Insurance companies use a lot of math to solve problems. Such as how much premium to charge you or how much of a coverage limit should a policy include. But I don’t deal with any of that type of stuff. Instead, I deal with paying claims. You suffer loss, I write a check. But often we have to use some hard to follow math to get to the point where we are ready to issue a check. And more often than not, it will confuse the policy holder.
In the end when dealing with an insurance claim, such as homeowners following a water or fire loss, the math is all the same: TOTAL LOSS – LESS DEDUCTIBLE = PAYMENT AMOUNT. But it’s not always that simple. What if we’ve already issued an advance payment? Or what happens if there is a policy limit that is reached or exceeded? That’s when we have to use funny math which often only confuses our policy holders.
The most common question when dealing with payment calculations from my experience is the claim that we’re taking the deductible twice when a prior payment has been issued and a supplemental payment is then needed. Lets look an example. House fire results in an initial damage estimate of $25,000. You have a $1,000 deductible. We write check for $24,000 and everyone is happy (hopefully). However during repairs, some hidden damage is found that is going to cost $2,500 more. So we start over… TOTAL LOSS – DEDUCTIBLE – PRIOR PAYMENT = SUPPLEMENTAL PAYMENT. But hold on there Joe Adjuster… you already TOOK my deductible from the first payment remember? Yes, yes I did. So you can’t then include it a second time as then I’m getting screwed!! **Side note, this would be a good time to read Who’s Screwing Who? Common misconception is that when a supplemental payment is calculated, we still consider the deductible amount as part of the math. It’s not to screw the policy holder, it’s just math. No matter how many prior payments are issued or what they were based on is now irrelevant. All that matters is the NEW total loss amount. So if the new fire loss is $27,500, we deduct the $1,000 deductible and then the $24,000 prior payment and magically we get to the same $2,500 amount as the new hidden damage. So why don’t we just cut to the chase instead of showing the long math? Because you can often have MANY payments on a claim and as long as you follow the simple math, TOTAL LOSS – DEDUCTIBLE – PRIOR PAYMENT(S) = SUPPLEMENTAL PAYMENT you’ll never be wrong.
Let’s make it even more confusing. Now let’s throw in a policy limit. Maybe for whatever reason there is a $25,000 limit for the fire damage. Again, $25,000 in damages (initially) with a $2,500 supplemental damage estimate and $1,000 deductible. Now it sounds like an algebra problem (and we haven’t even discussed recoverable depreciation and code upgrades paid when incurred). Even some adjusters can be psyched out about limits and where to apply them but they are simply the last thing considered. So the new equation is TOTAL LOSS – DEDUCTIBLE = AMOUNT OWED… BEFORE THE APPLICATION OF ANY LIMITS. So if the amount owed is $24,000 and there is a $25,000 limit, you’re good, we pay the claim in full. But when that supplement comes in, now your loss is $27,500. We take that amount less the $1,000 deductible for a payable loss of $26,500. But wait, we have a policy limit of $25,000 and we’ve already paid $24,000 so we can only pay an additional $1,000 until the limit is reached. The homeowner is out the $1,500 difference because of the policy limit. Once the limit is reached, it doesn’t matter if $100,000 of supplemental damage is later found, your claim is now paid and closed. **This is also the time you start to think about who picked that limit and if there is any claim you can make against the agent who sold you the policy or the carrier who underwrote the policy with insufficient limits but that’s another blog for another day.
In the end, there is a ton of math that needs to be considered when paying an insurance claim. More times than not your average adjuster is going to be doing it correct but if you have questions, don’t hesitate to speak up and and have your adjuster explain the math to you in detail. A good adjuster is going to always make sure that the policyholder understands the payment and how it was calculated. This will prevent a complaint and/or other headaches down the road.
As usual, any questions or comments, please let me know.