elements of which are:
• staff salaries and benefits;
• the cost of any outsourcing; and
• IT provision.
2. Monitoring the cost of the claims themselves (claims indemnity), which encompasses the
average lifecycle as well as:
• payment of claims;
• subrogated recovery: and
• recovery from reinsurers, where appropriate.
Question 7.1
Which of the following is NOT a consideration for a claims manager when
determining costs and expenses of running his operation?
a. Payments made to customers. □
b. Payments made to suppliers. □
c. Cost of recruiting staff. □
d. Office rent and rates. □
e. Cost of IT for claims staff. □
A3 Staffing
The claims manager also needs to:
Chapter 7
• ensure they have the means to recruit, train, motivate and retain intelligent and
competent staff; and
• effectively manage and motivate staff by:
– planning tasks and responsibilities,
– acting as a senior point of referral for technical queries,
– providing leadership through decision-making and pro-active working methods,
– controlling and monitoring progress, and
– co-ordinating training and ensuring staff development.
B Leakage (or overpayment of claims)

Within the claims process, the claims handler needs to make important decisions
concerning:
• the validity of the claim (that is, does the claim fall within the scope of the insurance
contract); and
• if it is a valid claim, the size of the payment.
However, within this process, there is scope for paying more than is justified by the details
and circumstances of the claim. This potential overpayment is referred to in an insurance
context as leakage, and can be defined as:
the amount by which the actual settlement exceeds the amount that would have
been required to make an acceptable settlement under the policy.
In an article by George Bathurst entitled ‘Blocking the leaks’, published in Technology for
finance, it is estimated that the UK insurance industry’s average for leakage is around 5% of
claims annually. It can be seen from this that leakage could be the critical factor between a
profitable or unprofitable account.
Consider this…
Would you think that ex gratia payments should be included in overpayment?
An ex gratia payment is often made in the following circumstances:

• where an exclusion is a borderline one;
• where hardship would be created; or
• to preserve good business relationships.
It is debatable whether such payments should be categorised as ‘leakage’ as they are not
based on contractual obligation. Given that they would be authorised by the claims manager,
they cannot really be regarded as avoidable overspend, and may be problematic should a
recovery be required from reinsurers.
To identify overpayment, a detailed review of the handling of a claim through its various
stages is required. The review may consider whether:
• the cause of loss falls within the policy scope;
• the date of loss falls within the policy dates;
• the claim was notified within the time limit;
• there is sufficient proof of the extent of the loss;
• the correct policy excess has been properly applied;
• the effect of under-insurance has been properly calculated and applied to the settlement
figure;
• all recoveries have been made;
• all subrogation has taken place;
• all contribution has been taken into account;
• any fees paid are reasonable and not inflated;
• depreciation has been taken into account;
• it is a repeat claim;
Chapter 7
• the insured damage or site has been (re-)inspected; and

• the settlement was appropriate.
Quantifying overpayment is not an exact science, and entails a degree of subjectivity. It can
be categorised as either soft or hard leakage.
Soft leakage Hard leakage
This is subjective and difficult to quantify, e.g. failure to This is relatively easy to identify, e.g. failure to deduct
negotiate an (adequate) adjustment for wear and tear the policy excess
It can be represented in a formula:

Overpayment (or leakage) = What was actually paid – What should have been
paid
Once any overpayment has been identified, steps should be taken to prevent or limit its
reoccurrence.
Example 7.1
John owns a motor car. He purchased it new five years ago and it cost him £10,000. He is
insured comprehensively with an excess of £500. The car is now worth £2,000. John has
an accident caused by a third party and his car is written off. John notifies his insurers and
his claim is dealt with by a poorly trained handler who notes that the policy is
comprehensive, as well as the fact that John paid £10,000 for his car five years ago, and
offers John £10,000 in settlement of his claim. John accepts, payment is made and the file
is closed.
In this scenario, John should have been offered £2,000 less the policy excess, making a
total offer of £1,500. Leakage is calculated as:
What was actually paid – What should have been paid = LEAKAGE
£10,000 – £1,500 = £8,500 plus salvage and any subrogated recovery.
How could this have been avoided?

