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A loss adjustment expense is nothing more than a specific cost associated with investigating, administering, defending or paying an insurance claim. This expense can vary greatly depending on the complexity of a claim. It can also depend upon the capacity of the insurance company’s staff to perform all the necessary tasks related to a claim.
In many cases, insurance companies must hire and pay for outside help. Even with a fully staffed company, an allocated loss adjustment expense cannot be avoided. One example is the cost of a police report. The police department charges anyone not directly involved in an incident to pay for a copy of the accident, injury or theft report.
Claims can involve unallocated or allocated loss adjustment expenses. An unallocated expense pays for the company’s claim operations in general. These costs can include salaries, supplies, rent and utilities for the claims department as a whole. An allocated expense is any cost that is particular to an individual claim. Such expenses are often recoverable from the at-fault party when an accident occurs.
Insurance companies do not wish to pay claims that have not been substantiated and verified. They prefer to pay a loss adjustment expense for services that confirm a claim is valid, rather than blindly paying a claim. Depending on local law, such scrutiny may be a legal requirement. Insurance companies will order different services, depending on the type of claim.
Auto insurance claims usually incur the loss adjustment expense of a police report. The exception occurs when police did not investigate the auto accident. If the insurance company does not have damage appraisers on staff or if their staff has too many cases, the company will hire an outside appraiser to estimate the amount of damage to one or both of the vehicles involved.
If there are conflicting stories about how the accident occurred, companies will often pay an loss adjustment expense for an independent adjuster or other service to secure a recorded interview from the parties involved. This may also prompt a locus investigation, where an adjuster takes photos of the accident scene and draws diagrams depicting each party’s description of events.
Claims involving injuries can incur other expenses related to controlling medical costs. This may involve hiring an independent doctor to examine a patient and report his opinion. It may also involve a bill review where the reasonableness of fees is assessed.
Claims that cannot be settled outside of court will incur other fees as well. Methods of settlement like mediation, arbitration or court all cost money. Sometimes the insurance company will hire an expert witness to help defend a claim. While less common that other allocated expenses, these types of allocated adjustment expense are often the largest.
The Coalition Against Insurance Fraud estimated in 2006 that the US had losses of up to $80 billion in insurance fraud, but it is hard to get an exact number as the fraud is engineered to be undetectable (vs something like a robbery of goods for instance).
Having someone dedicated to the company efforts is more effective in theory then hiring out an independent contractor. However,insurers tend to bring in external loss adjusters in the following situations: when claims are over a certain value (say, a few thousand); when there has been minimal contact between the insurer and the claimant (if insurance has been purchased online); if there has been a large volume of claims at once (for instance in the aftermath of a natural disaster); or if it’s a particularly complex claim.
How rampant is insurance fraud and does a loss adjuster who works full time vs an independent contractor help the insurance company deter fraud more readily?
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