Evaluating First Party Property Claims

The Basic Investigation Required to Evaluate a Claim

Adapted from Zalma on Insurance Claims Part 107 Second Edition: A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims now available  here.

The evaluation of a first party property claim always involves:

  1. A determination of the actual cash value (ACV) of property the risk of loss of which was insured.
  2. ACV is defined as:
  3. replacement cost less physical depreciation;
  4. fair market value; or
  5. a combination of both.
  6. A determination of the replacement cost value (RCV) of the property the risk of loss of which was insured.
  7. A determination of the damage caused by a peril insured against.
  8. A determination of the cost to repair or replace the damaged, destroyed, or stolen property with material of like kind and quality.
  9. A determination of the ACV of the damaged or destroyed property.

It is the duty of the insured to prove his or her claim to the insurer. It is the duty of the adjuster to verify that claim or negotiate a settlement based upon the investigation that is satisfactory to both the insured and the insurer.

Structure Losses

The Scope of Loss

In a loss to structures or contents the scope of loss is generated at the first meeting between the adjuster and the insured. The scope of loss is where both parties agree on the categories of property damaged.

At this point they are not trying to ascertain the amount of the loss. However, their findings will be used later to arrive at the total amount. These agreements are not to the amount of the loss but to the general categories of loss that will be used to agree on the total amount of the loss.

In a typical fire loss, these categories include:

  • the number of rooms damaged by fire;
  • the length, width, and height of each room;
  • the number of openings – doors and windows – in the damaged room;
  • the type of wall coverings;
  • the need to remove and replace drywall, plaster, structural lumber, hardware, etc.;
  • the need to remove and replace fixtures and appliances;
  • the contents of the dwelling;
  • the type, quality, and quantity of contents and/or structural amenities;
  • the type, quality, quantity, and description of the damaged property that is salvageable;
  • the type, quality, and quantity of the nonrepairable portions of the property: and
  • any other damages observed to any part of the structure or its contents.

A dispute between the parties concerning coverage and scope of loss might well be resolved by the court on summary judgment, particularly to the extent it involves matters of contract interpretation, which are questions of law for the court. [Feldman v. Illinois Union Ins. Co. (2011) 198 Cal.App.4th 1495]

Converting the Scope of Loss to Dollar Amounts

The adjuster and the insured’s representatives then use the detailed information contained in the scope of loss to write a repair estimate based on his or her experience and tools made available by the insurer. Many insurers and independent adjusters use software programs like Xactimate, Boeckhs, Marshall & Swift, or their own in-house software, to produce the estimates. In a fire case the software would be used to create a repair estimate and to assist in evaluating estimates presented by the independent fire reconstruction contractors retained by the insurer or the insured or both.

Many contractors use the same software to prepare their estimates to make the insurer’s evaluation work easier. The adjuster requires each builder estimating a loss to use his or her agreed scope of loss so that multiple bids can be easily compared and so that, he or she may consider changing the scope if the bidding contractors discover additional damage not observed at the time the scope of loss was prepared.

The software takes the dimensions of each room and applies “unit costs” to the dimensions to create an estimate. A unit cost as applied to fire reconstruction is a dollar amount that years of study and experience have shown is necessary to repair a particular part of a structure. The unit costs were developed by time studies of restoration company staff at work that determined the amount of time needed to perform a particular repair. The cost of the labor and the materials used are evaluated with a mathematical formula so that a particular unit cost can be reached that includes the contractor’s overhead and profit. Similar unit costs exist for every category of property where construction or reconstruction is required.

If a licensed contractor is not being asked to assess the damage, an experienced property adjuster can still obtain a reasonable idea of the cost of repair sufficient to allow him or her to negotiate a settlement with the insured. He or she will measure each affected room, applying the Pythagorean theorem to measure triangular shapes and accounting for missing walls in three-walled rooms. The adjuster’s estimate can be used to negotiate a final price with the bidding reconstruction contractors or an insured who wishes to use his own labor or that of friends or colleagues.