In this example, the claims handler should have been properly trained and systems should
have been in place to ensure that before the file was closed:
• an indemnity offer was made;
• the excess was taken into account;
• salvage was sold to the benefit of the insurer; and
• subrogation rights were exercised against the third party.
Consider this…
Having understood ‘leakage’, what steps can you think of that could be taken to prevent it
happening again?
B1 Prevention
There are a number of steps that can be taken to reduce leakage, including the following.
1. Senior management focus Senior management could put emphasis on reducing claims payments in
Chapter 7
particular rather than expenses in general. Also, management control
should be in place in respect of all claims, not just the large ones
2. Employee skills Employees should be trained to the appropriate levels, and be encouraged
to take professional qualifications. Training should include:
• legal training;
• awareness of market practices; and
• knowledge of best practice
3. Supervision of staff Supervisors require all the same skills as the rest of the employees plus:
• management training; and
• presentation training
4. Quality management Adequate checks should be in place to avoid hard leakage and as many
aspects of soft leakage as possible
Checks are usually undertaken by way of regular audit
5. IT checks Computer systems can be designed to stop certain areas of leakage

For example, a system could warn or stop a user from making a payment
for which an excess or deductible has not been applied
6. Culture Insurers should allow a culture of accuracy and open challenge to flourish.
This encourages staff to be more attuned to ensuring the accuracy and
validity of their actions, and ultimately reduces errors and omissions
In his article, George Bathurst considers the main cause of leakage to be poorly skilled,
badly trained staff using ineffective, disparate systems. He maintains that an improvement in
business processes will directly affect profitability. In essence, the longer it takes to process
a claim, the more opportunity there is for money to ‘leak’ out of the company.
C Monitoring financial performance

Most policyholders (individuals and companies alike) pay premiums for cover and in the
event of a claim, expect to be paid an indemnity. An insurer is effectively a ‘trustee’ for the
vast amounts of money generated by all those premiums and it is critical that it ensures that
it has sufficient funds to pay the claims that are made. An insurer must always have a
mandatory solvency margin, which means that it must have a proportion of its funds set
aside to pay out reported and estimated claims. With the demise of several insurers over the
last few decades, it is even more critical that an insurer’s financial state is continually
assessed to ensure that it remains in a position to pay its liabilities, i.e. its claims.
Solvency II
The Solvency II Directive is a European Union (EU) Directive for insurance companies. It
directs insurers to ensure that they have enough capital set aside to provide reserve funds
to cover all insurance claims that they are likely to receive.
For further background reading, you can visit the Bank of England website:
https://bit.ly/2N1LOa8
Consider this…
Can you think of the reasons for monitoring a company’s financial performance?
There are a number of reasons why it is necessary to monitor a company’s financial

performance:
• the regulators need to be satisfied that the company is solvent in order to allow it to
continue underwriting and pay claims. Lloyd’s syndicates are also required to file various
financial performance indicators to Lloyd’s for similar reasons;
• for purposes of their annual reports and accounts; and
• to maintain management control (especially in respect of budgeting).
C1 Financial Conduct Authority (FCA) regulation

The Financial Conduct Authority (FCA):
Chapter 7
• is responsible for ensuring that markets operate with integrity;

