THE CHARTERED INSTITUTE

OF LOSS ADJUSTERS

CH 2 Introduction to Claims Handling

CILA CH 2 – Introduction to Claims Handling

ii
 INTRODUCTION TO
CLAIMS HANDLING

by
Malcolm Hyde
BSc (Hons) Dip (Fr) FCII FCILA

WITHERBY Insurance
& LEGAL

Witherby Insurance and Legal

A Division of Witherby Publishing Group Ltd
4 Dunlop Square, Livingston, Edinburgh, EH54 8SB, Scotland, UK
Tel No: +44(0)1506 463 227 - Fax No: +44(0)1506 468 999
Email: info@emailws.com - Web: www.witherbyseamanship.com
CILA CH 2 – Introduction to Claims Handling

First Published 2011

ISBN: 978-1-85609-447-4

© Witherby Publishing Group Ltd, 2011

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library.

Notice of Terms of Use

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise,
without the prior permission of the publisher and copyright owner. While the principles discussed and the
details given in this book are the product of careful study, the author and publisher cannot in any way
guarantee the suitability of recommendations made in this book for individual problems, and they shall not
be under any legal liability of any kind in respect of or arising out of the form or contents of this book or
any error therein, or the reliance of any person thereon.

Printed and bound in Great Britain by Bell & Bain Ltd, Glasgow

Published in 2011 by
Witherby Publishing Group Ltd
4 Dunlop Square, Livingston
Edinburgh, EH54 8SB
Scotland, UK
Tel No: +44(0)1506 463 227
Fax No: +44(0)1506 468 999
Email: info@emailws.com
Web: www.witherbys.com

iv
 Introduction

Introduction
This learning material has been designed with two main concepts in mind:
1. That it is easily understandable
2. That it engages the learner, promoting questions such as why, who and how does this
affect me?
The learner could simply read and learn the material, but the concept of adding
“Activities” and “Putting it into Practice” is designed to help the learner explore the
subject to a greater depth.
Those who adopt a positive, proactive approach will benefit as they will enhance their
learning, becoming ever more useful in the workplace; the resulting rewards for this are
immense.
There are deliberately no suggested answers to either the Activities or the Putting it into
Practice questions. These are set for you to explore.
CILA would like to acknowledge the assistance of Luke Exford and Alison Gamble in the
production of this book.

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CILA CH 2 – Introduction to Claims Handling

About the Author

Malcolm Hyde BSc (Hons) Dip (Fr) FCII FCILA is the Executive Director of the Chartered
Institute of Loss Adjusters. He is a Chartered Loss Adjuster and Chartered Insurance
Practitioner. His main loss adjusting experience has been in Property Claims although
he has also worked in France on information technology implementation projects. Since
1994 he has been involved in the education and training of Loss Adjusters and considers
the passing on of knowledge in a clear and engaging manner to be highly beneficial and
rewarding. Malcolm became the Executive Director of the Institute in 2009 and this
has provided a further platform to provide learning materials. He co-authored Property
Insurance Law & Claims and previously provided the technical approval for a text book
produced by the CII.

The author is very grateful to the following people for their contributions and assistance.

Simon Burley is a Director at Camford Sutton Associates, a company providing consultancy

and claims resolution services. Simon’s area of expertise is within the liability field, where
he provides assistance in resolving difficult claims, quantum investigation and consultancy
on liability claims related matters. Simon is a CILA Past President and a member of both
the Liability SIG and the Small Independent Practices SIG Committees. He is also Chairman
of the Professional Conduct Committee and acts as an examiner for CILA.

Luke Exford MRICS, FCILA, FUEDI ELAE qualified as a Chartered Quantity Surveyor in 1988
having worked in the construction industry, prior to joining a prominent Loss Adjusters
based in London. Luke qualified as a Chartered Loss Adjuster in 1998 and specialises in
property and construction losses. Luke has been a representative on Council and a former
Chairman of the Property Special Interest Group.

Alison Gamble BA (Hons) has worked in the insurance industry for 15 years in a variety of
roles, including claims handling, training and quality management. She has a particular
interest in modernising and improving our industry while at the same time retaining
traditional standards and technical expertise.

Michelle Haynes BA (Hons) ACII ACILA is a Chartered Loss Adjuster who has worked in the
Insurance industry since 2000 and in Loss Adjusting since 2004. Michelle recognised the
importance of gaining her chartered status. Firstly she completed an Advanced Diploma
in Insurance and then achieved an Associate status with the CII. Michelle then proceeded
quickly passing the CILA examinations in under two years before embarking on the
Accreditation for Chartered Status. Michelle is keen to encourage others to undertake
the examinations and maintain technical competence within the industry, and she was
therefore delighted to contribute to this learning material using her knowledge base from
her own studies and experience from busy property Loss Adjusting practices.

vi
 Contents

Contents
Introduction v
About the Author vi

SECTION ONE − INTRODUCTION TO THE INSURANCE POLICY 1

1.1 What is an Insurance Policy? 3
1.2 The Promise or Operative Clause 4
1.3 The Agreement 4
1.4 The Property Insured 4
1.5 Loss or Damage 5
1.6 Value of Property 5
1.7 Key Points 6
1.8 Definitions 6
1.9 General Conditions 7
1.10 Key Points 8
1.11 General Exclusions 9
1.12 Key Points 10

SECTION TWO − POLICY CONDITIONS AND WARRANTIES 11

2.1 What is Meant by a Condition 13
2.2 Types of Conditions 14
2.3 Other Policy Conditions 16
2.4 Difference Between Conditions and Warranties 16
2.4.1 Points to Remember about Warranties 16
2.4.2 Insurers’ Right to Void the Policy 17
2.5 What Happens when there is a Breach of Warranty 17
2.6 Key Points to Remember 18

SECTION THREE − THE PERILS 19

3.1 Fire 22
3.2 Explosion 22
3.3 Lightning 23
3.4 Flood 23
3.5 Storm 24
3.6 Escape of Water 25
3.7 Riot 26
3.8 Malicious Damage 26
3.9 Theft 27
3.10 Accidental Damage to Underground Services 28
3.11 Accidental Damage 28

SECTION FOUR − INTRODUCTION TO CLAIMS VALIDATION 31

4.1 What is Claims Validation? 33
4.2 Key Points to Remember 36

SECTION FIVE − CLAIMS HANDLING − NEGOTIATION 37

5.1 Win or Lose? 39
5.2 Preparation 39
5.3 Communication 40
5.4 Key Points to Remember 42

SECTION SIX − REASONABLE CARE 43

6.1 Reasonable Care within the Policy 45
6.2 What does Reasonable Mean? 45

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CILA CH 2 – Introduction to Claims Handling

6.3 FOS View on Reasonable Care 46

6.4 Key Points to Remember 47

SECTION SEVEN − MITIGATION 49

7.1 Mitigation Measures for Household Contents 51
7.2 Evaluating the Benefit of Repair or Restoration 52
7.3 Controlling Mitigation Spend 52
7.4 Key Points to Remember 53

SECTION EIGHT − GRADUALLY OPERATING CAUSE 55

8.1 Gradually Operating Cause as a Policy Exclusion 57
8.2 Identifying a Gradually Operating Cause 57
8.3 Other Considerations 58
8.4 FOS View on Damage to Underground Services 58
8.5 Key Points to Remember 59

SECTION NINE − UNDERINSURANCE 61

9.1 Penalties for Underinsurance 63
9.1.1 Change of the Basis of Settlement 63
9.1.2 Room Based and Bedroom Rated Policies 64
9.2 Commercial Policies 64
9.3 Pro rata Condition of Average 64
9.4 The Special Condition of Average 65
9.5 The Two Conditions of Average 65

SECTION TEN − REPUDIATIONS 67

10.1 The Rationale for a Repudiation 69
10.2 When and How to Repudiate 70
10.3 What to Tell the Policyholder 71
10.4 Signposting a Repudiation 71

SECTION ELEVEN − FRAUD, DETECTION AND PREVENTION 73

11.1 The Definition of Fraud 75
11.2 Offences Under the Act 75
11.2.1 False Representation 76
11.2.2 Dishonest 76
11.3 Intent 77
11.4 Identification of Fraud 78
11.5 Fraud Indicators 79

SECTION TWELVE − FINANCIAL CRIME 81

12.1 Definition of Financial Crime 83
12.2 Definition of Fraud 84
12.3 Money Laundering Regulations 84
12.4 Key Points to Remember 85

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 1
INTRODUCTION TO THE INSURANCE POLICY
CILA CH 2 – Introduction to Claims Handling

2
 Introduction to the Insurance Policy

1. INTRODUCTION TO THE INSURANCE POLICY

Contents
1.1 What is an Insurance Policy?
1.2 The Promise or Operative Clause
1.3 The Agreement
1.4 The Property Insured
1.5 Loss or Damage
1.6 Value of Property
1.7 Key Points
1.8 Definitions
1.9 General Conditions
1.10 Key Points
1.11 General Exclusions
1.12 Key Points

Introduction
The Insurance Policy is probably the most important reference point when dealing with
claims as it is this document that details the cover provided. When handling a claim it is
essential to refer to the individual Insurance Policy in each case and this requires that you
are familiar with the format of an Insurance Policy.
This section provides an outline of the various sections of the Insurance Policy and explains
the elements that you will need to understand and be aware of when handling any claim.

1.1 What is an Insurance Policy?

The Policy is the contract between the Insured and their Insurance Company. You will
recall that Book 1 outlined the essentials of the contract between the Insured and the
Insurance Company. An Insurance Policy is a written document that details the extent
of cover being provided by the Insurance Company to the policyholder. All property
insurance policy wordings have the various sections outlined below. Wordings are often
based on the ABI recommended wordings which can be found on the CILA website
www.cila.co.uk. These standard policies outline the format and content required in an
insurance policy.
The various sections of the Insurance Policy are usually, but not always, as follows:
● The Promise or Operative Clause
● Definitions
● Perils (covered in Section 3 of this book)
● General Conditions
● General Exclusions.

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CILA CH 2 – Introduction to Claims Handling

1.2 The Promise or Operative Clause

The dictionary definition of “operative” is “working”. This can be taken to mean that the
operative clause is the part of the policy wording which confirms the factors that must be
in place for the policy to be in operation or working.
This clause is also referred to as ‘the Promise’, as it is this series of words that forms the
agreement between the Policyholder and Insurer. It outlines what each party promises to
do. A claim will only be covered if the insurance policy is in force and has been accepted
by both parties. The operative clause is therefore an essential part of the policy as
without confirmation that both parties have fulfilled their promise no contract exists
between the parties.
The following is an example of an operative clause:
“The Insurer agrees (subject to the terms, definitions, exclusions, provisions
and conditions of this policy) that if after payment of the first premium the
Property Insured described in the schedule be lost destroyed or damaged
by . . . (perils outlined). . . during the period of insurance (or any subsequent
period for which the Insurer accepts a renewal premium) the Insurer will
pay to the Insured the value of the property at the time of the loss or its
destruction or the amount of the damage or at the Insurer’s option reinstate
or replace such property or any part of it”.
As you will appreciate this is a complicated piece of text, but it will be broken down to
highlight the parts relevant to claims handling.

