IF4KF2_2022_online

Insurance
claims
handling
process
IF4
2022
KEY
FACTS
Insurance claims
handling process
IF4: 2022 Key facts

This edition is based on the 2022 examination syllabus to be
examined from 1 January 2022 until 31 December 2022.
2 IF4/2022 Insurance claims handling process
© The Chartered Insurance Institute 2021

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been produced solely for the purpose of examination and
should not be taken as definitive of the legal position. Specific
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investments.
Print edition ISBN: 978 1 80002 275 1
Electronic edition ISBN: 978 1 80002 276 8
This edition published in 2021
Typesetting, page make-up and editorial services CII
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Printed and collated in Great Britain.
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Contents
1: General principles 5
2: Insurance products 17
3: Claims considerations and administration 49
4: Claims handling procedures and related 81
claims services
5: Claims handling systems 99
6: Claims settlement 123
7: Management of expenses 135
General principles
1
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.
Legal requirements for a claim

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 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.
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.
The effect of a breach of a condition varies depending upon
which of the following three groups it falls into.
Conditions
Conditions Conditions
precedent to
precedent to the subsequent to the
liability (or
contract contract
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.
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.
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.
Duties of the insured after a loss

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.
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.
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.
Documentary evidence
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;
• 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.
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.
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.
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.
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 Images/dashboard camera footage of the incident

claims and satellite images of the location may be
reviewed as necessary, as well as engineering
reports
Personal Medical evidence and/or doctors’ certificates,

injury and death certificates and coroners’ inquest judgments
sickness will be examined, as applicable
claims
Motor damage Vehicle registration documents in respect of total

claims 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 to verify the damage caused and agree repair

engineers costs with the garage
Restoration to restore property or contents damaged by water

experts and fire
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.
Proximate cause
‘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.
In most cases, common sense can be used to decide the
proximate cause of a loss by looking at cause and effect.
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 those named as specifically not covered

excluded perils
Uninsured or those perils not referred to in the policy and

unnamed perils 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.
Insurance products
2
Motor insurance
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.
Road Traffic Act only

This is the minimum cover required to comply with the Road
Traffic Act 1988 (as amended) and provides for:
• 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;
• claimants’ costs and expenses; and
• emergency medical treatment and hospital charges arising
out of the vehicle use.
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 abroad.
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.
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 being driven.
The policy may also extend to include personal accident,
medical expenses and personal effects.
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;
• 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.
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).
Motorcycle insurance
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:
• 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.
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.
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 cover for third party liability can also be applied

unloading to accidents whilst loading and unloading
Indemnity to usually anyone may drive on the insured’s

driver 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 indemnity for their acts of negligence is

passengers 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 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.
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.
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.
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, Cover usually excludes loss or damage

strikes, labour or if the building is unoccupied for more
political disturbances, than 30 or 60 days, malicious damage
malicious damage or is usually subject to an excess
vandalism
Storm or flood Usually subject to an excess
Falling trees or Though damage to walls, gates, fences

branches 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

Theft or attempted theft With an unoccupied exclusion (30 or 60

Impact Collision into, or impact of, road

vehicles, animals, aircraft (or other
aerial devices) and things dropped
from them
Subsidence, ground Usually with a large excess.

heave or landslip (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’ Incurred whilst reinstating the building

and surveyors’ fees, after suffering loss or damage
cost of debris removal
Loss of rent
Accidental damage As an optional extension

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
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 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.
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.
Travel insurance
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 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.
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 • Theft.

found cover
• Straying.
• Advertising costs for finding lost pets.
Liability (dogs • Damage to third party property.

only)
• 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.
• 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.
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.
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.
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 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.
‘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 e.g. corrosion or rust, wind or

exclusions rain damage to property in
the open
3. Aspects of cover which can e.g. money, glass and

be written into the policy for subsidence
additional premium
4. Property or risks more e.g. motor vehicles or aircraft

appropriate to another
class of business
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
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.
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.
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.
Pecuniary insurance
Legal expenses insurance
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 Covers the cost of defending unfair

cover dismissal or racial or sexual discrimination
claims plus any awards made against the
insured if unsuccessful
2. Criminal Covers the cost of defending an action

prosecution against the insured, usually under Health
defence cover and Safety legislation. Fines are not
covered as this would be against the
public interest.
3. Property Covers the cost of representation for legal

disputes cover 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
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.
Business interruption insurance

