Recipes for Success: What Should the Claim File Contain?

Maybe the risk manager is buying unbundled claim services from a third-party claim administrator. In that case, the client has the same motive for checking the claim file for thoroughness. Maybe the risk manager has internalized the claim-handling function and manages some claims in-house. To make sure that the claim staff embraces sound claim practices, the risk manager may want to conduct an internal audit.

Bare Essentials

We can say that each claim file should have certain elements. Beyond that, claim documentation should surpass bare minimums to represent best-in-class disciplines.

Generally, each claim file should include:

• Notice of loss or accident report
• Insurance coverage information (unless there is total self insurance)
• Investigative or fact-finding work product, or written evidence of attempts to gather it
• Damage information or evidence of attempts to find it
• Copies of closing documents if the claim has been closed or resolved

A notice of loss or accident report is self explanatory. Often, this may be the ACORD loss report completed by the policyholder, insurance agent, or broker. In workers' compensation cases, this may be an Employer's First Report of Accident. In some instances (professional or product liability, environmental impairment, directors and officers, etc.), the first report may be a letter of representation from a claimant's attorney or suit papers.

Insurance coverage information is evidenced in various ways and to different degrees of thoroughness. In some files, the ACORD or loss report form will cite basic coverage elements: effective dates, policy numbers, and policy limits. The claim file might include a copy of the insurance policy or maybe just a copy of the declaration page.

Investigative work product may hinge upon the claim's severity, the elapsed time post-loss, and the handling adjuster's diligence (or indolence, as the case may be). Investigative work products include signed or recorded statements from claimants, insureds, and witnesses; notes of interviews; photographs; official reports (police, fire, EMS, coroner); medical records and bills; property damage estimates or repair bills; weather reports; and news articles.

The texture of investigative work product may vary, depending on the type of claim under consideration. A fleet auto claim will have investigative materials that differ from a dog-bite homeowner's claim or a diving board product liability loss. The important point is that there should be some type of investigative work product in the file, or evidence that the adjuster has undertaken steps to procure it. Absence of both is a danger sign that claims are being handled sloppily.

Damage information may include medical bills, doctor and hospital records, medical and wage authorizations, repair estimates and invoices, valuation information on property to be replaced, and wage loss data, such as pay stubs, tax returns, or employer statements of earnings.

If the file is open, it makes no sense to look for closing documents. Often, however, a claim review will focus on closed files or a blend of open and closed. In finalized cases, the claim file should contain copies of the closing documents. In some instances, this might be a Proof of Loss executed by the insured. In others, there might be a Release of All Claims. Litigated third-party claims that the adjuster eventually settled might not include a release, but rather a copy of an executed dismissal issued by the court acknowledging that the claim is extinguished.

Extras: Read All About Them

Other extras that a good claim file might include are:

• Reserve worksheets These show the process, but not necessarily a formula, that the claim person used to set a reserve. Note that we say worksheets, plural. As reserves are dynamic and changing, there might be multiple reserve sheets to help outsiders fathom how an adjuster came to put down a number at different points in a file's life cycle.
• Adjuster file notes View these as progress notes, akin to the type of entries a nurse might write about a hospitalized patient. These provide a coherent narrative for outsiders to trace the progress of a claim. It also helps if the claim file were reassigned (a common occurrence in busy claim units) or if someone calls with a question or problem and the handling adjuster is away.
• Payment information This includes copies of checks or drafts issued on a claim, printouts showing current reserves and cumulative payments to date, and erosion against the policy limit.
• Correspondence The claim file also should contain copies of relevant correspondence, such as letters to and from the insured, the claimant or claimant's counsel, defense counsel, and the agent or broker. Correspondence is a broad term that includes letters, faxes, e-mail, etc. These items provide a narrative thread to those reviewing the file. They help outsiders understand what is happening, or what already has occurred. Furthermore, they function as a narrative road map to the adjuster's questions and thought processes during the handling of the file. The lack of such items might be another red flag that the case files are superficial.

Some files might contain copies of an insured's loss run, as well. Insurance companies' claim practices vary on this point, however, and the loss run is something that a client may not find in the claim file. There are many reasons for this. The loss run may contain information on unrelated claims, causing confusion. In addition, there are insurance company concerns about the discoverability of claim files. Loss runs typically reflect reserves. If an insurance company contests coverage but, for example, carries a significant claim reserve, the claim file will be produced in discovery and undermine the insurance company's coverage stance.

Perhaps the insured demands that the adjuster settle a claim within policy limits and the adjuster is resisting this. If the loss run shows that the adjuster has posted policy limits or has reserved the case for much more than the adjuster has offered, an insured could use the loss run against the adjuster in a bad-faith claim. For these and other reasons, some insurance companies avoid including loss runs in the claim file. Nevertheless, there probably is no one single industry standard here.

If the claim were the subject of insurance and coverage questions arose, the claim file also might contain documents such as coverage analysis, reservation of rights letters, non-waiver agreements, coverage declination letters, coverage counsel opinions, copies of declaratory judgment action filings, etc. In some cases, however, the claim department may partition this material, separating it from the rest of the claim file materials.

So, risk manager, is your claim service whipping up a souffl? or a sou-flop? Check the ingredients of the claim file to answer that question. In determining what is a quality work product, thoroughness is always in good taste.

Kevin Quinley, CPCU, is senior vice president for Medmarc Insurance Group in Chantilly, Va. He can be reached at kquinley@medmarc.com.