1.3 The Agreement

The Operative Clause generally starts with the phrase “The Insurer agrees” or something
similar. This is the Insurer’s acceptance of the fact that they will provide policy cover once
the payment of insurance premiums has been received (subject to the terms of the policy
definitions, perils, general conditions and general exclusions which are all discussed later
in this section). The Policyholder promises to pay the agreed premium in exchange for the
policy cover provided.
As an example, let us consider the importance of the agreement detailed in the operative
clause and what it means. If Mr Smith, a policyholder, has been online and taken out an
insurance policy for his three bedroom detached house and he has a fire a few weeks later,
try to consider how the wording of the operative clause could affect the claim. What steps
should be taken to check that the Policyholder has fulfilled his promise?
Checking that premiums have been paid is vital. If the Policyholder has not paid the
insurance premium by the date agreed by both parties, they have broken their promise
and the agreement has not been met. In this case the Insurer does not need to issue
payment for the claim as the policy was not actually in existence as the policyholder has
not fulfilled their part of the agreement by fulfilling their promise of making payment of
premiums. This could mean that a very large claim for fire damage will not be paid by
Insurers.
However, if it is confirmed that the policyholder has paid the premium then the policy was
activated. The next stage is to assess whether payment should be issued in respect of the
claim.

1.4 The Property Insured

The operative clause states that Insurers will make a payment for loss or damage to the
Property Insured as described on the policy schedule. This means that they will only pay

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 Introduction to the Insurance Policy

for damage to the property detailed on the schedule, in our example a three bedroom
detached house. When Mr Smith took out the policy, he would have been asked by the
Insurance Company for details of the property that he intended to Insure. The premiums
being charged would have been set by the Insurance Company based upon the information
Mr Smith provided about the property. In our example Mr Smith did this online, as is often
the case now with household policies, and he would have provided this information at the
time of completing the application form online.

Activity
List some questions you would ask to check that the damage was to the
property insured in the following examples:
● Mr Smith’s home
● An item of jewellery
● An outbuilding.
The key point here is that the operative clause confirms that Insurers will
only pay for loss or damage to the property insured. This means that it is
imperative that you make the necessary enquiries to establish that the
property which has been lost or damaged is the same property defined in
the policy or policy schedule.

1.5 Loss or Damage

This part of the operative clause confirms that Insurers will only pay for an item/
property that has been lost (this includes destroyed) or damaged. The cause of the loss
or damage and policy coverage are discussed later in this section. At this stage, we
are concerned with making enquiries to check that the item/property has been lost or
damaged.
Apart from a Loss Adjuster’s visit and inspection, a number of other sources are available
in the first instance to confirm that a loss or damage has occurred, for example
photographs of the damaged item, independent reports from surveyors or Loss Adjusters
and crime references/police reports. Validation that the item claimed for was lost or
damaged is discussed in greater detail in Section 4.

Activity
What steps would you take to establish that the following items had been
lost/damaged in the following examples:
● A policyholder notifies his insurance company of a stolen watch
● A house has been reported to Insurers as being damaged by fire
● A carpet has been water damaged.

1.6 Value of Property

The final part of the operative clause that is relevant to claims handling is the section
that confirms that Insurers will pay the value of the property at the time of the loss. This
means that the Claims Handler will need to establish the value of the lost or damaged
item; Insurers will pay no more than the item’s value at the time of the loss. Validation of
the replacement cost or repair cost will be explored in detail in Section 4.

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CILA CH 2 – Introduction to Claims Handling

1.7 Key Points

The operative clause is an essential part of the insurance policy wording. It details the
agreement entered into by the Insurer and the Policyholder. The operative clause is not
always referred to on a case by case basis, but it is important to have an understanding of
the relevant parts to help establish whether the Policyholder is entitled to be indemnified
for their claim and for confirmation that a contract exists.

Activities
Find your company’s policy wording library. Look at three different policy
wordings and locate the operative clause in each. Compare and contrast the
operative clause in each wording.
Discuss the operative clause with your colleagues. Has anyone ever had a
situation where the premiums have not been paid but a claim notified? How
did Insurers ask for the claim to be handled?
At the beginning of this section, we provided a ‘typical’ operative clause.
Review this and re-write the operative clause in your own words making
it as understandable as possible to someone without insurance or legal
knowledge.

1.8 Definitions
The definitions section of a policy sets out exactly what an Insurer means by the words
used in their policies. This is why it is sometimes entitled the ‘Meanings of Words’ section.
You will recall that a number of items and parties are detailed in the operative clause.
The Definitions section of the policy wording should clarify what is meant. Words that are
defined in the policy may appear in bold type or capital letters whenever they are used in
the policy wording.
An example could be that the operative clause confirms that the Insurer will pay for loss
or damage to the property insured. In the case of a household policy for Buildings, the
property insured will be the building. However, each Insurer will include different aspects
as part of their definition. In the case of a household policy, the definition is normally
the home followed by a list of other items included such as swimming pools, patios,
outbuildings etc. If you are dealing with a claim for damage to a building, it is imperative
that you refer to the specific policy definition of building to make sure that the feature
being claimed for is covered by the policy.
The definitions section of the policy should be referred to on each occasion when dealing
with a claim, as each Insurer has different definitions. The following are examples of
definitions that could be found in a household policy, but some policies may provide many
more definitions:
● Buildings: This will normally define the home and any number of other features that
form part of the description of the Building. These can include swimming pools, gates,
fences, service tanks, drains, pipes, cables and tennis courts. This definition extends
the cover from just the house itself to physical aspects within the boundaries of the
home. From this you can see that the extent of cover is vastly increased when you
review the description. The definition may also include the nature of the construction
materials, eg built of brick, stone etc.
● Contents: This will normally be defined as household goods, personal possessions
and other articles. An important part of the Contents definition is that it may state
that Contents are defined as articles belonging to the policyholder for which they are

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 Introduction to the Insurance Policy

responsible, or that belong to any members of their family permanently residing at the
premises.
● Business Equipment: This could include computer equipment and telephone
equipment.
● Money: This could include cash, cheques, stamps, vouchers and various other forms of
money.
● Personal Possessions: These are personal belongings and valuables normally worn or
carried. Each policy will differ and may include more items.
● You: A household policy will often refer to ‘you’ throughout the policy wording, and
this is normally defined as the named policyholder.
● We, Us, Our, the Company: This will be the named insurance company providing the
policy.
It is helpful to keep in mind that each policy will be different when you are dealing with a
claim and you should refer to the specific policy wording on a case by case basis. Where a
particular aspect is not defined by the policy, the Financial Ombudsman Service confirms
that the everyday meaning of the words is accepted.

Activities
Obtain three different policy wordings. Review the definitions section and
find out whether the policies include the following under the Buildings and
Contents description:
● Garage
● Computer equipment
● Swimming pool
● Satellite dish.
Review one policy wording. Does this policy include cover for belongings of
domestic staff under the Contents definition?
Review some policy wordings and list three other definitions you have found
apart from those already discussed in this section. Consider the implication
of the definitions when claims handling.

1.9 General Conditions

Each policy will contain a General Conditions section containing general conditions
applicable to the whole policy. There are some conditions found in most policies but some
may be specific to the policy in question.
It is helpful to have an understanding of the General Conditions that could be applicable
to the whole policy and to bear them in mind when dealing with a claim.
The following are some general conditions that are sometimes referred to as Claims
Conditions as they affect the handling of claims:
● Notification of Claim: This condition requires that the policyholder notifies the Insurer
immediately of the loss or claim. Some policies will give a specific timescale for
notification of a claim.
● Notification to Police: In the event of theft or malicious damage, this condition will
normally state that the police should be notified immediately.

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CILA CH 2 – Introduction to Claims Handling

● Preventing Loss: This condition often requires that the policyholder must take all
reasonable steps to prevent loss or damage and maintain the property in a good
condition and state of repair. This can also mean that the policyholder must take
action to mitigate the loss.
● Fraud: This condition highlights the fact that Insurers can cancel the policy and that
cover will be ended if any claim or part of a claim is found to be fraudulent or false.
● Contribution and Average (underinsurance): The principles of this condition will be
discussed in detail in Section 9.
The following is an example of a general condition that does not directly relate to claims
handling. However, Insurers will need to be informed if the policyholder has not met the
condition:
● Changes that must be notified to Insurers (material facts): This condition confirms
that it is the responsibility of the policyholder to notify Insurers of any changes to the
risk. The importance of material facts is discussed in Section 6 in Book 1.
The reader should remember that the above is not an exhaustive list of Conditions and
reference should always be made to the specific policy document.
An important General Condition is the requirement for the policyholder to mitigate
their loss, ie to take steps to avoid or reduce further damage. Consider the case where
a policyholder has an escape of water but has failed to stop the leak before contacting
his Insurers. The initial damage may have been limited to a small section of a ceiling,
but if the leak is left to continue in the policyholder’s knowledge, then the extent of
damage could be far worse requiring an extensive drying programme and repairs. As the
policyholder has failed to prevent further damage, the cost of repairs will have increased
considerably from the cost that may have been involved if the policyholder had stopped
the leak as soon as it was located. This scenario is one that you will often come across. As
policyholders sometimes require assistance, they should be told at the earliest opportunity
that it is their responsibility to mitigate their loss. Mitigation is discussed in detail in
Section 7.

1.10 Key Points

General Conditions are applicable to the whole policy and are normally a requirement
for the policyholder to do or not to do something, eg notify Insurers of changes to their
property. If a condition has not been met, Insurers need to be made aware of this as they
have the right to cancel the policy and cease providing any further cover (although in
practice this does not usually happen).
If you think that a General Condition has not been adhered to, you should refer the matter
to Insurers. They may wish to discuss the situation with their underwriting department for
clarification before the claim proceeds.

Activities
Review three policy wordings and note any further general conditions you
may find.
Consider why you think one of the general conditions is that the police must
be notified about theft or malicious damage? You may find it helpful to
discuss this with a colleague.
List some issues that you think may arise if a policyholder fails to inform
Insurers about a claim as soon as they become aware of it.

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 Introduction to the Insurance Policy

1.11 General Exclusions

General Exclusions apply to the whole policy and are normally located in their own
separate section in the policy wording. These exclusions are different to the specific
exclusions found in the Perils section of the policy.
General Exclusions are used to reject cover for specified reasons.
Examples of General Exclusions are listed below together with the reasons for each
exclusion:
● War Risks: This exclusion is often outlined in the following way “Damage occasioned by
war, invasion, act of foreign enemy, hostilities (whether war be declared or not) civil
war, rebellion, revolution, insurrection or military or usurped power”. The reason for
this exclusion is that individual insurers would be unable to sustain the cost of damage
likely to occur as a result of war. The exclusion was first introduced in 1937 when the
Second World War was imminent. The Government agreed to accept the risk in the War
Damage Act 1941 and 1943. Any damage caused by war is excluded as the claim should
be dealt with by the Government.
● Riot: “Damage occasioned by riot and civil commotion (unless specified in the
policy and then only to the extent specified”. This has traditionally been excluded
due to the fact that there has been a variable risk of riot at different places and at
different times. However, be aware that this risk may be covered by the policy and the
individual policy wording should be reviewed.
● Northern Ireland: This exclusion was worded as “damage in Northern Ireland
occasioned by or happening through or in consequence of: civil commotion, any
unlawful, wanton or malicious act committed maliciously by a person or persons
acting on behalf of or in connection with any unlawful association”. An unlawful
association, in terms of this exclusion, means an organisation involved in terrorism and
any organisation defined in the Northern Ireland (Emergency Provisions) Act 1973. The
reason that this exclusion was introduced was that Insurers incurred a high claims cost
during the conflict in Northern Ireland. Insurers were paying claims then recovering
their losses from the Government. Scope for compensation from the Government was
then defined in the Criminal Damage (Compensation) (Northern Ireland) Order 1977.
As a result of this, Insurers took the opportunity to exclude all damage where the
Insured had a right of recovery from the Government. This exclusion was incorporated
into the Terrorism Exclusion.
● Terrorism Exclusion: This exclusion confirms that the policy does not cover damage
caused by fire and explosion occurring as a result of terrorism. However, there is a
special provision available to provide cover for terrorism. The reader is encouraged to
look at a policy wording to review the special provision for terrorism.
● Pollution: “Loss or destruction caused by pollution or contamination but this shall
not exclude destruction of or damage to the property insured not otherwise excluded
caused by a) pollution or contamination which itself results from a peril insured
against, b) any peril hereby insured against which itself results from pollution or
contamination”. This exclusion means that any damage caused by pollution will not be
covered unless the pollution has been caused by an insured peril, eg escape of oil, or
where the pollution results in an insured peril, eg fire. It would be beneficial to review
this exclusion once you have studied the sections on Perils and Proximate Cause.
● Marine Clause: This exclusion confirms that if at the time of the loss the property was
insured by a marine policy then the property policy will not react to cover the claim.
This is because a marine cargo policy will consider any damage sustained en route
to the warehouse, but if damage occurs at the warehouse then the damage should
be picked up by the property Insurer unless the marine policy also provides cover for
damage at the warehouse. If this is the case, both Insurers share the cost.