• promotes effective competition; and
• requires firms to put the well-being of their customers at the heart of how they run their
businesses.
The Financial Services Act 2012 enables the Financial Policy Committee (FPC) within the
Bank of England to give directions, using its macro-prudential tools, to the regulators for the
purpose of protecting and enhancing financial stability. The Act also requires the Prudential
Regulation Authority (PRA) to consider financial stability in its regulation of PRA authorised
persons, such as banks and insurers. In addition, it requires the FCA to include within its
objectives the soundness, stability and resilience of the UK financial system.
The FCA regulates the conduct of business for all authorised firms and supervises firms
based upon a ‘three pillar’ system which involves the following.
Firm Systematic Framework This involves preventative work through a structured assessment of
firms
Event-driven work Dealing with problems that have emerged or happened and securing
them with customer redress or alternative remedial work
Issues and Products Campaigns in relation to market sectors or products which put or may
put customers at risk
The focus of the FCA is to ensure that client assets are protected and that relevant markets
function well.
The system originally covered risk categories C1 (large banking and insurance groups with
very large number of retail customers) through to C4 (smaller firms including most
intermediaries). However, the FCA announced in September 2015 that it was making further
changes to its supervisory model, including how it classified firms, to support the sector-
based approach introduced as part of its ‘New Strategy’ in 2015. The FCA will continue to
look at the way individual firms and people behave, but will also increasingly look at how
markets work as a whole, with greater emphasis on sector and market-wide analysis.
Part of the change to the FCA model is a move away from C1 to C4 conduct categories that
it has previously used; instead, firms will now be categorised as either ‘fixed portfolio’ or
‘flexible portfolio’.
The FCA approach will vary depending on the risks it has identified in each sector, but may
mean that over time, some firms will see changes to how they are supervised. The
reclassification meant that around 70 firms moved from ‘fixed’ to ‘flexible’ portfolio or from
‘flexible’ to ‘fixed’.
Fixed portfolio firms are a small population of firms (out of the total number regulated by
FCA) that, based on factors such as size, market presence and customer footprint, require
the highest level of supervisory attention. These firms are allocated a named individual
supervisor, and are proactively supervised using a continuous assessment approach.
The majority of firms are classified as flexible portfolio firms. These firms are proactively
supervised through a combination of market-based thematic work and programmes of
communication, engagement and education activity aligned with the key risks identified for
the sector in which the firms operate. These firms use the FCA Customer Contact Centre as
their first point of contact with FCA as they are not allocated a named individual supervisor.
Contact Centre staff should have the expertise to deal with the majority of issues and
queries, and these will be passed onto the appropriate supervision area where necessary.
C2 Annual reports and accounts

These are required by the Companies Act 1985. They include a:
• profit and loss account; and
• balance sheet.
The profit and loss account shows the transactions carried out by a company during the
financial year. The balance sheet shows the financial position at the end of the financial year:
it shows the assets and liabilities of the company. Premium reserves, such as outstanding
claims and incurred but not reported (IBNR) claims are disclosed in the liability section.
Chapter 7
C3 Management control
Management accounts enable a company to:
• plan (i.e. budget);
• monitor; and
• control
the company’s operations. They are produced more frequently than the annual reports and
accounts.
Summary
It is imperative that a company’s financial performance is monitored regularly. Then
appropriate action can be taken if necessary and the interests of related parties are
protected at all times. The monitoring of claims outstanding and IBNR are an integral part of
this. It is extremely important, therefore, that this aspect of a company’s operations is
carefully monitored.
Conclusion
The claims function is the main source of money spent by an insurance company. If this is
not properly reported and controlled, the very existence of the insurer is under threat. This
chapter has considered how this expenditure is managed and the financial considerations to
be aware of when settling any particular claim.
This concludes our consideration of the claims handling process. You should now be aware
of all the different aspects and be able to demonstrate how accurate claims handling goes
beyond answering the simple question: ‘Is the claim covered by the policy?’
Key points
Role of the claims manager
• The claims manager is responsible for the day-to-day implementation of the strategy of
the company with regard to claims.
• They are responsible for monitoring and controlling the cost of running the claims
department as well as the cost of meeting claims.
• They must ensure that policyholders are treated fairly as stipulated by the Regulator.
• They must recruit and manage intelligent and competent staff.
Leakage (or overpayment of claims)
• Leakage can be defined as avoidable overspend in settlement of a claim.

• It can be soft leakage, e.g. failing to negotiate an adequate adjustment for wear and
tear, or hard leakage, e.g. failing to deduct a policy excess.
• Leakage = what was actually paid – what should have been paid.
• Leakage can be prevented by senior management being concerned that staff are
properly trained and supervised and that adequate checks are in place.
Monitoring financial performance
• It is important for a firm to monitor its financial performance because:

– it is critical that an insurer has sufficient funds to pay claims made;
– the regulators monitor insurer’s solvency;
– the Companies Act 1985 requires all companies, including insurers, to publish
annual reports and accounts; and
– management accounts enable a company’s management to plan (budget), monitor
and control what is happening to their company effectively.
Chapter 7
Question answers
7.1 d. Office rent and rates.
Chapter 7
Self-test questions
1. How many aspects constitute the claim manager's role in respect of cost?
a. Two. □
b. Three. □
c. Four. □
2. What is 'leakage' in a claims context?
a. Staff expenses incurred unnecessarily. □
b. Supply chain costs increasing leading to more expensive claims costs. □
c. Avoidable overspend in claims settlement. □
3. An ex-gratia payment can be described as:
a. An extra payment made to the customer within the terms of the policy. □
b. A payment made to keep favour with a supplier. □
c. A payment made outside the strict terms of the policy. □
4. Which of the following are reasons for the monitoring of a company's financial
performance? (Select all that apply.)
a. The requirements of the regulators. □
b. for the purpose of the annual report and accounts. □
c. to aid management control. □
Chapter 7
5. What does IBNR stand for?

a. Incurred but never received. □
b. Incurred but not reported. □
c. Incurred but not reopened. □
d. D. Insured but not reserved. □
i
Chapter 1
self-test answers
1 a. The duty on the insured to demonstrate they have a valid claim.
2 a. The insured peril arose.
c. The financial extent of the loss.
3 a. Cover was in force.
b. Peril is covered.
c. Conditions have been complied with.
d. The insured has mitigated their losses.
e. The amount of the loss is reasonable.
4 a. The claim exceeds the sum insured.
b. The policy is subject to a large deductible.
5 b. False.
6 a. To gather all the information about the claim in one place.
7 b. Pawsey vs Scottish Union & National.
8 a. True.
ii IF4/October 2020 Insurance claims handling process
Chapter 2
self-test answers
1 b. Four.
2 b. Comprehensive.
3 a. True.
4 e. Fractured leg.
5 b. False.
6 b. Hazardous sports and pursuits.
7 c. Earthquake.
8 a. Legal liability for damages for bodily injury, disease, illness or death of an employee
whilst working.
b. Liability for costs and expenses.
9 b. False.
10 c. Deliberate damage caused by the insured.
iii
Chapter 3
self-test answers
1 a. Increased consumer awareness.
c. Greater expectations of service.
d. Increased competition.
2 a. Anyone else involved in an insurance claim, apart from the insured and the insurer.
3 c. An amount equal to the total expected cost of settling the claim, including customer/
claimant payments and expenses/fees.
4 a. True.
5 b. A database of vehicles which have been declared as being a total loss of stolen
following a claim.
6 d. Financial Ombudsman Service.
7 c. Six.
iv IF4/October 2020 Insurance claims handling process
Chapter 4
self-test answers
1 a. Settlement without deduction for wear and tear.
2 a. True.
3 c. An insurance company.
4 b. Claims made in the policy year are covered whenever they occurred.
5 d. Finance team.
6 a. £1,000–£25,000.
v
Chapter 5
self-test answers
1 b. The complete range of technologies used to store, process and transmit data.
2 a. True.
3 b. Six.
4 a. Ethnic origin.
b. Politics.
c. Religion.
d. Health.
e. Sexual orientation.
5 a. True.
vi IF4/October 2020 Insurance claims handling process
Chapter 6
self-test answers
1 b. Four.
2 a. Three.
3 a. The sum insured or limit of liability was exceeded.
b. Application of an average clause.
c. Application of excesses or deductibles.
4 c. (Sum insured/value at risk) x loss.
5 a. True.
vii
Chapter 7
self-test answers
1 a. Two.
2 c. Avoidable overspend in claims settlement.
3 c. A payment made outside the strict terms of the policy.
4 a. The requirements of the regulators.
b. for the purpose of the annual report and accounts.
c. to aid management control.
5 b. Incurred but not reported.
ix
Cases
G
Gabay v. Lloyd (1825), 1E
K
Konstantinos Agapitos v. Ian Charles Agnew