Although the jury heard testimony that Xactimate is an insurance “industry standard”; the jury heard that Xactimate is “used widely in the insurance industry.” The expert who prepared the plaintiff’s Xactimate estimate in this case relied on reports of detailed inspections concerning the scope of damage and necessity of repairs-coincidentally, so did the contractor who prepared the Xactimate estimate in [Hennen v. McGinty, 335 S.W.3d 642, 646, 654 (Tex.App.-Houston [14th Dist.] 2011)]. No one specifically testified that the plaintiff’s estimated costs of repair were reasonable and necessary. [United Nat’l Ins. Co. v. AMJ Invs., LLC, 447 S.W.3d 1 (Tex. App., 2014)]

Failing to create a scope of loss can be expensive to the insurer.

In a case where the insurer, from the beginning, showed the insurer was more interested in avoiding paying the claim than trying to make a fair settlement. The public adjuster complained he could not get the insurer’s vice-president, or its adjuster to discuss what might be covered. The adjuster cancelled an appointment to determine the scope of loss and never made another. The insurer never sent anyone to the building to determine the scope of loss. The insurer rebuffed the public adjuster’s attempt even to discuss the matter. It made no payment until shortly before trial. The court concluded that the insurer’s actions were clearly not those of an insurer acting in good faith. [Track Mortg. Group, Inc. v. Crusader Ins. Co., 98 Cal.App.4th 857, 120 Cal.Rptr.2d 228, 02 Cal. Daily Op. Serv. 4599, 2002 Daily Journal D.A.R. 5847 (2002)] nor one willing or competent to adjust a property claim.

Obtaining Competitive Estimates

If the loss is large enough to warrant multiple estimates, either during assessment of the scope of loss, or immediately after it is completed, the adjuster should obtain competitive estimates from two or more licensed contractors. The contractors preparing competitive estimates must be instructed to write their estimates based on the scope of loss agreed between the insured and the insurer.

The adjuster should walk through the site of the loss with the contractors so that if there is any question as to the scope of the loss, it can be resolved with the adjuster, the insured and the bidding contractors at the scene of loss.

Reviewing the Estimates

With the estimates prepared on the same scope of loss the adjuster can compare the estimates, lumber for lumber, window for window, and dry-wall for dry-wall and learn which contractor found more damages than those found at the creation of the original scope of loss. The comparison would then allow the insurer and the insured to determine an exact amount of loss.

The result of the adjuster’s work is called a “bid comparison.” The bid comparison is usually created on a spreadsheet so that the prices estimated by each contractor for each category of work listed on the scope may be compared.

The purpose of the bid comparison is to establish that all of the contractors have presented a comprehensive estimate of all the work required to effect a complete repair and avoid supplemental estimates. If the low bidder has left out a category of work it is often found on the bid comparison and that when that category is added in, the low bidder is found to be, in fact, the high bidder. The adjuster should, therefore, never accept a bid on its face without completing a complete bid comparison.

If all the contractors who have submitted bids are licensed and seem equally able to perform reconstruction work with the same quality of workmanship that existed before the loss, it is best to recommend to the insured the use of a builder who has successfully estimated a similar scope of work in the past and has completed the work successfully and satisfied the property owner.

Every final adjustment should be based primarily on the most competitive bid that includes the full scope of loss prepared by a competent reconstruction contractor.

Every insurance claims person must understand that the Schedule of Prices or unit costs included in a software program like Xactimate, were estimates for the purpose of bid comparison. The contractor who is the successful bidder is to be compensated based on actual quantities of work performed, materials used as measured by the adjuster. [Frenz Enterprises, Inc. v. Port Everglades, 746 So.2d 498 (Fla. App., 1999)]

Negotiating Settlement

After the adjuster has completed the bid comparison and established the objective amount of the loss, he or she should meet with the insured and present each of the estimates and the bid comparison. The adjuster will then advise the insured that the settlement of the building or structure loss will be based on the objective value of the loss determined by the bid comparison.

The decision on which contractor to use is always made by the insured not the insurer. The insured may believe he knows someone who can do the work better or who, from experience, the insured knows will satisfy him, and will accept the dollar amount offered by the insurer.

The adjuster should never demand that a particular contractor be used since the insurer is only obligated to pay indemnity, not to reconstruct a building.

If the insured is satisfied that the estimates cover the entire scope of loss agreed to at the first meeting with the adjuster, the settlement of a structure loss will be amicable.

Adapted from Zalma on Insurance Claims Part 107 Second Edition: A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims now available  here.

Read about this book and other insurance books by Barry Zalma at http://www.zalma.com/blog/insurance-claims-library/

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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