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CILA CH 2 – Introduction to Claims Handling

● More Specifically Insured: “Any property more specifically insured by or on behalf of

the insured”. The reader may come across the importance of this exclusion where a
policyholder has a number of different policies covering the same item, for example a
mobile phone. If the Insured has cover under their household insurance policy but they
also have a specific insurance policy for the mobile phone, this exclusion under the
household policy would mean that the claim should be dealt with by the mobile phone
Insurers.
● Consequential Loss: “Consequential loss or damage of any description except loss
of rent where such loss is included in the cover under the policy”. The dictionary
definition of consequence is “the result, effect, that which naturally follows” and this
helps us to understand what is meant by a consequential loss. To explain this further,
a consequential loss is a loss that flows from the original loss or damage. For example,
if a fire has occurred at the policyholder’s property they may be unable to attend an
event for which they have paid for tickets. They may ask if they can claim for the cost
of the tickets but this exclusion confirms that this not covered. This exclusion may be
difficult to explain to a policyholder especially if they are upset by the fact that they
have lost further money.
You may find that you never have cause to apply the riot, war and terrorism exclusions in
view of the fact that these events rarely occur. However, you should be aware of them.
The pollution exclusion may need to be considered in greater detail and an understanding
of the perils and proximate cause may assist. In the case of the marine exclusion, close
analysis of the movement of goods will be required. The exclusions for consequential
loss and property more specifically insured will be relevant frequently in the handling of
domestic and commercial claims.

Activities
In the following cases consider whether one of the General Exclusions is
relevant:
● A policyholder has submitted a claim for theft of property which
occurred at their home. They would also like to know if the policy will
provide cover for the cost of their weekend break in a hotel which they
were unable to attend due to the theft
● A laptop has been damaged for which the Insured took out a policy at the
time of its purchase
● A policyholder has noticed a strong smell of oil in the garden and dark
patches on the lawn.

1.12 Key Points

General exclusions are applicable to the whole policy and should be considered in each
claims situation. The exclusions outline types of damage and/or property that the policy
does not intend to provide cover for.
Each individual insurance policy will vary in its content and detail and as a result the
policy wording should be referred to on each occasion that a claim occurs. It can be
helpful to send the policyholder a copy of the relevant section of the policy wording when
communicating a decision regarding a claim, particularly if a claim is being repudiated.

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 2
POLICY CONDITIONS AND WARRANTIES
CILA CH 2 – Introduction to Claims Handling

12
 Policy Conditions and Warranties

2. POLICY CONDITIONS AND WARRANTIES

Contents
2.1 What is Meant by a Condition
2.2 Types of Conditions
2.3 Other Policy Conditions
2.4 Difference Between Conditions and Warranties
2.5 What Happens when there is a Breach of Warranty
2.6 Key Points to Remember

Introduction
The purpose of this section is to help you to understand the conditions of an insurance
Policy and in particular how they relate to the handling of insurance claims. The following
aspects are covered:
1. What is meant by a condition
2. Types of conditions
a. Express conditions
b. Implied conditions
c. Conditions precedent to policy liability
d. Conditions subsequent to policy liability
3. Examples of Policy Conditions
4. Contracting parties’ options in the event of a breach of condition
5. Difference between a condition and a warranty.

2.1 What is Meant by a Condition

A condition is “A future event which is uncertain, the happening of which creates rights
or obligations or enlarges rights or obligations or destroys them”. In simple terms, this
means that if something happens in the future the duties and rights may change, or if “x”
happens then one party will may have the right to “y”.
So a contract condition is a contractual term that requires one of the contracting parties
to do something, or not to do something. For example, a contractual condition could
be that Jack will wash Harry’s car for £5 providing Harry delivers the car to Jack before
9.00 am. (If Harry delivers the car, ie a future event that may or may not happen, then
Jack will wash it for a fee of £5.)

Activity
Take a contract, perhaps your contract of employment, and look for the
conditions that it sets out. Alternatively look on the internet for “standard
conditions of trade”. Observe the nature of the conditions. Also think about
how fair and reasonable the conditions are from the perspective of all
parties to the contract.

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CILA CH 2 – Introduction to Claims Handling

2.2 Types of Conditions

Express Conditions
Express conditions are those that are stated in the contract, so this simply means that
they are expressed.

Implied Conditions
Imagine a contract where absolutely everything had to be expressed. For instance does
your contract of employment state what currency you will be paid in? Some conditions
are so obvious they do not need to be expressed. That does not mean that they
cannot be expressed and it is good practice to express anything that could be open to
interpretation.
Sometimes there are contractual terms that are implied by law. The Supply of Goods
(Implied Terms) Act 1973 is an example of such a law.

Conditions Precedent to Liability

Conditions can be divided into two further categories - precedent and subsequent.

Conditions Precedent
A condition precedent to liability is a condition which, if breached, means that there is no
liability on Insurers to meet the claim. For example, a Policy condition could be that the
premium must be paid. If the premium is not paid, Insurers might have no liability for any
claims.

Conditions Subsequent
These conditions are those that apply after a loss has occurred. For example, let’s say in
the previous example that the premium has been paid, a loss occurs and the Policy says
that in the event of a loss the Policyholder must cooperate with any attempt to recover
the money from the person causing the damage.
Should the Policyholder fail to do so there would be a breach of condition after there had
been a liability under the Policy to pay, in other words a breach of condition subsequent to
liability.

Activity
Take a Policy and look at the Policy Conditions. Identify conditions that
apply before there is a liability under the Policy. Then look for conditions
that apply after there is a policy liability. A clue is to look for a “Claims
Condition”.

Examples of Policy Conditions

Policy conditions vary from Policy to Policy, but there are a number of conditions that can
be expected to be found on most if not all Policies. These include:
● Reasonable care
● Insurer’s rights following a claim
● Subrogation
● Arbitration.

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 Policy Conditions and Warranties

We will consider two of these conditions in more detail as follows:

1. Reasonable Care Condition

In general terms, this condition requires that the Policyholder must exercise reasonable
care to prevent losses.
A common way of describing this obligation is to suggest that the Policyholder should act
as if they were not insured. Clearly we take out insurance policies because we know that
occasionally things do go wrong, and when they do we want some security that we are
protected. The Reasonable Care condition does not require that the Policyholder takes
absolute care to prevent loss but rather that they take reasonable steps.
The Financial Ombudsman has considered many cases about the Reasonable Care condition
and the suggested guideline is to judge whether the Policyholder has been reckless, as
only then should the Reasonable Care condition be applied.

Putting this into practice

Tommy is a footballer and plays for a major premier league team. He walks
out onto the pitch one day and the referee points out to him that he is
wearing an earring. Tommy rushes over to his coach and asks that he takes
care of the earring, which is diamond encrusted. His coach agrees and places
the earring in his pocket. Later, Tommy scores a hat trick and at the point of
scoring the last goal the coach reaches into his pocket to pull out his scarf.
The earring is mistakenly flung into the air and is lost forever. The question
arises, did Tommy exercise reasonable care? The answer is yes, he did not
act recklessly and he did not court the danger of losing the earring.
Compare this to a situation where Tommy realises that he is still wearing
his earring and hands it to an opposition supporter, asking that he meets
him in a bar later that evening to hand back the earring. The earring is not
returned. The question again arises, has Tommy exercised reasonable care?
The answer is no, he has acted recklessly.

Activity
Consider a theft claim that you have dealt with and concentrate on the
Reasonable Care condition. What questions did you ask or what aspects of
the claim did you consider in order to judge whether the Policyholder had
met this condition?

2. Insurer’s Rights after a Claim

Following a claim, the Insurer needs the right to carry out a reasonable investigation to
establish that the loss is covered by the Policy. To complete such an investigation, the
Insurer will typically require access to the damage and information from the Policyholder.
The Insurer’s Rights after a Claim condition usually states that the Policyholder must
provide reasonable proofs and allow the Insurer to appoint persons to carry out reasonable
investigations. Should the Policyholder refuse, the Insurer could in turn refuse the claim
on the basis that the Insurer’s Rights after a Claim condition had not been compiled with.

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CILA CH 2 – Introduction to Claims Handling

Activity
Take a look at three Policy wordings and find the condition in each that
gives the Insurer the right to investigate a claim.
On occasion you may need to bring this condition to the attention of a
Policyholder and so it is useful to know where to find it within a Policy and
how it is commonly worded.

2.3 Other Policy Conditions

There are several other Policy conditions, including Subrogation and Arbitration, and it is
worth familiarising yourself with each of them to ensure that you understand the Insurer’s
rights and the duties of the Policyholder. The Policy conditions are usually grouped
together so they should be easily found.

Activity
Make a list of the Policy conditions that are common to three Policy
wordings. Ask your senior colleagues if they have encountered a breach or
issue with these conditions. Find out how these claims were resolved.

2.4 Difference Between Conditions and Warranties

A warranty relates to something that is ongoing. Think about when you purchase a new
MP3 player. In addition to the MP3 player, software etc, you will be given assurances in
the form of a guarantee or warranty that if something goes wrong within say 12 months of
purchase the equipment will be repaired or replaced. This is an example of a warranty. It
is not a condition of the sale that applies only at the time of sale, but rather it continues
to operate.
To an extent, an insurance warranty is similar as it is something that continues after the
Policy is sold. An example might be that the warranty requires that the Policyholder locks
the external doors at the close of business. This means that after the contract has been
made there is an ongoing obligation to lock the doors as prescribed by the warranty.
So in effect a warranty is a condition of the Policy, but Insurers make adhering to a
warranty more fundamental. Warranties are worded in such a way that makes them
Conditions Precedent to Liability. They go to the root of the contract and in fact a breach
of warranty can make the Policy void from the date of the breach.

Activity
Ask colleagues for copies of some warranties. Note the wording of the
warranties and look for similarities. Make a list of the different subjects of
the warranties, such as locks, alarms, fire precautions etc.

2.4.1 Points to Remember about Warranties

● Warranties go to the root of the contract.
● Warranties are conditions that are ongoing.
● A breach of warranty may make the policy voidable at the injured party’s option.

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 Policy Conditions and Warranties

2.4.2 Insurers’ Right to Void the Policy

Warranties are used by Insurers to control and reduce risk. Using their experience, Insurers
recognise the features of a risk proposed to them that make it a higher risk.
For example, consider a warehouse storing computers and printers which are packed in
cardboard boxes. Now imagine there is a flood due to heavy rain and water covers the
floor of the warehouse. The boxes on the floor are saturated and the cardboard soaks up
the water, contaminating the row of boxes above those on the ground. Insurers could be
faced with a large claim. The first two rows are affected so that they cannot be sold, and
how would you feel about buying from the third row?
So how could this risk have been reduced? Well Insurers could have added a warranty, an
ongoing condition that said that all stock must be stored on racks, say 15 cm from the
ground. This would have prevented the damage to the bottom two rows and would have
avoided any doubts about the third row.