(2002), 3E3
M
Manifest Shipping Co. Ltd v. Uni-Polaris
Shipping (2001), 3E3
Marsden v. City & County Insurance
Company (1865), 1E
P
Pawsey v. Scottish Union and National
(1907), 1E
V
Versloot Dredging BV v. HDI-Gerling
Industrie Versicherung AG and others
(The DC Merwestone) (2014), 3E3
x IF4/October 2020 Insurance claims handling process
xi
Legislation
A Third EU Motor Insurance Directive 1992,
2A1A
Access to Justice Act 1999, 4C4
Arbitration Act 1996, 3G1B
C
Civil Liability Act 2018, 4C4, 4D3
Civil Procedure Rules 1998 (CPR), 4D3
Companies Act 1985, 7C2
Consumer Insurance (Disclosure and
Representations) Act 2012, 3F1, 3F3
Consumer Rights Act 2015, 1B1, 3H2
Criminal Justice and Courts Act 2015, 3E3B
D
Defective Premises Act 1972, 2B2
E
Employers’ Liability (Compulsory Insurance)
Act 1969, 2I1, 4B3
Employers’ Liability (Compulsory Insurance)
Regulations 1998, 2I1
Enterprise Act 2016, 3F3E, 3H2
F
Fifth EU Motor Insurance Directive 2005,
2A1A
Financial Services Act 2012, 7C1
G
General Data Protection Regulation (GDPR),
5A5
I
Insurance Act 2015, 3E3A, 3F3, 3F3E
L
Law Enforcement Directive (LED)
2016/680/EC, 5A5
Legal Aid, Sentencing and Punishment of
Offenders Act 2012, 4C4
Legal Services Act 2007, 4C4
Limitation Act 1980, 6I3
M
Marine Insurance Act 1906, 3F2, 3F3
R
Road Traffic Act 1988, 2A1A, 6I
T
Theft Act 1968, 2G3
xii IF4/October 2020 Insurance claims handling process
xiii
Index
A claims (continued)
systems, 5A
ABI, See Association of British Insurers (ABI) design of, 5A6
accident Claims and Underwriting Exchange (CUE),
report form, 4A1 3E1
action by the insured, 1C2 Claims Portal, 3E1, 4B3, 4D2
actuarial reserving, 6B1 claims-made basis, 2I4, 4B3
after the event (ATE) legal expenses cover, collating historical data, 6B1B
4C4 commercial insurances, 4B
all risks, 2H2, 4B1B commercial property
insurance, 2G2 insurance, 2G
new for old, 4A3A commercial vehicles, 2A3, 4B4
alternative dispute resolution (ADR), 3G2, 4D complaints, 3G
annual reports and accounts, 7C2 comprehensive cover, 2A1D
arbitration, 3G1B condition
Art Loss Register, 3E1 precedent, 1B, 6C
article 75, 6I1 subsequent, 1B
Association of British Insurers (ABI), 2G1, consumer, 3F2
2G1, 2G2 consumer contract, 1B1
ABI Personal Effects Contribution Agreement, contents, 4A3A
6G2 insurance, 2B2
authorised repairers, 4C2, 6A2 contribution, 6G2
average, 6F cost, 7A2
clause, 1B, 6C creditor insurance, 2H3, 4B2C
criminal prosecution defence cover, 2H1
customer expectations, 3B
B
basis of contract clauses, 3F3B D
before the event (BTE) cover, 4C4
benefit policies, 2J data integrity, 6B1A
betterment, 4A3B decentralised organisations, 5B2
breach deductible, 1B, 6C, 6H
of policy condition, 6C disaster recovery companies, 5C3
of warranty, 3F3B, 3F3D, 6C disputes, 3G
breakdown insurance, See extended divisional structure, 5B2
warranties doctors, 1D3
buildings, 4A3B dominant cause, 1E
insurance, 2B1 duties of the insured, 1C
business interruption, 4B2B
insurance, 2H2
E
C employers’ liability, 2I1, 4B3
employment cover, 2H1
catastrophe reserves, 3D4 engineering, 2H2
centralised organisations, 5B2 equalisation reserves, 3D4
certificate of insurance, 2I1 estimating, 3D
Civil Procedure Rules (CPR), 4D ex gratia payment, 6C, 7B
claim form, 1D2 excepted or excluded perils, 1E
contents of, 1D2A excess, 1B, 6C, 6H
claimant exclusions, 2A1F
claims express conditions, 1B, 1C2A
characteristics of, 5A2 express duties, 1C2
handler, 3E2 extended warranties, 2F, 2F, 4A5
handling, 3F, 3H2, 5A2, 5A4
expenses, 3D4, 7A2
invalid, 6C
F
manager, 7A fair presentation, 3F3A
overpayment of, 7B fair treatment of customers, 3H
partially met, 6C Financial Conduct Authority (FCA), 3F, 7C1
procedure, 1C2 Financial Ombudsman Service (FOS), 3G1A
projection of, 6B1C Financial Policy Committee (FPC), 7C1
reserving, 3D financial risk control, 4C5A
services, 4C fire and special perils, 2H2, 4B1A
settlement, 6A ‘Standard Fire Policy’, 2G1
staff, 3A insurance, 2G1
xiv IF4/October 2020 Insurance claims handling process
fire and special perils (continued) loss (continued)

