Claims Handling from Notice to Payment

A claim is where the insurance contract is performed. Everything before it is promise, and everything after it is the insurer keeping the promise or not. Claims handling follows the same path for a kitchen fire, a wrecked car and a customer’s fall, with differences in who is owed, what is measured and who defends. The sections below follow that path, then work three claims from first notice to the last payment. All names and dollar figures in the claims are invented.

The Path of a Claim

Step	What happens	Who acts
1. Notice	The insured, or the producer on the insured’s behalf, reports the loss	Insured or producer
2. Acknowledgment and coverage check	The insurer confirms the policy was in force, the person is an insured, and the loss falls inside the coverage and the policy period	Claims staff
3. Assignment and investigation	An adjuster inspects, takes statements, gathers records and estimates	Adjuster
4. Reserve	The insurer sets aside its estimate of what the claim will cost	Adjuster and claims management
5. Proof of loss	The insured documents the loss, often on a sworn form	Insured
6. Decision	The insurer pays, pays under reservation, or denies in writing	Claims management
7. Settlement and payment	The amount is agreed or determined, and payment goes to the right payees	Adjuster
8. Recovery	The insurer pursues subrogation and sells salvage	Recovery staff

The insured’s part begins with prompt notice. Standard homeowners forms generally excuse the insurer only if a failure to meet a duty is prejudicial to it, so late notice does not by itself end coverage, but a delay that prevents inspection can. A producer’s most useful claim act is to report immediately and to remind the insured to protect the property, keep receipts for temporary repairs, and not discard damaged items. A producer should never tell an insured that a loss is or is not covered. The decision belongs to the insurer, and a producer’s guess becomes the insured’s expectation.

Who Adjusts the Claim

A staff adjuster is the insurer’s employee. An independent adjuster works for a fee for the insurer and handles claims in the field, especially after a catastrophe when staff are stretched. A public adjuster, called an adjuster for the insured in Michigan’s statute, works for the policyholder and is paid by the policyholder. The distinction matters because the first two serve the insurer’s interests, within a duty to deal fairly, and the third serves the claimant’s.

Michigan requires a license to adjust a loss or to hold oneself out as an adjuster, and exempts several groups. Among them are lawyers, an employee or manager of an authorized insurer adjusting that insurer’s policies, and a licensed producer to whom the insurer has granted claim authority (MCL 500.1222(1), (2)). An adjuster for an insured is further limited:

• The fee may not exceed 10% of the amount the insurer pays in settlement (MCL 500.1226(3)).
• The adjuster needs a written contract on a form the Director approves before providing services (MCL 500.1226(4)).
• A contract signed within 48 hours after the loss can be voided by the insured for 10 days after signing (MCL 500.1226(4)).
• The adjuster may not solicit while the loss is in progress or while the fire department is working at the scene (MCL 500.1227(1)).

Investigation and Fair Handling

What the adjuster collects depends on the line. On a property claim the adjuster inspects the damage, photographs it, establishes the cause, measures the repair and may take recorded statements. Standard forms also let the insurer require records, the damaged property for inspection and an examination under oath. On an auto claim the adjuster uses the police report, photographs, repair estimates and a valuation of the vehicle. On a liability claim the adjuster looks at the scene, witnesses, the insured’s incident report and the claimant’s medical records, because both the insured’s fault and the claimant’s damages must be shown.

Michigan holds insurers to standards during this stage. Its unfair claims practices include failing to acknowledge or act reasonably and promptly on communications about a claim, failing to adopt reasonable standards for prompt investigation, refusing to pay without a reasonable investigation, and failing to affirm or deny coverage within a reasonable time after proof of loss is completed (MCL 500.2026(1)(b), (c), (d), (e)). Those practices are violations when they form a course of conduct and not an isolated incident. The timing rules of MCL 500.2006 need no pattern, and they are set out below.

Reserves

A reserve is the insurer’s estimate of the unpaid cost of an open claim. It is not a payment, an offer, or an admission that the claim is covered. An adjuster sets the first reserve soon after notice, from what is known, and changes it as information arrives. Incurred loss is paid loss plus the current reserve. For a liability claim there are two reserves, one for the indemnity the insurer may pay and one for the defense expense. If the café claim worked below opens at a $25,000 indemnity reserve and a $10,000 expense reserve, its incurred loss is $35,000 before anything is paid. The insurer’s loss ratio rises when a reserve rises, even though no money has left yet.