2.5 What Happens when there is a Breach of Warranty

Historically this was simple. Insurers could simply void the Policy and make no payment.
However, there are rules that now apply particularly in Household Insurance. The FCA
requires that the retail Policyholder is treated fairly. Would it be fair to void a Policy for a
breach of warranty when the breach had no bearing on the loss?
In fact the FCA states that an Insurer should not reject a claim due to a breach of
condition or warranty that is unrelated to a claim.

Activity
Consider the following two cases.
You are dealing with a claim for theft. Victoria, the Policyholder, forgot
to lock her house front door. There are two locks on the door, but it is a
requirement in the form of a warranty that the lock conforming to BS3621 is
locked.
In fact thieves gained entry to Victoria’s shed and stole her Trek 5000 racing
bicycle which is covered by the Policy. The failure to lock the front door
in no way assisted the thieves. Would it be fair to refuse to deal with the
claim on the basis of this breach of warranty?
The second case relates to a Policyholder, Bradley, who has many antiques
and silverware. He is a local celebrity as he used to play lead guitar for a
well-known rock band. There is a warranty on Bradley’s policy stating that
he must use a burglar alarm each and every time he leaves the premises.
Bradley employs a cleaner, Chris, and quite often when Chris arrives the
alarm is not set even though Bradley is out. One evening Chris is drinking
in a local public house. A vague acquaintance asks Chris about Bradley’s
house. Chris, due to his “merry” state, describes Bradley’s house as an
Aladdin’s cave and even goes on to say that frequently the burglar alarm is
not set.
The information falls into the wrong hands and the house is broken into,
albeit on a day when the alarm had been set.
Is it fair that the claim is repudiated on the grounds that the risk had been
increased?

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CILA CH 2 – Introduction to Claims Handling

Treating the Customer fairly when making decisions is judged by the FCA as follows:

Signs of retail Customers being Signs that retail Customers may not be
treated fairly being treated fairly
Decision making at all levels reflects the Minimal evidence that decisions reflect any
fair treatment of customers. The firm consideration of the impact on customers.
uses staff, customer and other external The firm is slow or unwilling to react to
feedback where appropriate, with timely customer/staff feedback. Conflicts between
action. The interests of customers are the interests of shareholders and customers
properly balanced against those of are consistently and inappropriately
shareholders (and other customer groups). resolved in favour of shareholders.
It is important to remember that the FCA regulations apply to retail customers and not
those acting in a business capacity. However, it is becoming increasingly the case that
Insurers wish to demonstrate that they are treating all customers fairly, whether retail or
business customers.

2.6 Key Points to Remember

● Conditions exist in all insurance Policies. They place duties on parties or change their
rights in certain scenarios.
● Failure to meet a condition is called a breach of condition. If a condition precedent
to liability is breached by a Policyholder, Insurers may not have a liability to pay their
claim.
● While some conditions are common to most Policies, it is always important to check
the specific requirements of each Policy. It should also be noted that not all conditions
are actually expressed in the Policy but rather some are implied.
● Warranties are conditions that are ongoing. They go to the root of the contract such
that a breach of warranty may make the policy voidable at the injured party’s option.

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 3
THE PERILS
CILA CH 2 – Introduction to Claims Handling

20
 The Perils

3. THE PERILS
Contents
3.1 Fire
3.2 Explosion
3.3 Lightning
3.4 Flood
3.5 Storm
3.6 Escape of Water
3.7 Riot
3.8 Malicious Damage
3.9 Theft
3.10 Accidental Damage to Underground Services
3.11 Accidental Damage

Introduction
As a Claims Handler, you may become all too familiar with the fact that the general public
often believe that their insurance policy provides them with cover for any eventuality and any
damage that occurs. However this is not the case. Property insurance policies provide cover
for damage caused by specific events or causes of damage, and these are known as perils.
This section reviews the following perils and discusses the effect they have on claims
handling:
● fire
● explosion
● lightning
● flood
● storm
● escape of water
● riot
● malicious damage
● theft
● accidental damage to underground services
● accidental damage.
Each policy wording may slightly alter the description of the peril and the specific wording
should be considered in each case.
The reader will need to be mindful of proximate cause (discussed in Book 1), as it is the
proximate cause of the damage that will determine whether a peril has operated.

Activities
Review the perils detailed in a policy wording that you use regularly.

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CILA CH 2 – Introduction to Claims Handling

3.1 Fire
Fire was the first peril that was insured against as initially property insurance policies
were established to deal with the cost of fire damage to properties.
It may appear that the fire peril is self-explanatory, but it needs to be explored further as
claims for damage caused by smouldering or scorching can be presented as fire claims. It
is important to be able to distinguish whether the cause of the damage is something that
could be considered under the fire peril.
The term fire is used in the policy in its everyday sense. The key points are that there must be:
● actual ignition
● something on fire which should not have been on fire
● no connection between the insured and the fire, ie the insured did not wilfully set fire
to the insured property. However, if the insured’s negligent actions resulted in the fire,
this will be considered.
The first point outlined above is that there must be actual ignition. This is best described
in simple terms to a policyholder that there must be flame for there to be a fire within the
definition of the policy.
Smoke damage would appear to be covered as long as the smoke resulted from a fire
(because in that instance fire would still have been the proximate cause of the damage).
Damage to property caused by scorching or smouldering would not constitute fire damage
as no ignition has occurred. However, the cause of this damage may be accidental and
therefore may be covered by the accidental damage peril.
The second point requires the Claims Handler to consider the original use or purpose
of the insured property. This was explored in the case of Harris v Poland (1941), where
jewellery was placed under a fire grate and forgotten about. A fire was subsequently
started and the jewellery was damaged. The judge ruled that the claim could be
considered under the fire peril as the jewellery was not supposed to be on fire.
The third point requires the cause of a fire must be investigated and verified. If an
insured has deliberately started a fire, then the incident was not accidental on the part
of the insured and this would go against the basic claims principles. Also if an insured
has deliberately started a fire and then attempted to cover this fact up, there may be a
fraudulent claim.
The risk of fire can be increased by, among other things, the nature of any chemicals
stored, the construction of the property and proximity to other flammable properties.

Activities
Locate details of the following case and consider their importance in respect
of a fire claim, Tempus Shipping v Louis Dreyfus & Company (1931).
Consider what sources are available to you to establish the cause of a fire.
List three.
Review two policy wordings and note any differences in the wording of the
fire peril.

3.2 Explosion
This section will review explosion which occurs independently of another peril. The reader
should be aware that the fire peril will cover loss from an explosion caused by fire or from
a fire caused by an explosion.

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 The Perils

A policy may only provide cover for fire and not explosion damage, and the exact cause of
the loss must therefore be established.
In Commonwealth Smelting Ltd v Guardian Royal Exchange Assurance (1984) it was held
that an explosion meant an event which was “violent, noisy and caused by rapid chemical
or nuclear reaction or the bursting out of gas or vapour under pressure”.
In Aegis Electrical and Gas International Services Company Ltd v Continental Casualty
Company (2007) the court held that what was required for an explosion was “manifest
violence and a shattering destruction”.
The above two cases provide a good explanation of what is meant by explosion in terms of
an insurance policy.
The reader may associate explosion with bombs used in battle and war, but this type of
loss is excluded. This is discussed in greater detail under the General Exclusions section of
the insurance policy section.

Activities
List two examples of explosions that would fit within the description of
explosion outlined in the two cases explained.
Discuss explosion claims with your colleagues and find out their experiences
of dealing with these types of claims.

3.3 Lightning
A lightning strike may lead to an outbreak of fire. In general, claims presented following a
lightning strike concern damage to electrical appliances and wiring.
It is often difficult to prove that the fault within the appliance or apparatus results from a
lightning strike. When a Loss Adjuster inspects damaged appliances, they may find that the
items no longer work, but a report from an electrical expert may be required to establish
the cause of the damage. It is useful to obtain weather records to confirm whether there
was a lightning storm in the area on the date in question.
Of course, a lightning conductor might be a requirement to reduce this risk.

Activities
List three appliances that are most likely to be damaged by lightning.
Review two policy wordings and note any differences in the wording of the
lightning peril.

3.4 Flood
Flood is often found alongside storm in a policy wording, and if this is the case then the
difference between storm and flood is irrelevant. It can be unclear what the cause of the
damage is. For example, surface water drains unable to cope with the quantity of rain
during a storm back up and flood a premises. This leads to the question of whether the
damage has been caused by escape of water, storm or flood. If the policyholder has cover
for all three perils then the cause is irrelevant, and this could provide great assistance to
the Claims Handler when handling the claim.
However we still need to outline what flood means in a policy. In Young v Sun Alliance
and London Insurance Ltd (1976) the Court of Appeal held that the word ‘flood’ means a

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CILA CH 2 – Introduction to Claims Handling

rush of water brought about by severe weather conditions. In Rohan Investments Ltd v
Cunningham (1998) the policyholder’s flat was damaged by an ingress of water resulting
from heavy rainfall lasting over a period of some days. This case demonstrates that a flood
does not have to be a violent rush of water occurring in a short space of time, but can be
due to an abnormal volume of rainfall.
The FOS has indicated that it favours the broader definition of flood in Rohan rather than
that in Young v Sun Alliance.
The FOS considers that the ordinary householder’s expectations of what constitutes a flood
should be accepted. This is following on from a complaint which was escalated to the FOS
in October 2001. In this case, an Insurer had repudiated a policyholder’s claim for damage
to a cellar which had filled with around 4 inches of water. The FOS considered that the
claim should be accepted as flood damage. Much concern is given to the risk of flood
and the protection that might be required, such as storing stock at a certain level above
ground.

Activities
Carry out some research into the case of Tate Gallery (Trustees) v Duffy
Construction Ltd (2007) and make a note of the judge’s comments regarding
the factors required to consider a flood.
The floods in the summer of 2007 are notorious within the industry. Ask
one of your colleagues who handled some of these flood claims about their
experiences.

3.5 Storm
Storm claims can often be very problematic to handle due to the fact that a policy
wording will rarely define what is meant by storm conditions, although some policies
may contain definitions. As previously highlighted, policyholders often believe that their
policy provides cover for all eventualities and this is certainly put to the test with the
presentation of storm claims.
Insurers often have their own internal definition of what constitutes storm conditions and
it is helpful to obtain copies of the relevant claims handling guidelines and refer to them.
Case law can provide some guidance when looking for a definition of storm. In Oddy v
Phoenix Assurance (1966) the Judge held that “Storm means storm and to me connotes
some sort of violent wind usually accompanied by rain or hail or snow”. The Judge
expressed the clear view that a storm must involve violent wind.
This was followed in the case of S&M Hotels v Legal & General Assurance Society (1972).
In that case, Thesiger J said that: “A storm must be something more prolonged and
widespread than a gust of wind”.
Due to the very problematic nature of storm claims, a number of cases exist which provide
guidance on the issue. In view of this, it is useful to consider in more detail the FOS
approach to storm claims.
The FOS have indicated that they will employ a two tier test. It will employ the ‘but for’
test to determine the proximate cause of the damage followed by a common sense review
of the evidence. Consider the example of tiles falling from a neglected roof during strong
winds. The ‘but for’ test indicates that the claim should be paid, ie “but for the strong
winds, the damage would not have occurred”. However, the FOS will then review all of the
evidence and if it can be demonstrated that the roof would have suffered damage sooner
or later because of poor maintenance, common sense will indicate that the proximate
cause of the loss was not storm.