standard market exclusions, 2G1 adjusters, 5C2
first loss basis, 2G3 amount of, 1A
first party, 3C assessors, 5C6
fleet insurance, 2A3 first notification of, (FNOL), 1D1
franchise, 2J2, 6H loss adjusters, 1D2A
fraud, 3E, 6C Loss Development Factor Method, 6B1C
consequences of, 3E3 losses-occurring basis, 4B3
detection of, 3E1, 3E2 Low Value Personal Injury Pre-action
prevention of, 3E1 Protocol, 4D2
functional structure, 5B1
M
G
management control, 7C3
general damages, 4B3 mandatory solvency margin, 7C
glass market agreements, 6G
claims, 4B1D material damage warranty, 2H2
insurance, 2G4 material loss, 2H2
replacement, 6A3 medical expenses, 2J4
global reserving process, 6B1 MoJ Portal, 3E1
good faith MOJ Portal, 4B3, 4D2
condition of, 1D2A money, 2G5, 4B1E
gross profit, 2H2 motor
accident notification, 1D2A
cover, 2H1
H damage claims, 1D3
health claims, 4A2 insurance, 2A
health insurance, 2J extensions, 2A1E
exclusions, 2J3A liability claims, 1D3
policy benefits, 2J3 repairs, 6A2
helplines, 4C1 motor engineers, 1D3
household Motor Insurance Anti-Fraud and Theft Register
claims, 4A3 (MIAFTR 2), 3E1
insurance, 2B Motor Insurance Database (MID), 3E1
Motor Insurers’ Bureau (MIB), 6I
motorcycle insurance, 2A2
I
ICOBS, See Insurance: Conduct of Business N
Sourcebook (ICOBS)
implied conditions, 1B non-disclosure, 3F3A, 3F3D
implied duties, 1C1 notification, 1C2A, 1D2A
Information Technology (IT), 5A2B, 5A4
benefits of, 5A4A O
difficulties with, 5A4B
role of, 5A1 organisational structure, 5B
Insurance: Conduct of Business sourcebook outsourcing companies, 5C1
(ICOBS), 3H2
Insurance: Conduct of Business Sourcebook
(ICOBS), 1B, 1B, 3F1
P
insured partially met claims, 6C
perils, 1E patents, 2H1
invalid claims, 1C1, 6C paying for repairs, 6A2
investigation process, 1D3 payment of money, 6A1
pecuniary insurance, 2H, 4B2
L personal accident insurance, 2J1
personal injury and sickness claims, 1D3
leakage, 7B Personal Injury Pre-action Protocol, 4C6, 4D1
hard, 7B personal lines, 4A
prevention, 7B1 physical risk control, 4C5B
soft, 7B policy
legal costs services, 4C4 conditions, 1B
legal expenses, 4B2A policyholder
insurance, 2H1 pre-action protocols, 4D
liability private motor
claims, 4B3 claims, 4A1
insurance, 2I insurance, 2A1
limit of liability, 1B, 6C pro rata condition of average, 6F
loss product liability
xv
product liability theft (continued)

