Today insurers are increasingly focused on pursuing subrogation recoveries for claims that they have paid against parties they believe cause or contributed to their insured’s loss. Commonly enough the process begins by demands being sent with little detail. Some demands I have seen simply assert that the party is liable, without providing reasons and demand a specific sum of money. Often after the demand is looked into, it becomes apparent that liability should either not be accepted or only in part or that the amount claimed is not justified.
The purpose of this article is to discuss some of the issues that we as loss adjusters consider when appointed on a liability claim involving a subrogation recovery action by an insurer (claimant). For some issues I have provided examples drawn from actual cases in which I have been involved.
The starting point is to gather evidence concerning the loss from our principal’s insured. This includes interviews and obtaining their documentation. I have been involved in a number of matters where initially it looks one way, only to have it look differently once explanations and other evidence are received.
This evidence on which the claimant is relying should also be requested, including their loss adjuster reports, expert reports, good quality colour photographs and other relevant documentation. As the onus is on the claimant to prove their case, I have no concerns about pursuing this information so an informed decision can be made. Sometimes obtaining information from the claimant can take a while and it may take several requests. Also sometimes the level of evidence that was obtained by the claimant to verify their insured’s claim is less than what is needed for a successful recovery.
Other useful evidence may come from internet searches. For example, images available from Google may be compared with post loss photographs to ascertain pre-existing damage unrelated to the recovery.
After analysis of the available evidence, if liability cannot be denied, I reach a view on whether an offer should be recommended for a portion only of the adjusted loss. This takes into account:
- Whether the claimant has contributed to the loss
- Whether other parties contributed to the loss and the principle of proportionate liability applies. For instance, I have had this arise in construction matters where different contractors or suppliers have contributed to the loss in different proportions.
The full amount demanded often cannot be justified in a liability settlement. My starting point is to check whether the supporting documentation such as quotes and invoices substantiate the amount claimed. I then check whether amounts claimed for each item have been correctly totalled. Whilst this may sound basic, I was involved in a recovery where the amount claimed included adding together the quote and invoice for the same item of work. This of course inflated the amount claimed and was not justified.
Where supporting documentation is not provided for specific items claimed, a default position would be to not allow the items due to insufficient evidence, subject to a review if this documentation is provided.
Where only limited evidence is provided, a portion of the amount claimed may be offered, subject to a review if further documentation is provided. In a case in which I was involved only limited evidence was provided of a stock loss, comprising photographs of a few water damaged items and what appeared to be an internal stock list with prices. However no original purchase documentation for the stock was provided, no replacement quotes and invoices were given, there was no indication as to whether the prices in the list included a mark-up and no information about whether any of this stock was obsolete and could only be sold for less than cost price. An opportunity was given for the claimant to provide full supporting documentation, however this was not provided. A portion of the stock loss amount was offered and was accepted.
On occasions insurers may accept a statutory declaration as evidence of lost items, where for example original purchase documents were destroyed.
Occasionally items unrelated to the subject of the recovery are claimed. If a satisfactory explanation for their inclusion cannot be provided, then obviously they should not be allowed. An example is power tools being claimed in a construction claim, which were unrelated to the rectification works.
Some Insurers attempt to recover loss adjuster costs. Views differ as to whether these costs should be allowed, depending on which side of a recovery matter a party is positioned. However it is my view that they should not be allowed because they do not form part of the claim settlement and are a cost of an insurer doing business. This view remains to our knowledge untested, but is generally accepted by insurers.
Often the claimant has paid out the claim under their policy on a “new for old” basis. In some cases, such as with motor vehicle insurance, claims are paid on the basis of an agreed value, which is above the market value of the vehicle. In liability claims the argument exists for a betterment deduction. Often the amounts demanded by the claimant do not take into account any deduction for betterment. When considering whether to make a betterment deduction we take into account whether the claimant will be better off due to factors such as receiving “new for old” or an improved item.
An example of an improvement is a claimant being paid $20,000 under an agreed value policy for a motor vehicle total loss, when the pre accident market value of the vehicle was $15,000. Arguably the extra $5,000 paid above market value is an improvement and should not be part of a liability claim settlement.
In the case of contents items destroyed by water or fire, such as televisions and furniture, there may not be a second hand market for them. A common practice here is to make a betterment deduction taking into account the specific age, pre-existing condition and life expectancy of each item and other relevant factors. However with building damage claims the application of depreciation may be more complex and difficult.
This article attempts to point out that deciding not to take demands at face value, along with gathering relevant evidence, considering legal liability and performing some financial analysis, may produce a more realistic claim settlement.
LL.B., Dip FA, ANZIIF (Snr Assoc)
Executive Adjuster – Technical Assessing