Adjusting the Commercial Property Loss

The Compact Book of Adjusting Property Claims Second Edition

A Primer For The First Party Property Claims Adjuster.

Adapted from Barry Zalma’s book, in two volumes, “The Compact Book of Adjusting Property Claims – Second Edition” now available from Available as a Kindle book and Available as a paperback. Other insurance books by Barry Zalma are available at

The insurance adjuster is not mentioned in a policy of insurance. The obligation to investigate and prove a claim falls on the insured. Standard first party property insurance policies, based upon the New York Standard Fire Insurance policy, contain conditions that require the insured to, within sixty days of the loss, submit a sworn proof of loss to prove to the insurer the facts and amount of loss.

The policy allows the insurer to then, and only then, respond to the insured’s proof of loss. The insurer can then either accept or reject the proof submitted by the insured.

The Compact Book of Adjusting Property Claims -- Second Edition: A Primer For The First Party Property Claims Adjuster.Technically, if the wording of the policy was followed literally the insurer could sit back, do nothing, and wait for the proof. If the insured was late in submitting the proof the insurer could reject the claim. If the insured submits a timely proof of loss the insurer could either accept or reject the proof of loss. If the insurer rejected the proof of loss the insured could either send a new one or give up and gain nothing from the claim. Suit on the policy would be difficult because the policy contract limited the right to sue to times when the proof of loss condition had been met.

The adjustment of a commercial loss is performed in the same manner as any other property loss. The difference is one of tone rather than substance.

Adjusters who usually deal with a business entity, and its officers or employees, rather than an individual find claims handling is often, but not necessarily always, easier.

The experienced adjuster who deals with commercial claims usually has knowledge of the business and the people who operate the business. Some insurers even assign a single adjuster to a major commercial insured to handle all claims presented by the commercial insured. Familiarity and a good working relationship over a period of months or years benefits both the insured and the insurer.

A fire can be devastating for a business if the business is not rapidly put back to work after the fire is extinguished. The adjuster must recognize this fact and act quickly to complete a fair and thorough investigation.

To adjust the commercial property loss the adjuster must be familiar with the coverages and be ready to read and understand the policy using the efforts described above in Chapter 1.

An adjuster must always be absolutely certain which endorsements apply to the insured. The adjuster reviews the loss notice and re-reviews the coverages to ascertain which coverages apply to the type of loss reported. He or she makes immediate contact with the insured so that he or she may inspect the loss.

If there is a potential loss of earnings it is important to collect as much business documentation as possible so the history of the business can help the adjuster and his or her consultants to determine the amount of loss. Loss of earnings forms vary greatly. It is important that the terms and conditions are explained to the insured and why the adjuster should collect documents for analysis, possibly by a forensic accountant, including:

  • four years of corporate tax returns;
  • four years of profit and loss statements and balance sheets;
  • bank account statements and canceled checks;
  • one year of source documents on payroll, expenses, costs that continue, costs that do not continue, leases, contracts, and any other relevant business documents; and
  • if business information is kept on computers, the software used and a backup copy on a disk is necessary for the adjuster, or the retained forensic accountant, to work up the amount of loss.

The adjuster must always conduct a thorough investigation at the scene of the loss. He or she must establish the cause and origin of the loss, and obtain a general idea of the extent of the loss and what expert assistance will be required to complete the investigation and adjustment. If cause and origin of the loss are not obvious it is imperative that the adjuster retain the services of a cause and origin expert or engineer.

For example, if it is a fire loss, the adjuster must decide if a fire cause investigator is needed. If it is a theft or business interruption loss the adjuster must determine if the assistance of a forensic accountant is needed. If so, the adjuster should advise management that the loss requires the assistance of a company general adjuster who is more experienced and knowledgeable than the average adjuster.

If a general adjuster is not available the adjuster must determine whether the loss is too complex for his or her skill level or involves legal issues the adjuster will obtain authority to retain an insurance coverage lawyer experienced in major losses, commercial insurance coverage issues and/or potentially fraudulent claims. The attorney will provide advice and counsel to the adjuster who will assist, as a lawyer, the adjuster to make it possible to complete the adjustment of the complex commercial claim.

If, at any time in the investigation, it appears that the loss is suspicious, that there is a possibility that fraud is being attempted, that the co-insurance clause may come into effect, that there may be a penalty under the reporting form, or that a condition or warranty in the policy may have been violated by the insured, the adjuster must immediately ask the insured to sign a non-waiver agreement or issue a thorough reservation of rights letter.

The non-waiver agreement is a mutual agreement between the insured and the insurer that nothing done in the investigation of the claim will act to change the positions of the parties or waive any of the rights either party has under the contract. If the insured is unwilling to sign a non-waiver agreement because the insured does not understand it and wishes to seek the advice of counsel, the insured should be requested to seek that advice. However, since waiver could cause a problem the adjuster should not delay the investigation for more than the time necessary to issue and deliver a thorough and detailed reservation of rights letter to the insured.

The investigation continues pursuant to the reservation of rights. The non-waiver agreement and the reservation of rights letter are equally effective for maintaining the status quo while the investigation is being conducted; however, the non-waiver is preferred because it is a mutual agreement between the insured and the insurer while the reservation of rights is a unilateral statement of the insurer.

In Scottsdale Insurance Company v. MV Transportation, 115 P.3d 460, 36 Cal.4th 643, 31 Cal.Rptr.3d 147 (2005) the issue on appeal was whether an insurer that had properly reserved its rights could obtain reimbursement of its expenses of defending its insured against a third-party lawsuit where it was determined, as a matter of law, that the policy never afforded any potential for coverage and there was no duty to defend. The court held “yes.” In reaching its decision, the court discussed at length its prior holding in Buss v. Superior Court, 16 Cal. 4th 35 (1997).

A Colorado District Court found that the insurer properly asserted an exclusion from coverage. Moreover, Defendant’s reservation of rights sufficiently informed Plaintiffs of the potential grounds for denial of their claim, as the letter included Policy language describing several exclusions including wear and tear, deterioration, weather, and faulty construction, design, or maintenance—the same Policy language on which the insurer relied. [Gallegos v. Safeco Insurance Company of America, Not Reported in F.Supp.3d, 2015 WL 3526956 (D.Colo., 2015)

Though insurers sometimes send a reservation of rights letter, even when problems have not surfaced as a result of the initial investigation in first party cases, this function is merely to protect the insurer against claims of waiver and bad faith claims, Massachusetts Cas. Ins. Co. v. Rossen, 953 F.Supp. 311, 315 (C.D.Cal.1996. [Equitable Life Assur. Soc. of U.S. v. Schwartz, 291 Fed.Appx. 25, 2008 WL 3863428 (C.A.9 (Cal.) 2008)]

Some cases indicate that a reservation of rights letter somehow causes an insured to anticipate litigation, the Southern District of Florida did not find the case persuasive. [Gables Condo. and Club Ass’n, Inc. v. Empire Indem. Ins. Co. (S.D. Fla., 2019)]

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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