Three Outcomes: Pay, Reserve Rights, Deny

An insurer that finds coverage pays what the policy owes. Where coverage is uncertain, it may investigate or defend under a reservation of rights, a written notice that it is proceeding without waiving a coverage defense and may later decline to pay. The notice should state the grounds, so the insured can decide whether to hire a lawyer. A common case is a guest’s injury that may fall under a business exclusion. The insurer defends the suit and reserves its right to deny indemnity if the facts show a business activity. Without the reservation, the insurer’s conduct could later be argued to waive the defense.

A denial should be in writing and should explain, by reference to the policy provision and the facts, why the claim is not covered. Michigan lists failing to promptly explain a denial or compromise offer among unfair claim practices (MCL 500.2026(1)(n)). A disagreement about the amount of loss is different from a disagreement about coverage. The policy’s appraisal provision settles amount, and Michigan’s fire policy law prescribes the process (MCL 500.2833(1)(m)). Whether a loss is covered at all is not an appraisal question.

A Homeowners Fire Claim

The Yilmaz family has a homeowners policy with a dwelling limit (Coverage A) of $320,000 and a $1,000 deductible. A kitchen fire causes smoke damage through the first floor. They call their producer the same evening. The producer reports the claim, reminds them to cover the broken window and to keep receipts, and tells them the insurer will assign an adjuster. The Coverage D living-expense coverage pays the necessary increase in their living costs while the kitchen is unusable, so they keep hotel and meal receipts.

The adjuster inspects, prices the repair at $41,800 and sets a reserve. The family’s contractor then finds smoke damage inside a wall cavity. A supplement adds $2,400, so the agreed repair cost is $44,200. The adjuster also reviews the family’s inventory of damaged contents.

Standard homeowners forms settle buildings at replacement cost when the insurance is at least 80% of the building’s replacement cost, paying no more than actual cash value until repairs are actually completed, and settle personal property at actual cash value. Assume the Yilmaz dwelling is insured to at least that 80%. Assume depreciation of $7,400 on the building work, and contents with a replacement cost of $9,000 and depreciation of $3,100. The deductible comes off the total of the loss once. Living expenses are paid on receipts, so they are left out of the table.

Item	Replacement cost	Depreciation	Actual cash value
Building repair	$44,200	$7,400	$36,800
Contents	$9,000	$3,100	$5,900
Total	$53,200	$10,500	$42,700

• First payment: $42,700 less the $1,000 deductible is $41,700. Because the policy names a mortgage lender, the building portion of the payment is issued to the family and the lender together.
• After repairs are done and receipts show $44,200 spent, the insurer pays the $7,400 held back for depreciation.
• Total: $41,700 plus $7,400 is $49,100. That is $44,200 for the building plus $5,900 for contents, less the $1,000 deductible.

The form requires the sworn proof of loss within 60 days after the insurer asks for it. Michigan’s fire policy statute requires the loss to be payable within 30 days after the insurer receives proof of the amount of the loss, except as MCL 500.2845 provides, notwithstanding any contract term (MCL 500.2833(1)(p), 500.2836(2)). That rule governs here even where a form states a longer period. Michigan’s timely-payment statute also requires the insurer to specify what proof it needs within 30 days after receiving the claim, and benefits not paid on a timely basis bear 12% simple interest a year from a date 60 days after satisfactory proof of loss, paid in addition to the loss. Failing to pay on time or to pay that interest is an unfair trade practice unless the claim is reasonably in dispute (MCL 500.2006(1), (3), (4)). If the $41,700 were paid on day 90 after the insurer received satisfactory proof, the interest runs for 30 days: $41,700 × 0.12 × 30 ÷ 365 is $411.29. If a faulty appliance started the fire, the insurer can pursue its maker by subrogation for what it paid.

Subrogation works only if the insured leaves the claim intact. Standard homeowners forms let an insured waive recovery rights in writing only before a loss, and otherwise let the insurer require an assignment of its rights of recovery to the extent it has paid, with the insured signing the papers and cooperating (HO 00 03 05 11, Sections I and II Conditions, F). A family that signs a release for the appliance’s seller after the loss, without telling the insurer, undercuts that recovery and invites a dispute over the payment. A family should ask the insurer before signing any release.