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.
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.
The most common policies are:
Fire and The standard perils are extended to include non-

special perils 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.
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.
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.
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 That is costs (usually legal fees) involved in the

costs and claimant substantiating their claim, plus any
expenses award of cash and damages by the court
Definition of ‘Any person who is under a contract of service or

‘employee’ apprenticeship with the insured’. This is usually
extended to include, for example, self-employed
persons, work experience students
Arising out of The time a person is considered to be at work is

and in the usually counted from the moment they pass
course of through the ‘boundary gates’
employment
Trade or Usually extended to cover the insured’s ancillary

business 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 Provided the injury or the cause of the disease

insurance occurred during the period of insurance, insurers
are liable even if the policy has expired
Defence costs The costs incurred by the insured when

and expenses defending a claim
Additional This refers to any director, partner or employee

person(s) of the insured in their personal capacity, for
insured 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 recovery against
its insured once it has made a payment.
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.
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 third party property, but may

damage to exclude intangibles (e.g. copyrights) or indirect
property economic loss
Consequential e.g. when a vehicle has been damaged by a

loss 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 usually, a limit per occurrence and in the

indemnity 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);
• 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.
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,
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.
• 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.
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.
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.
Health insurance
Health insurance can be broken down into three types as
follows.
Personal provides payments in the event of accidental

accident death or bodily injury
Sickness provides payment for disablement due to sickness
Medical provides cover for individuals who seek medical

expenses 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.
Personal accident insurance

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.
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.
Policy benefits
The policy benefits provided under personal accident and
sickness policies usually include payments on the event of
any of the following.
Death usually within twelve months of the event giving

rise to the claim
Total loss of sight in one or both eyes
Permanent usually a capital sum or an annuity is paid, but

total often not until 12 or 24 months after the accident
disablement as it may take this long to decide whether the
disability is permanent and total
Permanent that is, a permanent disablement that stops the

partial person getting on with a substantial part of their
disablement normal business
Temporary usually a weekly benefit is paid for a maximum of

total 104 weeks
disablement
Temporary this only applies following an accident (i.e. not for

partial sickness)
disablement
Medical incurred for treatment or appliances given or

expenses prescribed, up to a fairly low limit
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.
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.
Claims considerations
3
and administration
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.
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);
• estimate accurately the final cost of outstanding
claims; and
• distinguish between genuine and fraudulent claims.
Service standards and

managing customer
expectations
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.
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.
Parties to a claim
The first would be the person or company insured by a
party particular insurance company (i.e. the policyholder)
The second can be viewed as the insurance company insuring

party the first party
The third refers to anyone else involved in a loss event, e.g.

party 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.
Estimating and reserving

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.
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.
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.
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.
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.
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.
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.
Other reserves
There are a number of other reserves to be considered while
on this topic, such as the following.
Equalisation These are required by law and are designed

reserves to smooth fluctuations in loss ratios (i.e. the
ratio of premiums to claims) for certain
classes of business
Catastrophe These are set up to cover a large number of

reserves related individual losses arising from one
event (e.g. hurricane)
Unearned premium The unearned premium reserve is that

reserve and element of the premium for which insurance
unexpired risk cover has not yet been provided. For
reserve 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 To cover the anticipated future costs of

handling expenses settling claims; it includes direct costs (e.g.
loss adjusters’ fees) and indirect costs (e.g.
office expenses)
Re-opened claims This occurs where the claim is closed but

reserves 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
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.
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.
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 This is an industry-wide register of known

Register 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 An IFB initiative, developing an industry

Intelligence Hub wide counter fraud sharing platform,
(IFiHUB) where intelligence about fraudsters can
be shared in real time.
Motor Insurance Anti- This contains details of all total loss and
Fraud and Theft theft claims. Insurers can therefore check
Register (MIAFTR 2) whether a total loss or theft of a vehicle is
being claimed for more than once
Motor Insurance This was set up by the insurance industry

Database (MID) 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 This database is shared by insurers