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 The Perils

The two tier test applied by the FOS is a useful tool to determine whether or not the
loss or damage that is the subject of the claim is proximately caused by storm. This is
particularly useful when considering claims where there is a dispute as to whether the
damage results from an exclusion such as wear and tear or a peril such as storm.
One particular type of storm claim to be aware of is a claim for damage to a flat felt roof.
This type of roof has a short life span and may start to leak when it reaches the end of its
life. It is common for a Policyholder to submit a claim for storm damage to their flat felt
roof when it begins to leak. This takes us back to the FOS ‘but for’ test. If the roof was at
the end of its life span, it would need to have been replaced sooner or later anyway and
would therefore not be considered. In view of the short life span of these types of roofs,
simply asking the age of the roof can help to determine the cause of the damage.

Activities
Look on the FOS website (http://www.financial-ombudsman.org.uk) for
more guidance on storm claims.
List the types of evidence a policyholder could provide to demonstrate the
age and condition of their roof.
Consider other types of property that could suffer storm damage other than
roofs.

3.6 Escape of Water

A large proportion of property claims relate to damage that has occurred due to an escape
of water. Insurers will often have their own internal procedures for dealing with such claims.
It is important to understand what is meant by an escape of water. Each policy wording
will be different, but the peril will normally be described as an “escape of water from”
followed by the words “any tank apparatus or pipe”. There may be any number of
descriptions of the type of water apparatus. Water apparatus will encompass a large array
of appliances and equipment that use or store water.
An important point to remember is that the escape of water peril will often exclude
damage to an unoccupied property; each policy will provide a definition of unoccupied.
The reason for this is that if a property is unoccupied for a long period of time then an
escape of water may occur unnoticed and cause substantial damage.
Claims can be submitted for dry rot to properties and some Insurers will consider these
claims if the cause of the dry rot is due to an escape of water. It is often in these cases of
dry rot that consideration will need to be given as to how long the leak has been ongoing
and whether it would have been reasonable for the policyholder to have discovered the
leak and stopped further damage before the dry rot occurred.
The key points are that the exact cause of the leak will need to be determined, the
Policyholder must provide confirmation that the leak has been repaired and the Claims
Handler needs to be satisfied that the Policyholder attempted to repair the leak as soon as
they were aware of the problem.

Activities
List five types of water apparatus that may leak resulting in an escape of
water claim.
Consider what evidence a Policyholder could provide to demonstrate that a
property was not unoccupied at the time of the escape of water.
List three sources that would assist in confirming that an escape of water
has occurred.

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CILA CH 2 – Introduction to Claims Handling

3.7 Riot
Claims involving riot do not arise very often, but it is helpful to understand what is meant
by riot.
The Public Order Act 1986 defines riot as comprising the following elements:
1. Where twelve or more persons who are present together use or threaten unlawful
violence for a common purpose and the conduct of them (taken together) is such
as would cause a person of reasonable firmness present at the scene to fear for his
personal safety, each of the persons using unlawful violence for the common purpose is
guilty of riot.
2. It is immaterial whether or not the twelve or more use or threaten unlawful violence
simultaneously.
3. The common purpose may be inferred by conduct.
4. No person of reasonable firmness need actually be, or be likely to be, present at the
scene.
5. Riot may be committed in private as well as in public places.
This provides the definition used by insurers to decide whether or not the peril has operated.
There is a second important statutory provision in the context of riot and that arises from
the Riot (Damages) Act 1886. This Act provides that where certain property is damaged,
destroyed or stolen by any persons “riotously and tumultuously assembled together”
compensation is payable by the Police Authority.
Claims for riot damage must be made to the police within 14 days and therefore insurers
generally require claims for riot damage to be reported to them within 7 days to enable
them to make the relevant claim against the Police Authority within 14 days.

Activities
Consider the definition of riot under the Public Order Act 1986. Can you
think of any incidents reported recently that would constitute a riot under
this definition?
List three types of property that you think may be damaged during a riot
and that would be covered by an insurance policy.

3.8 Malicious Damage

Malicious damage means damage that is caused deliberately or even perhaps accidentally
by trespassers.
Insurers generally limit their exposure and the malicious damage cover usually excludes
damage caused by malicious persons or damage caused by malicious acts while the
premises are let to tenants or if caused by other persons legally on the premises,
eg invited visitors.
The policy may state that the damage must be reported to the police, and this confirms
the fact that the damage must have been caused by trespassers or unlawful persons on the
property. A straightforward example of malicious damage is graffiti damage to property
carried out by unknown persons or persons not lawfully on the premises.
A number of claims are submitted by landlords for damage to their property caused by
their tenants. This could be damage to the property or even unauthorised decoration of

26
 The Perils

the property. The reality is that the landlord has given authority for the tenant to be there
and it is difficult to demonstrate that the type of damage that has been caused by the
tenants was carried out with malicious intent against the landlord.
Malicious damage cover is also restricted when buildings are unoccupied and you should
always check the wording for the definition of “Unoccupied”.

Activities
List three types of damage that would be considered as malicious damage in
terms of an insurance policy.

3.9 Theft
Theft is one of the few perils that has an actual legal definition. Section 1(1) of the Theft
Act 1968 defines theft as follows:
“A person is guilty of theft if he dishonestly appropriates property belonging to
another with the intention of permanently depriving the other of it; and “thief”
and “steal” shall be construed accordingly”.
As defined, theft must involve “dishonest appropriation”. If a person takes an item
and they do not believe that they are taking the item dishonestly then this cannot be
considered as theft.
For example, if my neighbour asks me to feed their cat during their absence and I take a
bottle of milk from their fridge, it could be argued that I have stolen the milk. However,
if I honestly believe they would not have had any objection, then I can argue that the
appropriation was not dishonest and accordingly did not amount to theft.
In the case of R v Ghosh (1982), the test of what is considered to be dishonest
appropriation was explored. Following on from this case, the test to be applied is:
1. whether the person acted dishonestly by the standard of ordinary and honest people,
and
2. if he so acted, whether he himself must have realised that what he was doing was by
those standards dishonest.
Not every theft claim that is presented can be considered a theft according to the
definition. It may be the case that a debt collection agency has removed goods following
repossession as the policyholder has failed to pay for them. In this instance, the goods
do not belong to the policyholder but the original retailer and the collection agency has
the right to remove them. This is not theft. It could even be the case that, as part of a
marriage break up, one party takes goods purchased together and the claim is presented
as theft. This is not necessarily theft if the party taking the items believes that they own
the items and therefore has the right to remove them from the home.
In the light of the definition of theft, it is very important to obtain full particulars of the
event in order to determine whether a theft has indeed occurred.

Activities
Review two policy wordings and note any exclusions you can find under the
Theft section.

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CILA CH 2 – Introduction to Claims Handling

3.10 Accidental Damage to Underground Services

Ordinarily there is cover under a household policy for “accidental damage for which [the
policyholder] is legally responsible to underground service pipes and cables supplying [the
policyholder’s] home”.
It is important to consider carefully the individual policy wording as the cover varies. For
example, some specifically include, following a blockage, the cost of breaking into and
repairing a pipe.
There are three aspects to underground services that should be understood: a drain, a
private sewer and public sewers.
A drain is an underground pipe taking foul or surface water from a single property. A drain
is therefore the responsibility of the private owner of the property.
A private sewer is an underground pipe taking foul or surface water from two or more
properties, ie shared private drain pipes. Any sewer built after 1st October 1937 is the
responsibility of the owners of the properties it serves. Any sewer built before this date is
the responsibility of the local water authority.
Public sewers are those adopted and maintained by a local water authority (or local
authority on their behalf) and are therefore the responsibility of the local authority.
Cover for accidental damage was primarily intended to deal with the consequences of
sudden and unforeseen events. However, the FOS has made decisions that have supported
the argument that an accident need not be sudden. It can occur in “slow motion”. This
can result in insurers accepting, for instance, claims for damage caused by gradual ground
movement.
The FOS has also decided that delamination of pitch fibre pipes by the action of sewerage
or water and the subsequent degradation of pitch fibre pipes by water ingress itself
represents accidental damage.
Claims Handlers will often be presented with a drainage report provided by either the
policyholder’s drainage company or the Insurer’s nominated drainage contractor. These
reports normally provide details of the location of the damage and sometimes they
will offer an explanation as to the cause of the damage. These reports are invaluable
in determining which party is responsible for the damaged drain, pipe or sewer and
determining the cause of the damage.

Activities
Review three policy wordings and note any differences in the cover detailed
for damage to underground services.
Obtain a drainage report and review whether the damage identified would
be covered by a policy wording you use.

3.11 Accidental Damage

Most household and some commercial policies provide cover for accidental damage. This
is in addition to cover under perils such as accidental breakage of fixed glass, accidental
damage to underground services etc.
The difficulty with accidental damage cover, so far as loss adjusters are concerned, is that
the policyholder will routinely expect almost everything to be covered under accidental
damage if not covered under any other peril.

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 The Perils

Accidental is defined in the dictionary as something that happens which is unforeseen

or unexpected, a chance mishap, not an inevitable happening and not deliberate. To be
considered as accidental damage, we are looking for something that occurred by chance
and as a result there must have been some kind of damage to the property covered by the
policy.
The part of the definition of accidental that may cause the greatest difficulty for the
reader is that the damage must be unexpected or unforeseen from the point of view of the
policyholder. In some circumstances, it can be difficult to determine that the damage that
has occurred was unexpected to the policyholder.
Another factor which often presents problems is that the damage must not be inevitable.
For example, if the policyholder was aware that the water tank in the loft was very old
and unstable, then one day the fixings finally failed and the water tank fell through the
ceiling, this would not constitute accidental damage. The policyholder was aware of the
problem and it was foreseeable that the fixings would eventually fail and the tank would
fall through the ceiling. However, the reader should be mindful that Insurers may take a
lenient view on this type of incident.
The accidental damage section of a policy will normally contain a number of exclusions
which can greatly assist when handling a claim.

Activities
Find six exclusions in the accidental damage section of a policy wording.
Consider whether the following examples can be considered accidental
damage:
● A policyholder decides to paint a table then decides that they do not like
the colour. They are unable to remove the paint so wish to claim for a
new table
● The policyholder drops the iron onto their carpet leaving a scorch mark
● A dog scratches a leather sofa a number of times.

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CILA CH 2 – Introduction to Claims Handling

30
INTRODUCTION TO CLAIMS VALIDATION
4
CILA CH 2 – Introduction to Claims Handling

32
 Introduction to Claims Validation

4. INTRODUCTION TO CLAIMS VALIDATION

Contents
4.1 What is Claims Validation?
4.2 Key Points to Remember

Introduction
Claims validation is a fundamental aspect of the claims handling process. Your ability to
validate claims will undoubtedly be a key performance measure in whatever sector of
claims handling that you work in.
This section outlines what is meant by claims validation and explains the elements you will
need to consider in the handling of any claim. There is much to learn on the subject of
claims validation and the topic is covered in much more detail in the later CILA Certificate
courses. This section will however give you an insight into the subject.