A Collision Claim in Michigan

Okafor’s car is hit at an intersection and the repair cost exceeds its value, so it is a total loss. She has broad form collision coverage. Under that Michigan coverage the insurer pays collision damage regardless of fault, and the deductible must be waived if the operator is not substantially at fault, meaning more than 50% at fault (MCL 500.3037(1)(b), (8)(b)). The adjuster values the car at $17,900 actual cash value, from comparable vehicles adjusted for mileage and condition, and her lender is owed $11,200. Her deductible is $500.

	She is not substantially at fault	She is 60% at fault
Actual cash value	$17,900	$17,900
Deductible	waived, so $0	$500
Insurer pays	$17,900	$17,400
To the lender	$11,200	$11,200
To Okafor	$6,700	$6,200
Salvage sold for	$2,600	$2,600
Insurer’s net cost	$15,300	$14,800

The lender is paid first because it is a loss payee named in the policy, and payment goes to it and the insured as their interests appear. The insurer may take title to the wrecked car and recover part of its payment by selling the salvage.

Recovery from the other driver is where Michigan differs from other states. Tort liability arising from the use of a motor vehicle that has the required security in effect is abolished, except for damages of up to $3,000 to a motor vehicle, and only to the extent that the damages are not covered by insurance (MCL 500.3135(3), (3)(e)). Reading that text, a collision insurer that has paid the loss has little left to pursue by subrogation against a driver whose vehicle carried the required security, because the claim survives only for damage that insurance does not cover. What remains open to the insured is the uninsured portion, such as a deductible. The statute does not mention subrogation, and the abolition does not reach a vehicle that lacked the required security. Damages are assessed on comparative fault, and a party more than 50% at fault recovers nothing (MCL 500.3135(4)(a)). In the second column Okafor is 60% at fault, so she cannot recover her $500 from the other driver. In the first column the waiver leaves her no uninsured damage to claim.

A Liability Claim

A customer slips on a wet floor in the Haddad family’s café and breaks a wrist. The café’s commercial general liability policy has a $1,000,000 each occurrence limit and a $2,000,000 general aggregate. The insurer sets the $25,000 and $10,000 reserves described earlier and investigates. Because the claimant has sued, the insurer must defend, so it hires a defense lawyer, and it settles the claim for $55,000 with the insured’s cooperation. Defense costs total $9,300. Had the claim been worth more than the $1,000,000 occurrence limit, the café would owe the excess, which is the gap a personal or commercial umbrella exists to fill.

Under standard liability forms, the insurer’s defense costs are supplementary payments and do not reduce the limits. The $55,000 settlement does reduce the aggregate. The remaining aggregate is $2,000,000 less $55,000, or $1,945,000, and any other occurrence in the period still has the full $1,000,000 each-occurrence limit, within what remains of the aggregate.

Limits After a Loss

A loss payment on a property policy does not reduce the amount of insurance for later losses in the same policy period. After the kitchen fire, the Yilmaz dwelling is still insured for $320,000, and a windstorm next month is measured against the full limit. Liability policies work differently where an aggregate applies. Each payment erodes it, and the insured has less left until the policy renews. Standard forms generally follow these rules, and a producer should confirm any limit that an endorsement changes before advising a client.

Lesson summary

• A claim moves from notice and a coverage check through investigation, a reserve, proof of loss, a decision, payment, and recovery.
• Prompt notice matters, but standard forms excuse an insurer only for a failure that prejudices it. A producer should report at once and never promise coverage.
• Staff and independent adjusters work for the insurer. A public adjuster works for the insured, and Michigan licenses adjusters, caps the fee at 10% of the settlement, and requires a written contract.
• A reserve is an estimate of unpaid cost, not a payment or an admission, and incurred loss is paid loss plus the reserve. An insurer uncertain of coverage may proceed under a written reservation of rights, and a denial should explain the policy provision and the facts.
• Buildings insured to at least 80% of replacement cost settle at replacement cost once repairs are complete, with actual cash value paid first. The deductible comes off the total loss once.
• Michigan requires a fire loss to be payable within 30 days of proof of amount, and benefits not paid on a timely basis bear 12% simple interest from 60 days after satisfactory proof.
• In Michigan a broad form collision deductible is waived when the operator is not substantially at fault, and tort liability for vehicle damage survives only for up to $3,000 not covered by insurance, which leaves a collision insurer little to recover from a driver whose vehicle carried the required security.
• Property payments do not reduce later limits. Liability aggregates are reduced by settlements and judgments, not by defense costs.