Underwriting 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
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
• 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.
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 If they get away with it once, the temptation will

claimants be there to continue this practice in the future
Insurance Act 2015

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.
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 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.
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.
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.
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
• 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 promptly.
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 The misrepresentations were

deliberate or reckless careless
The insurer may avoid the The remedies are based on what
contract. 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
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
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.
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.
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.
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 Relevant knowledge is that of
insured’s own knowledge, but is anyone who is part of the
deemed to include anything insured’s ‘senior management’
known by a person who is or who is ‘responsible for the
‘responsible for the insured’s insured’s insurance’. For
insurance’. This could include example, a risk manager.
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 Where the breach is neither

avoid a policy entirely where the reckless or deliberate, the
breach of duty of fair remedies provided in the Act are
presentation is ‘deliberate or less severe. They are intended
reckless,’ and where the insurer to be proportionate and to reflect
can show that they would not what the insurer would have
have entered into the contract done if they had known of the
had they known the information undisclosed information before
or would only have done so on entering into the contract.
different terms. The insurer may
also retain any 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.
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.
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.
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
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.
Contracting out and transparency

requirements
Different provisions as to contracting out apply depending
upon whether the insured is a consumer or non-consumer:
Consumers Non-consumers
The Act applies in relation to the The Act allows commercial
provisions on fraudulent claims, parties to contract out of the new
and Clause 15 operates to provisions by agreeing
prohibit contracting out so as to alternative terms, with the
place a consumer in a worse exception of basis of contract
position than would have been clauses which will remain
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.
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
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.
First party disputes

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 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
cooperate 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.
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.
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.
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.
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 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).
Fair treatment of customers

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.
The FCA has also issued specific guidance on the fair
treatment of vulnerable customers under the Financial
Services and Markets Act 2000.
It explains that to achieve good outcomes for vulnerable
customers, firms should:
• understand the needs of their target market/customer
base;
• ensure their staff have the right skills and capability to
recognise and respond to the needs of vulnerable
customers;
• respond to customer needs throughout the product design,
flexible customer service, provision and communications;
• monitor and assess whether they are meeting and

responding to the needs of customers with characteristics
of vulnerability and make improvements where this is not
happening.
Financial Vulnerability Task Force

The Financial Vulnerability Taskforce is a newly created
independent representative body covering the Personal
Finance Sector. Its ultimate purpose is to promote greater
understanding, encourage appropriate behaviours and
establish good practice in respect of consumer vulnerability.
It was created by the Personal Finance Society and promotes
a charter of good practice including 9 statements which
signatories subscribe to follow in their dealing with vulnerable
customers.
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;
• does not unreasonably reject a claim; and
• settles claims promptly once settlement terms are agreed.
The Consumer Rights Act 2015

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.
Claims handling
4
procedures and
related claims
services
Personal insurance
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.
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 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
4: Claims handling procedures and related claims services 83
their insurer where they would be dealt with as the ‘third

party’ as discussed above.
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.
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.
Household claims
Contents
Household contents are divided into two categories:
Durable Things like household furniture, refrigerators and

goods freezers, etc.
Consumer Less durable items that are likely to wear out more
goods quickly, such as curtains, towels and clothing
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.
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;
• 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.
Extended warranties
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.
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.
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.
Commercial insurances
Property claims
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.
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.
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.
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 repairer will be sent directly
to the insurer. Glass claims are usually subject to an excess
to avoid small claims.
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.
Pecuniary insurance
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.
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.
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.
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.
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.
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.
For policies written on a When was the claim made?

claims-made basis the
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 When did the loss occur?

losses-occurring 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.
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.
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 Less tangible losses, such as

quantified (e.g. medical compensation for pain, suffering
expenses, future loss of and loss of amenity (PSLA) and
earnings) 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.
Commercial vehicles
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.
Related claims services

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).
Helplines are often outsourced to specialist providers
because of their experience, economies of scale and IT
specialisation.
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.
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).
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.
Uninsured loss recovery services

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.
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.
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.
Legal costs services

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.
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.
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.
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.
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.
Rehabilitation
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:
• Medical
• Vocational
• Qualitative
Very few insurers have in house rehabilitation facilities,
although there are a number of independent firms offering
these services to insurers.
Civil Procedure Rules

The Civil Procedure Rules apply to claims where the incident
giving rise to a claim occurred in England and Wales, with
Scotland and Northern Ireland having separate rules in place.
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.
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.
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, £5,000 for RTA
claims and £1,000 for liability claims (both employers and
public).
Be aware
The small claims track for Liability claims (EL & PL) is likely
to be increased from £1,000 to £2,000 during 2022 as a
further consequence of the Civil Liability Act 2018.
Claims handling
5
systems
Analysis of claims systems
Role of IT
IT relates to the storage, production (or processing) and
communication of information.
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.
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.
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.
Complexity
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.
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.
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.
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;
• 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.
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.
Benefits of using IT
• 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.
These, then, are some of the benefits. But what difficulties
arise with the use of IT in claims handling?
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.
Data protection rules