4.1 What is Claims Validation?

The Oxford dictionary definition of validate is “make valid, ratify, confirm”. Claims
validation is about checking the validity and the value of the claim that has been
presented by the Policyholder.
There are essentially four elements of claims validation and these are as follows:
1. Validation of the cause of the loss or damage
2. Validation that the item claimed for existed
3. Validation that the item said to be lost or damaged is actually lost or damaged
4. Validation of the monetary value of the damaged or missing item.
1. Validation of the cause of the loss or damage
A claim is only covered by an insurance Policy if the cause of the loss or damage is one
of the perils listed in the Policy and no exclusions apply. It is therefore understandable
that Insurers want to check the cause of the claim before agreeing to make a payment
under the Policy. (We will look at perils and exclusions in more detail in the later CILA
Certificate courses.)
At the time of notifying Insurers of a claim, Policyholders will be asked to confirm
what they believe has caused the loss or damage. They will typically describe the
circumstances leading up to the incident and suggest a particular cause, for example
fire. Claims validation is about checking the circumstances that have been presented
by the Policyholder. In the majority of instances, it is relatively easy to confirm the
actual cause of loss or damage by a few simple enquiries.
As an example, let us consider the Storm peril and just one aspect of Buildings, a three
layer flat felt roof. How can we satisfy ourselves that the damage claimed resulted
from Storm? Well, we could make the following enquiries:
● Obtaining weather records – if there were no storm conditions at the time the
damaged occurred, the Policyholder will find it difficult to argue that the damage
was as a result of a storm. When checking the weather records, the wind speed,
gusts and the direction of the wind should be noted, as well as the amount of
rain, snowfall etc. The records should be checked for several days either side of
the alleged events and you should ask the Policyholder how they know when the

33
CILA CH 2 – Introduction to Claims Handling

damage happened as this makes it less easy for them to change the date to fit the
circumstances
● Reviewing the estimates for the repair of the roof – the nature of the damage and
the proposed repairs will tend to indicate how the damage has occurred
● Obtaining a report from someone who has inspected the roof, such as a Loss
Adjuster.

Activity
Decide what enquiries you would make to validate the cause of loss or
damage in the following scenarios:
1. Water damage to a kitchen ceiling. The Policyholder has advised that the
water came from a burst pipe in the bathroom above.
2. Paint damage to carpets. The Policyholder has advised that the carpet
was accidentally damaged by her husband whilst he was decorating.

2. Validation that the item existed

It is fraudulent to make a claim for loss or damage to an item that did not exist. To
avoid paying such claims, Insurers ask Policyholders to demonstrate the existence of
the item(s) being claimed for.
In some scenarios, such as water or fire damage, the items may still exist albeit in
a damaged state. Insurers will sometimes ask Policyholders to provide photographs
of the damaged items or arrange for them to be inspected. However, in the event
of extensive damage or in theft or accidental loss claims, these options will not be
available to Insurers.
Validating the existence of an item involves obtaining information that supports its
existence, for example purchase receipts, instruction manuals, photographs etc. Be
aware that although we tend to think of this type of validation in relation to contents
claims only, it is not unheard of for Policyholders to claim for the destruction of a
building such as a garage that did not exist.

Activity
Consider a claim for jewellery items that have been acquired by the
Policyholder over a number of years.
Think about all the possible documentation and proofs you could request
from the Policyholder to support the existence of jewellery. Ask colleagues
what they would request from the Policyholder. Remember to consider the
different scenarios by which jewellery is acquired, for example gifts or
inheritance.

3. Validation that the item claimed for was lost or damaged

Generally speaking, if you are dealing with a claim for damage rather than loss then
the damaged item(s) can be seen. Validation that the item claimed for was damaged
will simply involve obtaining photographs from the Policyholder or arranging an
inspection by another party, such as a Loss Adjuster.
However, depending on the nature and severity of the claim, the items may have
been totally destroyed or so badly damaged that they cannot be identified. In such
scenarios, Insurers typically appoint Loss Adjusters to inspect the site of the loss,
to discuss the claim with the Policyholder and to take enquiries as far as possible.
Reasoned judgements may have to be made. For example, if the claim includes a

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 Introduction to Claims Validation

television that has been destroyed by fire and the Policyholder is able to provide a
purchase receipt for this item, along with a photograph showing the television within
their home, it is likely that the television was destroyed in the fire that occurred
within their home.
With regard to claims for lost or stolen items, validation starts with asking the
Policyholder to describe the circumstances surrounding the loss. Such discussions can
reveal discrepancies which may suggest that the item(s) were not actually lost or
stolen.
Insurers typically require Policyholders to report losses to the police and, as part of the
validation process, it is useful to ask the Policyholder for the crime reference number
or indeed make enquiries with the police.

Activity
Following a flood, a Policyholder has submitted a claim for kitchen units and
a bread maker. What enquiries would you make to ascertain whether these
items were indeed damaged by the flood waters?

4. Validation of the value of the affected item

Validating the value of an item starts with understanding as much as possible about the
features of that item. For example, the value of a camera can range from £30 up to
£3,500. The difference in value will depend on the make, model and capabilities of the
camera. The features that influence the value of items differ by product type. If you
are asked to validate the value of a gold ring, you would need to establish what carat
gold the ring was, the weight and size of the ring, and other features such as engraving
etc.
Having gained an understanding of the item, the next step is to establish the value and
this can be done by a variety of methods, from simple checks on the internet through
to the appointment of specialist parties, such as fine art dealers.
By way of example, the following information would assist in valuation of a racing
bicycle:
i) What the frame is made out of, eg carbon fibre, aluminium, titanium
ii) The make of the forks
iii) Make and model of the wheels
iv) The chainset and gear mechanism
v) The make of the brake levers
vi) The make and model of the brakes
vii) The make and model of the bicycle.
Another example is a laptop computer, and the features that could affect the cost
include:
i) The size of the screen
ii) The processor make and speed
iii) The operating system
iv) Size of memory
v) Size and type of hard drive
vi) Software.

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CILA CH 2 – Introduction to Claims Handling

Activity
Review the following items and list the features that would affect the
replacement cost of each:
1. MP3 player
2. Television
3. Sofa.

Finally, Fraud is an important issue and validation in this respect is subject to a section of
this course in its own right.

4.2 Key Points to Remember

● Claims validation is not just about establishing the repair or replacement costs of a
claim. It involves a much wider consideration of the claim that has been presented by
the Policyholder.
● Claims validation starts with the Policyholder. Why do they believe they have a valid
claim and how can they support their claim?
● Claims validation will not always follow a standard process and nor should it. Your
enquiries will differ depending on the cause of the loss, the nature of the items
claimed for and the specific circumstances of the Insured.
● Having validated an item, the basis of settlement specified in the policy must be
applied.

36
 5
CLAIMS HANDLING − NEGOTIATION
CILA CH 2 – Introduction to Claims Handling

38
 Claims Handling − Negotiation

5. CLAIMS HANDLING − NEGOTIATION

Contents
5.1 Win or Lose?
5.2 Preparation
5.3 Communication
5.4 Key Points to Remember

Introduction
Negotiation is a key element of claims handling and you will need strong skills in this area
to be successful in any claims role. Whether you are dealing with colleagues, third parties,
policyholders, suppliers or indeed anyone else, it is important that you are able to obtain
a fair result for you and the person you are negotiating with.
This section discusses how you can prepare for negotiation activities and provides some
tips for successful communication.

5.1 Win or Lose?

It is important to note that negotiation should be aimed at obtaining the best equitable
agreement possible. It should not be treated as a win or lose situation and those who
indicate that they are looking for victory are unlikely to actually achieve the best outcome
from the negotiation. That is not to say that we might believe we have achieved a
successful outcome or be pleased with the result of a negotiation.

5.2 Preparation
Preparation is key and good preparation is about understanding what would be a successful
outcome for all the parties involved.

Activity
Think about the last time you were involved in a negotiation. Did you
understand what the parameters were for a successful outcome? Write a list
of the outcomes that were available and identify which would have been
the best for the long term relationship of the parties concerned.

To help in your preparation for negotiation, there are a number of questions you should
consider:
1. What are the parameters of an acceptable outcome?
a. Best possible outcome
b. Acceptable outcome
c. Unacceptable outcome
In order to identify the best, acceptable and unacceptable outcomes, you must
consider the implications of each outcome. The best possible outcome might be the
most appealing but it may not be in the best interests of the long term relationship.
This outcome may in fact be detrimental to subsequent negotiations.

39
CILA CH 2 – Introduction to Claims Handling

2. What are the alternatives?

Often there are alternative outcomes that might be acceptable to both parties. This
is illustrated by the practice of proposing options such as “we will compromise on the
method of settlement if we can agree that the settlement amount will not exceed X”.
Far too often negotiators become fixed in the mindset that there can only be one
type of agreement but this is rarely the case. Understanding alternatives will pay
dividends when you are seemingly at an impasse and you need something to break
the deadlock.
3. What are the needs of the other party?
Do your best to find out what the other parties desire and what is most important to
them. If you understand this, you can then focus on solutions that will appeal to the
other parties even if not all their needs are met. Your objectives may well be different
but an excellent bargain can sometimes be reached simply by understanding what the
other party is actually looking for.

Activity
The next time you are required to negotiate make a list of the following:
1. Acceptable outcomes
2. Possible alternatives
3. The most important aspects as far as the other party is concerned.

5.3 Communication
Communication is fundamental to negotiation activities and some tips for successful
communication are listed below:
1. Identify the most effective method of communication for the circumstances

Activity
Consider the advantages and disadvantages of using the following methods
of communication for negotiating settlement of a jewellery claim:
1. Letter
2. E-mail
3. Telephone
4. Face to face
5. Video conference
6. Instant messaging.

2. Remember the importance of listening

It is vital that you listen to the other party during any communication. We learn little
when we speak or when we just think about what we will say next while the other
party is speaking. We learn by listening.
Having listened, it then helps to clarify your understanding by putting the other party’s
points to them in a different way and asking them to confirm that you have the correct
understanding. For instance, you might say “Are you saying that you will accept the

40
 Claims Handling − Negotiation

replacement television from our supplier but because your ring had such sentimental
value you will only accept a cash payment for this item?”.
3. Know your case before you put it forward
You should always be able to support your case with rationale. Before entering into any
negotiation, you should have a clear understanding of this rationale and have available
any supporting documentation. It is also useful to rehearse the possible arguments
against your case.
How many times have you heard the argument “That is just the way we do it” or
“That is the system, we cannot change it”. While these arguments may be “correct”
there will be a rationale behind them. The rationale will most likely be in our case
due to the Policy wording or the principles of insurance. If you do not understand the
rationale, it will be incredibly difficult for you to persuade another person to accept
it.

Activity
Consider the following items and write down the rationale for why they are
not typically covered by insurance policies:
1. Plumbing repairs to pipework that caused an escape of water claim
2. Failure of a flat roof due to wear and tear
3. Undamaged bathroom furniture when a matching sink has been cracked.
Keep your notes and refer to them when you encounter such items in
practice.

4. Ask the other party what they will accept

The quickest way to establish the expectations of the other party is to ask them. You
can manage such discussions by first explaining the parameters of the negotiation, for
example the policy wording or the insurance principle that applies. Having checked
that the person understands, you can then ask questions such as “Having understood
that payment under the Policy is limited to the reasonable cost of alternative
accommodation, what do you consider to be reasonable cost?”
5. Identify who you are best able to negotiate with
There may be different parties involved in a claim and you may find it easier to
negotiate with one party compared to another. Alternatively, there may be others in
your team more able to communicate with particular individuals. Discuss approaches
with your colleagues or even suggest tackling issues as a team, for example “let me
deal with Joe Grundy and you deal with Peggy Mitchell”.
6. Ensure that you set expectations as soon as possible
If there are major difficulties to overcome, for instance significant underinsurance,
a large excess or a single article limit, make sure all parties are advised as soon as
possible. It is often advantageous to put Policyholders on notice of potential issues
when they are first identified. Although they may have an anxious wait while you
investigate the issue, it avoids a nasty surprise later in the claims process.
7. Agree the agreeable
Identify what can be agreed immediately and agree all those aspects. This approach
will strengthen your position because it will highlight your intent to make agreements
wherever possible.

