On a daily basis, we face a bombardment of sobering statistics about the economy through various media outlets. The front page of most newspapers continue to post dismal reports about the economic conditions of 2009, and from all indications, the situation will likely worsen before it improves.
Most Americans and businesses are experiencing the effects in some way, so it should come as no surprise that these conditions have filtered to the insurance industry. I am, however, somewhat amazed at the very sudden changes that have occurred in the past several months, specifically those in homeowner claim processing involving scheduled jewelry.
More than ever, insurers seem willing and ready to issue a check to the policyholder and close the file. There is no doubt that this path of least resistance is a simple and expedient way to close a file. But this does not make it right.
According to the U.S. Justice Department, more than $1 billion in scheduled insured jewelry is lost every year. In a weakening economy, questionable and fraudulent claims will probably rise. Insurers will write a large number of settlement checks — with an estimated average cost of $5,000 — this year, probably more than ever.
First of all, there are two types of scheduled jewelry policies written in the United States today. An agreed value policy may have a slightly higher annual premium. With this type of policy, the policyholder provides the insurer with a written appraisal from a jeweler. Let's say, for example, the jeweler appraises a piece at $10,000. The jewelry is then listed on the policy as scheduled personal property. The policyholder pays an additional annual premium, which ranges from one to three percent. Should a loss occur and the company agrees to settle the claim, settlement would be made in the form of a check paid directly to the policyholder for the agreed value of $10,000. Some of these policies even contain a provision to pay more than the agreed value if the item cannot be replaced for the agreed amount. The provision in the policy may allow for settlement for as much as 150 percent or $15,000 (in this scenario) if the item cannot be replaced for the agreed amount ($10,000). It is important to note that these provisions do vary from company to company.
The replacement policy is the most frequently written policy. The process of insuring the item is the same as the agreed value policy. The main difference is that the insurer has the option of replacing the item for the insured with like kind and quality. The insurer will utilize a jewelry replacement service, which can provide a price to replace the item based on the description and information contained in the appraisal the policyholder supplied the insurer with when the item was added to the policy. Most policies of this sort contain provisions for the insurer to opt to replace the item at whatever the cost would be (as quoted from the jewelry replacement expert), as long as the price does not exceed the replacement policy limit.
Settlement with a replacement policy is usually made directly to the replacement service, once the policyholder signs a "direction to pay" upon successful replacement of the article. Keep in mind that the settlement can be less than the scheduled amount if the item can actually be replaced for less. The insurer also has the option to issue a settlement check directly to the policyholder for the lesser amount. The insurer does not have to pay the policyholder the scheduled policy limit.
Whenever a settlement check is issued to the policyholder, he may then take the funds and do whatever they wish. Most likely the lost jewelry will not be replaced, and the settlement dollars will be used for something else — especially in tough economic times.
I have noticed that price quote requests for claimed scheduled items through our database have risen 25 percent since September, 2008. I am also finding that insurers are in fact taking the path of least resistance and simply issuing a check to the insured in increasing numbers rather than replacing. Actual replacement assignments have dropped.
When I inquired about this sudden trend of rapid settlement via check issuance, many supervisors and adjusters commented that the insured did not want to replace the item and needed the money for something else. Others said that, in order to improve customer service, the insurer can do whatever the policyholder wishes.
When receiving a replacement assignment, I have the opportunity to contact the policyholder and explain the replacement process. He often tells me the adjuster offered cash to settle the claim. Others have been very honest, admitting that they need the cash more than the jewelry. So is cash settlement the best way to close a claim? In my opinion, the answer is "probably not."
Replacing jewelry is a sensible, cost-effective alternative to cashing out. Replacement helps discourage fraud. The policyholder may think twice before filing a questionable claim if he learns that the policy carries a replacement provision (and most do). Cash settlement will serve to encourage questionable claims and fraudulent claims. An insured's personal financial duress is not a reason to provide cash settlement on a claim when the policy offers other options.
According to information contained in an online issue of Claims, Kristie Dwyer, information analyst for the National Insurance Crime Bureau (NICB), does state that jewelry losses were up 17 percent between 2006 and 2007. It is my opinion that these numbers will continue to climb as the economic distress continues.
The most important factor that may be overlooked here is that the main source of income of an insurance company is collection of insurance premiums. Insurers rely on the collection of nearly $2 billion in jewelry premiums each year, according to JCRS Inland Marine Solutions Inc. Companies pay out $1 billion per year. In these economic times, jewelry sales have plummeted. Thus, the amount of jewelry being insured has fallen as well.
Questionable and fraud-driven claims will continue to rise. More claims will be submitted and promptly paid. The margin of profit for the insurer will diminish.
When a cash out occurs rather than a replacement, the "collection of premiums cycle" is broken, meaning the insurer will no longer collect premiums on a cashed-out item that is not replaced. This will cost companies millions of dollars every year.
In summary, when settling a claim that is covered under an agreed value policy, the only option is to settle on the appraisal value. The insurer no longer collects premiums if the item is not replaced and insured.
With a replacement policy, the insurer has two options: The first is to offer replacement based on the quote generated by the replacement service and know that premiums will be collected again on the new replacement item. Suggesting replacement should always be offered as a cash alternative. The choice is that of the insurer, and not the policyholder. The second option is to issue payment to the insured based on the replacement service quote. The insurer no longer collects premiums if the item is not replaced and insured.
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