Basics of Liability Claim Adjusting: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Insurance Operations, Regulation, and Statutory Accounting, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:

Myhr, A.E.; and Markham, J.J. Insurance Operations, Regulation, and Statutory Accounting (Second Edition). American Institute for Chartered Property Casualty Underwriters. 2004. Chapter 10, pp. 10.3-10.8.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-67-1.

(a) On what actions do liability claim adjusters spend most of their time and effort?

(b) Who is the claimant in a liability claim?

(c) Which kind of liability claim is more common - a claim for bodily injury or a claim for property damage?

(d) According to Myhr and Markham, p. 10.4, what are the four steps in the process of adjusting liability claims?

Solution S5-67-1.

(a) Liability claim adjusters "spend most of their time and effort investigating and evaluating the legal aspects of liability and damages" (Myhr and Markham, p. 10.3).

(b) In a liability claim, the claimant is a third party with a claim against the insured. This claim arises from the allegation that the insured is liable for damages to the third party (Myhr and Markham, p. 10.3).

(c) A liability claim for bodily injury is more common than a liability claim for property damage.

(d) According to Myhr and Markham, p. 10.4, the four steps in the liability claim adjusting process are as follows:
1. Determining coverage;

2. Determining legal liability;

3. Determining damages;

4. Negotiating and settling the claim.

Problem S5-67-2.

(a) If a liability claim occurs, what aspect of the claim itself (not of the insurance policy language) determines whether coverage applies? What part of that aspect is irrelevant?

(b) What should a claim adjuster do if a part of a liability claim is clearly not covered by the insurance policy?

(c) Why do insurers typically pay the entire settlement of a liability claim, even when parts of that claim are clearly not covered under the policy?

(d) What should a claim adjuster do if there exists a significant possibility that the entire liability claim is not covered by the insurance policy?

Solution S5-67-2. This question is based on the discussion in Myhr and Markham, p. 10.5.

(a) What determines whether coverage applies for a liability claim are the allegations of the claimant. If the allegations are that the insured is liable in a manner that is covered by the insurance policy, then coverage applies. What is irrelevant is whether or not the allegations are true; coverage would apply even for groundless allegations of liability.

(b) If a part of a liability claim is clearly not covered by the insurance policy, the claim adjuster must explain to the insured why this part is not covered and refer to the relevant policy provisions in the explanation. "The adjuster must explain that the insurer will continue handling the claim but that the insured might have to contribute to an eventual settlement or judgment" (Myhr and Markham, p. 10.5).

(c) Insurers typically pay the entire settlement of a liability claim, even when parts of that claim are clearly not covered under the policy, because when liability claims are settled, the basis of liability for each aspect of the settlement is seldom specified, and so it is known how the settlement amount is attributed to the various covered and non-covered aspects of the claim (Myhr and Markham, p. 10.5).

(d) If there exists a significant possibility that the entire liability claim is not covered by the insurance policy, the adjuster must explain to the insured in writing why there exist doubts with regard to coverage. The adjuster should also explain his course of action - which is typically a further investigation. Based on the facts of this investigation, the adjuster can deny coverage. The insured would be informed if coverage is found to apply, as well as if it is found not to apply (Myhr and Markham, p. 10.5).

Problem S5-67-3.

(a) What is a declaratory judgment action?
(b) What are two possible disadvantages of filing a declaratory judgment action?

Solution S5-67-3. This question is based on the discussion of declaratory judgment actions in Myhr and Markham, pp. 10.5-10.6.

(a) A declaratory judgment action is a court's declaration of the rights of the parties in a dispute, but not a determination of which party's case is actually valid. Declaratory judgment actions determine issues of coverage - i.e., what is covered under the applicable insurance policy - but not issues of liability - i.e., whether the third-party claimant's allegations against the insured are actually legitimate.

(b) The following possible disadvantages of filing a declaratory judgment action are mentioned by Myhr and Markham, p. 10.6:

1. Declaratory judgments are expensive and often generate tens of thousands of dollars in legal costs. They are therefore not suitable for addressing small or moderate claims.

2. Declaratory judgment actions sometimes take as long to obtain as court decisions on other cases. This defeats their purpose.

3. If a declaratory judgment action is unsuccessful, it "complicates the defense of the underlying action" (Myhr and Markham, p. 10.6).

Any two of the above suffice as an answer. Other valid answers may also be possible.

Problem S5-67-4.

(a)What term do attorneys typically use to refer to what insurers would call "bodily injury" claims?

(b)Why should adjusters not deny coverage without further investigation for lawsuits where only injunctions and no monetary damages are sought?

(c)Name three kinds of claims that are clearly not covered by liability insurance for bodily injury or property damage.

Solution S5-67-4. This question is based on the discussion in Myhr and Markham, p. 10.6.

(a) "Bodily injury" claims in insurance are typically called "personal injury" claims by attorneys.

(b) Lawsuits where only an injunction is sought may be concerned with ongoing bodily injury; the injunction is then intended to stop further injury. Alternatively, such lawsuits may involve an attempt to stop interference with the use of property. "Because loss of use of property is included within the definition of 'property damage,' a lawsuit based on such alleged damage might be covered" (Myhr and Markham, p. 10.6).

(c) The following kinds of claims are clearly not covered by liability insurance for bodily injury or property damage, according to Myhr and Markham, p. 10.6:

1. "Lawsuits alleging breach of contract resulting only in financial harm";

2. "Lawsuits alleging financial fraud";

3. Regulatory fines;

4. Minor criminal fines.

Problem S5-67-5.

(a) What two questions must liability claim adjusters answer in order to determine whether the intentional acts exclusion applies?

(b) What two kinds of allegations by the third-party claimant make it difficult for the insurer to apply the intentional acts exclusion?

Solution S5-67-5. This question is based on the discussion of intentional acts by Myhr and Markham, p. 10.7.

(a) In order to determine whether the intentional acts exclusion applies, liability claim adjusters must answer the following questions (Myhr and Markham, p. 10.7):
1. "Did the insured intend the result of his or her action or merely intend to commit the action without contemplating the injurious outcome?"
2. "Can intentional acts be excluded when the claimant also alleges negligence or strict liability on the insured's part?"
The following can also be a valid answer:
3. "Is the insured liable for the intentional acts of an agent or servant, if the insured is vicariously liable?"

(b) Allegations by the third-party claimant of (1) negligence and/or (2) strict liability make it difficult for the insurer to apply the intentional acts exclusion, because this would render at least a part of the claim to be covered. When even a part of the claim is covered, the insurer is obligated to defend the insured (Myhr and Markham, p. 10.7).

See other sections of The Actuary's Free Study Guide for Exam 5.