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CILA CH 2 – Introduction to Claims Handling

Activity
Ask senior members of your team to tell you about any complex, difficult
negotiations that they have been involved in. How did they achieve
compromises and agreements?
Ask whether you can accompany them to a meeting or listen to a telephone
conversation when a contentious issue is likely to be discussed.

5.4 Key Points to Remember

● Successful negotiation is about reaching an agreement that is acceptable to all parties.
● Before entering into negotiations, it is useful to identify what is the best possible
outcome, an acceptable outcome and an unacceptable outcome. It is also helpful to
think about what other outcomes might be available and to consider the needs and
desires of the other parties.
● Successful negotiation requires good communication skills. You will need to select
the best method of communication for the circumstances. You must understand your
position and be able to explain and support it. Remember to listen to the other parties
and do not be afraid to ask them what they will accept.

42
 6
REASONABLE CARE
CILA CH 2 – Introduction to Claims Handling

44
 Reasonable Care

6. REASONABLE CARE
Contents
6.1 Reasonable Care within the Policy
6.2 What does Reasonable Mean?
6.3 FOS View on Reasonable Care
6.4 Key Points to Remember

Introduction
Insurers expect their Policyholders to take reasonable care and this is usually made clear
by a clause within the policy, for example “It is a Condition Precedent to Our liability
that You have taken reasonable care”. Loss Adjusters and Claims Handlers are therefore
required, as part of the handling of a claim, to establish whether the Policyholder has
indeed taken reasonable care.
This section outlines how reasonable care is incorporated into insurance policies and
explains how reasonable care should be evaluated in practice.

6.1 Reasonable Care within the Policy

Reasonable care may be required with regard to the policy as a whole or with regard to
specific aspects of the policy. For example, on a Buy to Let policy, the Policyholder may be
specifically required to take reasonable care in the acceptance of tenants. Indeed, moving
along the scale towards commercial policies, the Policyholder may be required to exercise
reasonable care in the selection of staff.

Activity
Review the conditions within a policy wording and identify those that
demand reasonable care by the Policyholder. Now review the entire policy
and look for other occasions when the word “reasonable” is used. You will
probably be surprised how frequently it appears in practice.

6.2 What does Reasonable Mean?

Insurance policies are taken out to protect the Policyholder in the event of a loss.
Sometimes the losses that we seek to protect ourselves against result from a mishap of
one kind or another. Insurers could argue that such mishaps would not have occurred if the
Policyholder had exercised reasonable care. However, Insurers cannot give cover on one
hand and simply take it away with the other.
Consider a claim where a Policyholder was carrying a birthday cake with lighted candles.
He slipped and fell causing the candles to fall and leave burn marks on a sofa.
Two questions arise when evaluating whether the Policyholder exercised reasonable care:
1. Who is the judge of the adequacy of reasonable care?
2. What degree of reasonable care was required?
With regard to the first question, the answer is the Courts and arbitration services such as
the Financial Ombudsman Service (FOS).

45
CILA CH 2 – Introduction to Claims Handling

With regard to the second question, reasonable implies that the care need not be
absolute. In the scenario, absolute care would have required that fire extinguishers were
in easy reach, that someone walked in front of the person carrying the cake to ensure
nothing got in the way, that a bucket of water was on hand and, to reduce the risk further,
only one candle was used. These precautions appear to go well beyond what is reasonable.

Activity
Accidental damage claims can often arise when the Policyholder is
undertaking DIY within the home, for example paint spills on a carpet. Ask
a sample of your colleagues what they consider to be reasonable care when
undertaking DIY. Now ask a sample of your friends and family for their view.

6.3 FOS View on Reasonable Care

The FOS has considered many cases concerning reasonable care and in general has used
the logic that the Policyholder has not exercised reasonable care if he has been reckless
and in some way “courted” the danger.
The nature of the reasonable care exclusions within the Policy are also important and the
FOS is critical of exclusions that:
a) dramatically reduce the range of cover actually provided from that set out in the cover
section of the policy
b) exclude cover unless Policyholders exercise a degree of care over their possessions
or well-being which goes significantly beyond the degree of care most of us actually
exercise.
When dealing with such exclusions, the FOS will consider whether the Policyholder was led
to believe that cover would be provided for something that the Insurer never intended to
cover, in other words the customer had been misled.
Alternatively, the FOS will consider whether the degree of care required by the Policy goes
beyond what could have been anticipated by the Policyholder. However, if the issue relates
to a specific exclusion that was brought to the attention of the Policyholder, the FOS may
deem the exclusion enforceable.

Putting this into practice

By way of an example, let’s say that Fiona, a barmaid, inherits a diamond
necklace worth £25,000. Fiona insures the necklace and the Insurer
specifically states that no cover will be provided unless the necklace is
being worn or is in a locked safe. The exclusion is made very clear to Fiona,
both verbally and in writing.

One evening, while working in the bar, Fiona’s boyfriend Martin asks if he can show the
necklace to his friends. Fiona gives Martin the necklace and the item gets passed around
Martin’s friends one by one. The necklace is eventually handed back to Fiona who is busy
and places it on the bar. Some thirty minutes later, Fiona realises that the item is missing.
The questions that arise regarding the exclusion are:
1. Has Fiona been careless?
2. Was she reckless?
3. Did she court the danger?
4. Had she been misled about the Policy cover?
5. Had the exclusion, that was strict, been brought to her specific notice?

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 Reasonable Care

While some of the answers could be debated, the majority can be answered yes and
therefore the exclusion is likely to be upheld. The only question that we can answer no to
is question 4.
In contrast, let us consider another example. Brian is given a watch by his daughter
Debbie. The watch is only worth £50. He visits a public house, the Bull, where his
acquaintance Eddie spots the watch and asks to take a look. Against his better judgement,
Brian hands the watch to Eddie whose father Joe arrives. Eddie shows the watch to Joe
and Brian is distracted by his former business colleague Matt. Knowing that Matt has been
in prison for fraud, Brian is keen to get his watch back. Unfortunately Joe has dropped
it and Eddie has stood on it rendering it irreparable. The policy has the typical clause
requiring reasonable care but there is an additional exclusion that states that there is no
cover for damage resulting from the item being dropped if this occurs in a public house.
This was not brought to the attention of Brian and all the general cover details suggest
that the cover is “All Risk” and comprehensive. The questions arise once again:
1. Has Brian been careless?
2. Was he reckless?
3. Did he court the danger?
4. Had he been misled about the Policy cover?
5. Had the exclusion, that was strict, been brought to his specific notice?
In this case, the answer is probably no to questions 1, 2 and 3. It could further be argued
that he had been misled about the Policy cover and the specific exclusion had not been
brought to his attention. On this basis, it is unlikely that the exclusion would be upheld.

Activity
Ask your senior colleagues for examples of when reasonable care has been
a potential issue on a claim. Find out how those claims were concluded and
the rationale for the decisions that were made in relation to reasonable
care.

6.4 Key Points to Remember

● Insurers expect their Policyholders to exercise reasonable care so that unnecessary
claims can be avoided or at least the extent of loss kept to a minimum.
● Reasonable care is a requirement that often appears more than once within a policy
wording. It can apply to the policy as a whole or as a specific requirement against a
certain section.
● Reasonable care does not mean absolute care.
● The FOS view is that the Policyholder needs to have been reckless or “courted the
danger” in order for a reasonable care exclusion to apply.
● The FOS are unlikely to accept reasonable care exclusions that:
◦ dramatically reduce the range of cover actually provided from that set out in the
cover section of the policy
◦ exclude cover unless policyholders exercise a degree of care over their possessions
or well-being which goes significantly beyond the degree of care most of us
actually exercise.
● You should consider whether the Policyholder may have been misled about the policy
cover and whether specific exclusions were brought to their attention.

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CILA CH 2 – Introduction to Claims Handling

48
 7
MITIGATION
CILA CH 2 – Introduction to Claims Handling

50
 Mitigation

7. MITIGATION
Contents
7.1 Mitigation Measures for Household Contents
7.2 Evaluating the Benefit of Repair or Restoration
7.3 Controlling Mitigation Spend
7.4 Key Points to Remember

Introduction
The word “mitigate” means to reduce the severity and in the context of insurance claims
the term “mitigation” is used to describe the actions that are taken to reduce the severity
or negative effects of a claim. Claims Handlers and Loss Adjusters are expected to play a
key role in the mitigation of losses.
This section explains the factors that influence what mitigation measures are undertaken
and how the cost of mitigation can be controlled. It also highlights the effects of allowing
mitigation costs to get out of hand.

7.1 Mitigation Measures for Household Contents

First, we should consider the different types of household contents that may be damaged,
for example:
● Soft furnishings
● Carpets
● Soft furniture
● Wooden furniture
● Audio visual equipment
● Jewellery and other precious items.
Second, we should consider the potential nature of damage to these items:
● Saturation by clean water (water from domestic plumbing)
● Debris from damaged building components
● Smoke/soot deposits
● Contamination by foul water (eg water from a flood)
● Oil contamination
● Contamination from acidic by-products from the burning of plastic (hydrocarbons)
● Contamination from asbestos.

Activity
Take two types of household contents from the list above and consider
how they would be damaged by a) smoke/soot deposits and b) foul water
contamination. Now write a list of the possible actions you could take to
reduce the effects of the damage.

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CILA CH 2 – Introduction to Claims Handling

7.2 Evaluating the Benefit of Repair or Restoration

There are two potential benefits of repair or restoration:
1. Making savings against the replacement cost
2. Restoration of an item that has sentimental value.
The main consideration must be economic, ie is the cost of restoration higher or lower
than that of replacement? This decision can be influenced by the following key factors:
● The basis of settlement, ie the cost of repair may be cheaper than replacement as
new, but if the policy provides for a different basis of settlement then this must be
taken into account
● Whether the repair or restoration will be effective and acceptable
● The long term effects on the item concerned.
We can look at each of these factors in a little more detail:
1) The basis of settlement. This is an important factor to be aware of when deciding
whether to proceed with repair or restoration. Clothing is a good example of when the
basis of settlement can have a significant influence on your decision. Consider a fire
claim where shortly after the incident you are presented with an estimate to clean
clothing. On the face of it, this might seem to be an appropriate settlement method.
However, the basis of settlement for clothing may take account of wear and tear and
it is therefore essential to establish the age of the items. Be careful that you do not
agree to restoration works that will exceed the amount of the policy liability.
2) Effective and acceptable restoration. You must ensure that any repair or restoration
costs to be incurred will result in actual successful restoration of the items concerned.
You should also consider whether restoration is an acceptable option and this may
depend on the nature of the damage. If for example a child’s toy is spoiled with
sewerage due to a flood or perhaps blood from an intruder, it is quite understandable
that any amount of cleaning would not warrant the cleansed toy being accepted.
3) Long-term effects of damage. You can encounter a scenario where the restoration
company confirms that they are able to restore an item in the short term but the item
may no longer be reliable in the long term. For instance, imagine smoke deposits on
a computer. The computer may be restorable but the smoke deposits might include
acidic particles which over a period of time would adversely affect the components of
the computer.

Activity
Contact a restoration company that is used by your organisation and ask
about their services. Find out what types of items they attempt restoration
on, the restoration methods that they use and the level of success they
achieve.

7.3 Controlling Mitigation Spend

When handling claims, it is very important that you control the amount of expenditure
associated with mitigation works, as with any other part of the claim.
This is underlined by the fact that, in the event that the sum insured is exhausted and
uneconomical, mitigation works are part of the expenditure that the FOS has previously
decided the Insurer should pay over and above the sum insured. For instance, if there
were a house fire and clothing was cleaned but not adequately restored, the FOS may

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 Mitigation

decide that the Insurers are liable not only for the cost of the cleaning but also the
replacement of the items.
You must also carefully consider mitigation costs in the event of a total loss, particularly if
the sum insured is likely to be paid out. The Policyholder may prefer to use the insurance
money to buy replacements rather than having remedial works done. It is therefore
important that you do not prejudice the Policyholder’s position by instigating expensive
mitigation works at the outset.

