When people file an insurance claim they often are at a loss on how the process goes and how are insurance claims paid. The purpose of insurance is to provide coverage (aka payment) to you in the instance you have experienced an event that is covered by your policy, i.e. hurricane, pipe break, etc. Many people think that when they file an insurance claim the insurance company is going to be the one responsible for the repair work. This is a common misconception. Most often the insurance company is just going to be a dollar amount for the claim based on the damages you have incurred. How are these insurance claims paid? There are a lot of factors that go into the payment which we will discuss. We will also discuss making sure the insurance company is paying the correct amount.
Estimates
Property claims are based on the damage sustained to a piece of property. The value or amount of this damage is determined by industry professionals creating estimates on what it would take to repair these damages and return the property to a pre-loss state. Most would think that the estimating of these damages is an objective practice, meaning there should be a set way to do these repairs. This is a common misconception. Estimating the repair value for damaged property is very subjective, and that is all based on the fact that there are usually multiple ways to complete those repairs and/or items that some might think are necessary and others do not.
Estimates are also called estimates for a reason, they are not called exacts. They are meant to be an educated guess at the amount of work needed. While most use industry-standard software to create estimates which provide standard unit pricing for thousands of items, people might disagree whether it takes 10 of something to complete or 20 of something to complete. This is where estimates can vary dramatically.
Deductibles
In property insurance, most policies have a deductible and the amount of the deductible may depend on the type of loss. For example, a pipe break may have a different deductible than a hurricane claim. Deductibles in property insurance are often misunderstood because they are compared to healthcare insurance deductibles which many people are familiar with. Deductibles in property insurance are not necessarily an out of pocket expense. They are applied by reducing the amount of the claim by the amount of the deductible.
Example – Total claim = $10,000, Deductible = $1,000, this would equal a payout of $10,000 – $1,000 = $9,000 payout
Typically if it turns out that the amount of damages the insurance company estimates is under the deductible then there would simply be no payout of money.
Replacement Cost Value (RCV) vs. Actual Cash Value (ACV)
The deductible is not the only thing that affects the payout the insurance company makes. This is where RCV and ACV come into the picture. RCV is the amount of money it takes to replace that item or make the repair based on the current market value of the item or repair cost. ACV is basically the RCV with depreciation subtracted.
Depreciation can come in two different forms, recoverable depreciation, and non-recoverable depreciation. As the terms may suggest, recoverable depreciation is depreciation that the policyholder can get back from the insurance company and non-recoverable depreciation is simply a deduction from the RCV and cannot be recovered from the insurance company.
Overhead and Profit (O&P)
O&P is an entire topic in and of itself. Basically O&P is the contractor’s expenses for performing the repair/rebuild work. Many insurance companies are hesitant to include O&P in their payment of an insurance claim. Usually, O&P is paid by insurance companies if there is a general contractor involved with the repairs and/or there are 3 or more trades needed to complete the repairs.
These requirements that insurance companies put on whether they pay O&P are arbitrary and claim that a 3 trade rule is “industry standard”, that if 3 trades or more are needed for a job then a general contractor would be required. The application of this rule does not make sense all of the time. If you were getting your roof replaced, you would likely need a general contractor to perform this work, however, there are not 3 or more trades involved with this repair work.
The bottom line for O&P is that if it is included in one claim it should be included in all claims regardless of the situation. It doesn’t make sense that an insured would be penalized because they don’t have a general contractor retained.
Settling a claim
There are a lot of factors that go into how a claim is paid. As claims professionals, we at NeJame Claims use multiple tools and industry knowledge to settle claims as quickly and efficiently as possible. Oftentimes claims can be settled with a one-time global payment for the claim. This means claims can be settled where the depreciation is released instead of being withheld. It’s important to work with a claims professional in these situations as many times the insurance company will offer to settle a claim in exchange for a release. You will want to make sure your claims professional is settling the claim for an appropriate amount If a release is involved.
If you think you need help with a claim or concerned with how your claim has been paid, please contact us for a complimentary review of your situation.
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