(continued insurance, 2G3
) third party, 3C
insurance, 2I3 claimants, 3C
products liability, 4B3 fire and theft, 2A1C
professional indemnity, 4B3 liability, 2A3
insurance, 2I4 only, 2A1B
projection of claims, 6B1C travel
property claims, 4A4
claim notification, 1D2A insurance, 2D
claims, 4B1
disputes cover, 2H1
proximate cause, 1E
U
Prudential Regulation Authority (PRA), 3F, underinsurance, 6C
7C1 unearned premium reserve, 3D4
public liability, 4B3 unexpired risk reserve, 3D4
insurance, 2I2 uninsured drivers’ agreement, 6I, 6I2
uninsured loss recovery services, 4C3
Q uninsured or unnamed perils, 1E
untraced drivers’ agreement, 6I, 6I3
qualified one way costs shifting, 4C4 utmost good faith, 3F2, 3F3
qualifying misrepresentation, 3F2
quantum, 1A
V
R voluntary excess, 6H
re-opened claims reserves, 3D4

recovery, 6D
W
rehabilitation, 4C6 warranties
reinstatement, 6A4, 6A5 breach of, 3F3B, 3F3D, 6C
replacement, 6A3, 6A5 irrelevant, 3F3B, 3F3D
reserving, 3D
process, 6B
restoration experts, 1D3
risk
avoidance, 4C5B
control, 4C5, 4C5A, 4C5B
management, 4C5
reduction, 4C5B
retention, 4C5A
transfer, 4C5A
Road Traffic Act only, 2A1A, 6I
S
salvage, 6E
second party, 3C
service
standards, 3B
sickness insurance, 2J2
single article limit, 2B2
small claims track, 4D3
solicitors, 1D3, 5C5
special damages, 4B3
specified working expenses, 2H2
staffing, 7A3
strategy, 7A1
subrogation rights, 6D
subsidence, ground heave or landslip, 2B1
sum insured, 1B, 6C
support services, 5C
supporting evidence, 1D, 1D3
surveyors, 1D3, 5C4
T
theft
claims, 1D3, 4B1C
xvi IF4/October 2020 Insurance claims handling process
Chartered Insurance Institute
42–48 High Road, South Woodford,
London E18 2JP
tel: +44 (0)20 8989 8464
customer.serv@cii.co.uk
www.cii.co.uk
Chartered Insurance Institute

@CIIGroup
© Chartered Insurance Institute 2020
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Insurance

Updates and amendments

© The Chartered Insurance Institute 2020

Using this study text

Consider this: stimulating thought Sources/quotations: cast further light

Key features can include:

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Summary of learning outcomes Number of questions

1. Understand the general principles in the claims handling process. 12

2. Understand insurance products and associated services. 13

3. Understand claims considerations and administration. 13

4. Understand claims handling procedures and related claims services. 13

5. Understand claims handling operations. 6

6. Understand claims settlement. 10

7. Understand how expenses are managed. 8

Published October 2020

4. Understand claims handling procedures

5. Understand claims handling operations.

Published October 2020 2 of 3

Reading list Examination guide

Published October 2020 3 of 3

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Syllabus learning outcome Study text chapter

3: Claims considerations and administration

4: Claims handling procedures and related claims services

5: Claims handling systems

Average clause Claim form Conditions Deductible

A Legal requirements for a claim

Conditions precedent to the Conditions subsequent to the Conditions precedent to liability

Implied duties Express duties

D1 First notification of loss (FNOL)

The benefits to the insurer are:

The insurer must satisfy itself that:

Solicitors to give legal opinions, or to commence or defend legal proceedings

Surveyors to estimate rebuilding costs

Doctors to verify or assess the severity of injuries and assist in rehabilitation

Restoration experts to restore property or contents damaged by water and fire

Jo is thrown from the horse

Jo lands in a ditch, and

Jo cannot move and spends

Insured perils those named in the policy as covered

Excepted or excluded perils those named as specifically not covered

The main ideas covered by this chapter can be summarised as follows:

Legal requirements for a claim

• When an insured makes a claim the onus of proof is on them.

Duties of the insured after a loss

specific considerations that apply when handling claims.

Benefit policy Commercial Extended warranties Fleet insurance

1. Road Traffic 2. Third Party 3. Third Party, 4. Comprehensive.

A1A Road Traffic Act only

Indemnity to passengers indemnity for their acts of negligence is covered

There is a fairly extensive portfolio of optional extensions available at an additional premium,

Fire, lightning, explosion and earthquake

Storm or flood Usually subject to an excess

Accidental damage to drains, pipes, cables or underground pipes

Accidental breakage of glass and sanitary fixtures