The DPA 2018 came into effect in the UK in May 2018, to
coincide with the implementation of the GDPR and the Law
Enforcement Directive (LED). It aims to modernise UK data
protection laws to ensure they are effective in the years to
come.
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 £17.5m or 4% of annual 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 SAR.
Post-Brexit – 'UK GDPR'

The GDPR is retained in domestic law now the Brexit
transition period has ended, but the UK has the
independence to keep the framework under review. The 'UK
GDPR' sits alongside an amended version of the DPA 2018,
with the key principles, rights and obligations remaining the
same. The UK GDPR applies to controllers and processors
based outside the UK if their processing activities relate to
offering goods or services to individuals in the UK; or
monitoring the behaviour of individuals in the UK.
Who does the GDPR apply to?

The GDPR applies to controllers and processors in the EU.
The definitions are broadly the same as previously – i.e. the
controller says how and why personal data is processed and
the processor acts on the controller's behalf. However, GDPR
places new legal obligations on processors, for instance,
firms are required to maintain records of personal data and
processing activities, and a firm has significantly more legal
liability if it is responsible for a breach.
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 regulations.
What information does the GDPR apply to?

The GDPR applies to personal data. However, the GDPR's
definition is more detailed than before, 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 emphasis on accountability. 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 under the GDPR

The following principles apply to all personal data:
1. Lawfulness, fairness and transparency – data should
be processed lawfully; data should be handled in
ways people would expect giving consideration to the
effect of processing the data on the individuals
concerned; and there should be full compliance with
the obligations of the 'right to be informed'.
2. Purpose limitation – data should only be collected for
specified, explicit and legitimate purposes and not
further processed in a manner that is incompatible
with those purposes.
3. Data minimisation – data should be adequate,
relevant and limited to what is necessary in relation to
the purposes for which they are processed.
4. Accuracy – data should be accurate and, where
necessary, kept up to date.
5. Storage limitation – 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.
6. Integrity and confidentiality – data should be
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.
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. They
are not required to automatically refresh all existing DPA
consents in preparation for the GDPR, but if a firm relies on
individuals' consent to process their data, it must make sure it
will meet 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 creates 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; and
• rights in relation to automated decision making and
profiling.
Subject access request

Under GDPR, individuals have the right to find out if an
organisation is using or storing their personal data. They can
exercise this right by submitting a subject access request
(SAR) to the organisation concerned. The SAR can be made
verbally or in writing. The organisation generally has one
month to respond to a SAR, although they 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 put into 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 mean more policies
and procedures for organisations, although many will already
have good governance measures in place.
Breach notification
The GDPR introduces 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
To ensure that the level of protection of individuals afforded
by the GDPR is not undermined, restrictions have been
imposed on the transfer of personal data outside the EU, to

third countries or international organisations.
GDPR still applies directly to firms operating in the EEA post-
Brexit, and to any organisations in Europe that send data to
firms in the UK.
Influence of customer expectations

on the design of systems
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.
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.
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 marketing investment

investigation
and 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:
Or a blend of both
Function Division
e.g. claims, e.g. product,
underwriting etc. geographical area
etc
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.
Advantages and disadvantages

Advantages Disadvantages
Employees can specialise in Inflexibility, for example, claims
their type of work because all personnel tend to see their role
those involved in the same or a as purely claims handling and
related activity are in the same may not recognise the need for
department them to give feedback and
communicate with their
underwriting and marketing
colleagues
Larger units may be more cost It is difficult to co-ordinate the

effective due to the uniformity of different functions, e.g. there
the procedures used may be a lack of common
interest between the different
functions
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.
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.
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 There may be a lack of contact
available (which would not between policyholders and local
always be the case at every staff, which could have
office location) repercussions in respect of
customer retention
Accessing records (electronic There will be an inevitable delay

and paper) and underwriting staff involved in advising head office
is easier and waiting for a response in
respect of significant
underwriting and claims issues
Support services
There are various external services available to an internal
claims team, which can assist them in their functions.
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.
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.
Advantages and disadvantages

Strategy Concentration on core Loss of control
activities
Dependence on provider
Better capacity to cope
with an increase in
workload
Costs This often results in cost Unforeseen problems

savings
Extra co-ordination and
audit costs
Service Through access to a May be a problem,

wider skill base and/or especially in respect of
improved technology etc. customer retention
Staff Reduces the requirement Loss of the opportunity to

for staff, and avoids the retain, and develop in-
peaks and troughs of house expertise
workflow and the loss of
expertise
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.
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 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.
Surveyors
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.
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.
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.
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.
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.
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.
Claims settlement
6
Claims settlement
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.
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).
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.
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.
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.
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.
Reserving: the process

