Waiver, Estoppel, Reservations of Rights, Salvage, and Subrogation in Insurance Claims: 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 9, pp. 9.24-9.30.

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

Problem S5-66-1.

(a) What are three possible courses of action available to adjusters when they receive a new claim?

(b) Give three reasons for why claim adjusters should perform complete files of information pertaining to the claim.

Solution S5-66-1.

(a) The following three courses of action are discussed by Myhr and Markham, p. 9.24:

1. "Accept the policyholder's word and settle the claim accordingly."
2. "Employ experts to investigate the claim or refer it to an SIU" (special investigative unit).
3. "Personally investigate the claim."

(b) The following reasons for why claim adjusters should perform complete files of information pertaining to the claim are discussed by Myhr and Markham, p. 9.25:

1. To justify settlement payments;
2. To audit claim procedures and claim-handling quality;
3. To enable transfer of cases among adjusters;
4. To provide satisfactory information to state insurance regulators;
5. To provide satisfactory information to reinsurers.

Any three of the above suffice as answers. Other valid answers may be possible.

Problem S5-66-2.

(a) Define waiver.

(b) Define estoppel.

(c) How might estoppel exist in cases where there was no waiver?

(d) Why are the concepts of waiver and estoppel important with regard to the actions of claim adjusters?

Solution S5-66-2.

(a) Waiver is "the voluntary and intentional relinquishment of a right," which can be "expressed explicitly or implied by conduct" (Myhr and Markham, p. 9.26).

(b) Estoppel is "a relinquishment of a right" that "results when someone's words or behavior cause another to rely, to his or her detriment, on those words or behavior. Estoppel bars the first party from asserting any rights inconsistent with his or her words or behavior" (Myhr and Markham, p. 9.26).

(c) Estoppel when there is no waiver can be "based on thoughtless, unintentional action on which the other party relies" to that party's detriment (Myhr and Markham, p. 9.26).

(d) Courts have ruled that adjusters have the authority to waive conditions within insurance contracts. Thus, if a course of action is prescribed by an insurance policy, the adjuster's statements to the contrary can constitute a waiver and/or estoppel of that course of action. Estoppel can occur if an adjuster continues to adjust a claim once an issue has been discovered that would prevent coverage from applying (Myhr and Markham, p. 9.26).

Problem S5-66-3.

(a) What do nonwaiver agreements and reservation of rights letters accomplish?

(b) What is the substantive difference between a nonwaiver agreement and a reservation of rights letter?

(c) Once a nonwaiver agreement or reservation of rights letter has been issued, what course of action must the adjuster take in addressing any outstanding coverage issues? What will happen if the adjuster fails to take this course of action?

Solution S5-66-3. This question is based on the discussion of nonwaiver agreements and reservation of rights letters in Myhr and Markham, pp. 9.26-9.29.

(a) Nonwaiver agreements and reservation of rights letters enable a claim adjuster to continue to investigate a claim without guaranteeing that insurer will make payment or provide coverage simply because the investigation continues to occur. These documents enable the insurer to later deny payment for the claim if there are legitimate reasons for why coverage should not be provided.

(b) A nonwaiver agreement is reached between the insurer and the insured; it is arrived at bilaterally. A reservation of rights letter is sent unilaterally by the insurer to the insured. A reservation of rights letter may also be more specific; it can tell "the policyholder about any specific problems, such as property or causes of loss that appear not to be covered or the policyholder's failure to perform any duties after a loss or to comply with other policy conditions" (Myhr and Markham, p. 9.26). In other respects, the two documents have the same content.

(c) "Once either a nonwaiver agreement or a reservation of rights letter has been issued, the adjuster must promptly resolve the coverage issue and must inform the policyholder. Should the adjuster fail to resolve the coverage issue and proceed to settle the claim, the claim payment constitutes a waiver, and the insurer is estopped from raising coverage issues again" (Myhr and Markham, pp. 9.26-9.29).

Problem S5-66-4.

(a) If an insurer has "totaled" a damaged item of property - i.e., paid the full value of the property - what right has the insured waived?

(b) What do adjusters typically do with regard to salvage of property? Why do they make this choice?

(c) What can an insurer do when an insured wishes to attempt to sell damaged covered property?

Solution S5-66-4. This question is based on the discussion of salvage in Myhr and Markham, p. 9.29.

(a) The insured can no longer salvage the property that has been "totaled". The property reverts to the insurer, and the insurer then has the option to recover some money by salvaging the property.

(b) Adjusters typically sell or consign the property to be salvaged to professional salvage companies. They do this because the "markets for salvaged property are specialized, variable, and irregular", and the insurer's personnel may not have the expertise to compete these markets (Myhr and Markham, p. 9.29).

(c) An insurer can consult a professional salvage company to receive an estimate of the percentage of original value that the damaged property has retained. The insurer can then offer a claim settlement equal to the original value of the property minus the salvage value. If the insured wishes to sell the property, the insured will likely accept this reduced settlement (Myhr and Markham, p. 9.29).

Problem S5-66-5.

(a) What is the role of the claim adjuster in handling a claim that has been subrogated?

(b) When a claim has been subrogated and the party responsible for the loss has liability insurance, what system can the two insurers use to settle the dispute without litigation?

(c) What is the upper limit of the claim amount which can be handled by the system in part (b).

Solution S5-66-5. This question is based on the discussion of subrogation in Myhr and Markham, p. 9.29.

(a) "Handling a claim involving potential subrogation is no different for an adjuster than handling any other claim, except that the adjuster must be especially thorough in establishing and documenting the cause of loss and might put the responsible party on notice of the liability claim" (Myhr and Markham, p. 9.29).

(b) When a claim has been subrogated and the party responsible for the loss has liability insurance, the two insurers can use the "nationwide arbitration system operated by Arbitration Forums, Inc." (Myhr and Markham, p. 9.29). This system offers faster and less expensive dispute resolution than the court system. It is also possible for the claim adjusters of the respective insurers to reach a settlement prior to arbitration.

(c) The upper limit of the claim amount which can be handled by the nationwide arbitration system of Arbitration Forums, Inc. is $100,000.

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