Global reserving process
Checking the integrity of the data
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.
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.
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.
Invalid and partially met claims

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.
The following terms and conditions may mean that a claim
may be only partially met:
• 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.
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.
Salvage
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).
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).
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.
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
Market agreements
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.
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.
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.
Excesses, deductibles and

franchises
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 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.
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.
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.
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.
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.
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.
Uninsured drivers’ agreement

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.
Untraced drivers’ agreement

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.
Management of
7
expenses
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.
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.
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.
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.
Staffing
The claims manager also needs to:
• 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.
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.
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;
• 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 This is relatively easy to identify,

quantify, e.g. failure to negotiate e.g. failure to deduct the policy
an (adequate) adjustment for excess
wear and tear
It can be represented in a formula:

Overpayment (or leakage) = What was actually

paid – What should have been paid
Prevention
There are a number of steps that can be taken to reduce
leakage, including the following.
1. Senior Senior management could put emphasis on

management reducing claims payments in particular rather
focus 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 Supervisors require all the same skills as the

staff rest of the employees plus:
• management training; and
• presentation training
4. Quality Adequate checks should be in place to avoid

management 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
Monitoring 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).
Financial Conduct Authority (FCA)

regulation
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 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’.
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.
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.
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.
Chartered Insurance Institute
3rd Floor, 20 Fenchurch Street,
London EC3M 3BY
tel: +44 (0)20 8989 8464
customer.serv@cii.co.uk
www.cii.co.uk
Chartered Insurance Institute

@CIIGroup
© The Chartered Insurance Institute 2021
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Insurance

IF4: 2022 Key facts

© The Chartered Insurance Institute 2021

Legal requirements for a claim

completion of a claim form or telephone notification, but

• all conditions and warranties have been complied with;

Here we are going to concern ourselves with the conditions

condition was not met, where that condition was not

Unfair or hidden terms and conditions

although consumers are still within their rights to rely on a

Duties of the insured after a loss

There is always a condition setting out the insured’s duties in

Contents of a claim form/notification

A motor accident notification may require the following

Most small domestic claims can be dealt with quickly and

Theft claims The details given at notification can often be

Motor liability Images/dashboard camera footage of the incident

Personal Medical evidence and/or doctors’ certificates,

Motor damage Vehicle registration documents in respect of total

Different types of experts may also be used in the

Solicitors to give legal opinions, or to commence or defend

Surveyors to estimate rebuilding costs

Doctors to verify or assess the severity of injuries and

Motor to verify the damage caused and agree repair

Restoration to restore property or contents damaged by water

Where an insurer wishes to involve other experts, it should

Once the insurer has established the proximate cause of the

Insured perils those named in the policy as covered

Excepted or those named as specifically not covered

Uninsured or those perils not referred to in the policy and

If an excepted or uninsured peril is the proximate cause, the

Road Traffic Act only

Third party only

Third party, fire and theft

• legal assistance; and

There are extensions available for the payment of additional

The third party liability section provides unlimited indemnity

Loading or cover for third party liability can also be applied

Indemnity to usually anyone may drive on the insured’s

Indemnity to indemnity for their acts of negligence is

Legal costs the policy can usually be extended to cover

There is a fairly extensive portfolio of optional extensions

• joint insured clause or cross liabilities clause (i.e. two or

Fire, lightning, explosion and earthquake

Riot, civil commotion, Cover usually excludes loss or damage

Storm or flood Usually subject to an excess

Falling trees or Though damage to walls, gates, fences

Escape of water With an unoccupied exclusion (30 or 60

Escape of oil With an unoccupied exclusion (30 or 60

Theft or attempted theft With an unoccupied exclusion (30 or 60

Impact Collision into, or impact of, road

Subsidence, ground Usually with a large excess.

Breakage or collapse of television or radio receiving aerials,

Accidental damage to drains, pipes, cables or underground

Accidental breakage of glass and sanitary fixtures

Legal fees, architects’ Incurred whilst reinstating the building

Accidental damage As an optional extension

Other extensions can be included for the payment of an

Buildings Liability of the owner and also their liability incurred

Contents Liability of the occupier for property in other