7.4 Key Points to Remember

● Mitigation is about controlling or reducing the effects of damage which in turn should
minimise claim costs.
● It is important to investigate and understand the nature of the damage when
contemplating what mitigation measures to undertake. You must also think about
the nature of the damaged items and how they will respond to the various mitigation
measures that are available.
● Act promptly when instigating mitigation measures, but review the position regularly
and adjust your approach if necessary to minimise overall claim costs.
● Give clear instructions to restoration/mitigation companies about what work should be
undertaken. Set boundaries in terms of scope or cost and ask them to revert back to
you immediately if these boundaries are likely to be exceeded.
● Discuss mitigation measures and decisions with the Policyholder. Be aware that the
Policyholder may have a sentimental attachment to items and not just an economic
interest.
● Remember that the cost of restoration plus potential storage costs can sometimes
exceed the amount of the Policy liability for the item(s).
● Evaluate the likelihood that the sum insured will be exhausted and, if so, involve the
Policyholder in the discussions about the best course of action – you may be spending
their money.

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CILA CH 2 – Introduction to Claims Handling

54
GRADUALLY OPERATING CAUSE
8
CILA CH 2 – Introduction to Claims Handling

56
 Gradually Operating Cause

8. GRADUALLY OPERATING CAUSE

Contents
8.1 Gradually Operating Cause as a Policy Exclusion
8.2 Identifying a Gradually Operating Cause
8.3 Other Considerations
8.4 FOS View on Damage to Underground Services
8.5 Key Points to Remember

Introduction
This section deals with the term Gradually Operating Cause, or simply GOC. Most policies
seek to exclude loss or damage resulting from a gradually operating cause and in this
section you will learn why Insurers do this and how the exclusion is applied in practice.

8.1 Gradually Operating Cause as a Policy Exclusion

When considering any exclusion, it is important to remember that, in the event of
a complaint being made, the FOS will usually only support exclusions that would be
expected or are specifically drawn to the attention of the Policyholder.
Insurance policies are intended to cover unexpected events not things that are bound
to occur. On this basis, it can be argued that something that happens gradually is
not unexpected and therefore need not be drawn specifically to the attention of the
Policyholder. That being said, it is always essential to ensure the customer is treated
fairly.
There are of course policies that are sold as extended warranties and Life Assurance could
be said to be covering the ultimate inevitable event. However, such policies are outside of
the scope of this text book.

Activity
Refer to a policy wording and locate, either in the General Exclusions or the
peril specific exclusions, any comments relating to damage occurring over a
period of time. Now refer to a policy prospectus, perhaps on the Internet,
and consider how clear the exclusions are concerning Gradually Operating
Cause.

You may well have found a General Exclusion along the lines of “this policy does not
cover loss or damage which develops gradually or is not caused by a specific or sudden
incident”. Additionally, you may have found GOC exclusions in relation to specific perils.
This should demonstrate to you that even if the damage is as a result of one of the insured
perils there is unlikely to be any cover if the damage has occurred gradually.

8.2 Identifying a Gradually Operating Cause

We will now consider two scenarios where GOC and indeed the GOC exclusion might apply.
Josh is preparing a casserole and he leaves the stove on low, slowly cooking some beef.
Josh takes a phone call and is invited out to see a band that evening. He decides to take
up the chance and in his excitement he leaves the stove on when he leaves. Over a period

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CILA CH 2 – Introduction to Claims Handling

of several hours, the beef dries out and begins to smoke. Eventually the beef ignites and
the heat causes a tea towel, which had been hung close by, to fall onto the stove. The tea
towel then catches fire. Fortunately Josh returns home at this point and extinguishes the
fire before too much damage is done. The question is whether the damage is as a result of
a gradually operating cause and therefore excluded by Josh’s home insurance policy.
Before giving an answer, consider another scenario. Sarah has regular barbeques during the
summer months. She also typically keeps her patio doors and windows open while cooking
on the barbeque. At the end of a long English barbeque season, Sarah notices that her
whitewashed walls have turned somewhat grey. Sarah looks at her home insurance policy
and notices that there is a “smoke” peril. Does this mean that Sarah will be successful in
making a claim for the damage under her home insurance policy?
By contrasting the two scenarios, you can formulate a view as to whether either, both or
neither of the causes are gradually operating.
You could argue that the first scenario is a GOC as it happened over a period of hours.
However, the actual event was a “one off”. There was at some point ignition and this
caused the damage. It would be very difficult to convince the Policyholder, the FOS or
indeed the Courts that the GOC exclusion should apply in this instance.
By contrast, the second scenario was not a “one off” event. It is clear that the damage
has occurred over a period of time and as such will be excluded by the policy, either by a
General Exclusion or by a peril specific exclusion.

Activity
GOC issues predominately arise in escape of water and storm claims. Review
a sample of such cases and look for evidence that the damage may have
been as a result of an ongoing gradual incident. Now find out how the claims
were eventually concluded and whether the GOC exclusion was applied in
practice.

8.3 Other Considerations

When considering GOC, the following should also be taken into account:
● Whether the Policyholder could have known that the damage was occurring
● The action the Policyholder took when it became apparent that damage was occurring
● Any other exclusions that might apply.

Activity
Refer to your colleagues and identify the common types of damage that
can occur without being immediately apparent to a Policyholder. Now look
at a policy wording and establish how Insurers encourage Policyholders
to regularly check their property and to take action when damage is
discovered. Consider a rented property and the measures that could be put
in place by the Landlord to ensure that any damage is identified and acted
upon at the earliest opportunity.

8.4 FOS View on Damage to Underground Services

A final point to note is that the FOS, in reference to claims for underground services, has
said that accidental damage can occur “in slow motion”. Claims for underground services

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 Gradually Operating Cause

and the FOS stance require further discussion outside of this section, but it is worth noting
that the FOS does not appear to have made a decision along these lines with regard to any
other perils.

8.5 Key Points to Remember

● Insurance policies are designed to cover unexpected, “one off” events. They are
not designed to cover the maintenance of a property or indeed any damage that has
occurred gradually over a period of time.
● Policy exclusions for GOC can be found under General Exclusions and/or peril specific
exclusions.
● When handling any claim, it is important to establish when and how the damage was
discovered and by whom. You should also consider the type of damage and whether it
is likely to have occurred as a result of a single event or over a period of time.
● Insurers expect Policyholders to minimise damage to their property and this includes
taking prompt action to prevent any further damage when a problem is identified.

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60
 9
UNDERINSURANCE
CILA CH 2 – Introduction to Claims Handling

62
 Underinsurance

9. UNDERINSURANCE
Contents
9.1 Penalties for Underinsurance
9.1.1 Change of the Basis of Settlement
9.1.2 Room Based and Bedroom Rated Policies
9.2 Commercial Policies
9.3 Pro rata Condition of Average
9.4 The Special Condition of Average
9.5 The Two Conditions of Average

Introduction
The purpose of insurance is to provide protection against a loss. In essence, it is about
creating a common pool of money by the many to meet the losses of the few. To ensure
that the arrangement is equitable, it is necessary for everyone who pays into the common
fund to pay their fair share. This section provides a basic understanding of what happens
when underinsurance arises.

9.1 Penalties for Underinsurance

A range of penalties apply when underinsurance arises, including:
● Change of the basis of settlement
● Pro rata Average
● Reinstatement Average
● Day One Average.

9.1.1 Change of the Basis of Settlement

This penalty is usually associated with domestic insurance. Since the late 1970s, it has
become increasingly common to provide cover on a New for Old or Reinstatement basis.
Settlement is based on the replacement cost of items of Contents or the rebuilding cost of
buildings. However, it is usually a condition of the Policy that the sum insured is adequate
to replace all items of Contents on a New for Old basis or to fully reinstate the building in
the event of a total loss.
If the sum insured is not adequate, there will most likely be a penalty in the event of a
claim. The nature of the penalty will be expressed in the policy and could include the
following:
● Value of item at the time of loss instead of New for Old or Reinstatement
● Secondhand values paid in the event of underinsurance.

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Activity
Obtain the prospectus for a Household Policy. Look at how it highlights the
basis of settlement and identify whether it points out that the sum insured
must be adequate.
Now review a Domestic Policy wording. Find the section that deals with
underinsurance and look at the penalties that are in place.

9.1.2 Room Based and Bedroom Rated Policies

The result of underinsurance is that the Insurer does not receive the full premium that
they would otherwise receive and, in the event of a loss, the Policyholder receives less
than they might expect. This is not good for either party and, over the years, Insurers
have implemented many initiatives to combat this. For example, Bedroom Based and Room
Rated policies make setting of the sum insured far simpler, encouraging the Policyholder
to be adequately insured. These Policies may be set with either unlimited or banded
sums insured depending on the number of rooms or bedrooms. It is important to check
the definition of a room or bedroom and ensure that the Policyholder has followed the
definition.
One definition of a Bedroom in a Policy is “Any room that was initially built as a bedroom,
whether it is currently used as a bedroom or not”. This may be simple to establish in a
modern house, but in a very old house the initial purpose of the room could be difficult to
establish. Common sense governed by the contra proferentem rule should apply in such
circumstances.

9.2 Commercial Policies

With regard to commercial policies, there are various penalties that exist and these mainly
relate to different kinds of Average. The main principle of Average is that, in the event
of underinsurance, the Policyholder bears the loss in direct proportion to the extent of
underinsurance. In other words, if the sum insured is only 50% of the value at risk, the
policy pays out 50% of the agreed loss, subject to all other terms and conditions.
There are a number of types of Average:
● Pro rata Condition of Average
● The Special Condition of Average
● The Two Conditions of Average.
The Policy will state which condition of Average, if any, will apply and the ABI recommend
various wordings, as considered below.

9.3 Pro rata Condition of Average

The ABI recommended wording for Average is:
“Whenever a sum insured is declared to be subject to Average, if such sum shall at
the commencement of any damage be less than the value of the property covered
within such sum insured, the amount payable by the Insurer in respect of such
damage shall be proportionately reduced”.
The calculation is simple and is as follows:
Sum Insured  Loss
Value at Risk
Value
V k

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 Underinsurance

For example:
Sum Insured (£50,000)
(£50 000)
 Loss (£5,000) = £2,500
V lue at Risk (£100,000)
Va
Value (£100 000)

9.4 The Special Condition of Average

The ABI recommended wording is:
“Whenever a sum insured is declared to be subject to the Special Condition of
Average, then, if such sum shall at the commencement of any damage be less than
75% of the value of the property covered within such sum insured, the amount
payable by the Insurer shall not exceed that proportion of the amount of the damage
which the said sum insured shall bear to the full value of the property insured”.
Again this is a simple process. The calculation is identical to the one above except for one
important difference. Average is only applied if the Sum Insured represents less than 75%
of the value at risk. So if the Sum Insured is 80% of the value at risk, the full loss (up to
the Sum Insured) will be paid. However, if the Sum Insured is only 74% of the value at risk,
only 74% of the loss will be paid.
In effect, this version of Average recognises the difficulty in accurately assessing the value
at risk and provides some leeway to the Policyholder.

9.5 The Two Conditions of Average

The ABI recommended wording is:
“Whenever a sum insured is declared to be subject to the Two Conditions of
Average
1 if such sum shall at the commencement of any damage be less than the value
of the property covered within such sum insured, the amount payable by the
Insurer in respect of such damage shall be proportionately reduced, but
2 if any of the property covered within such sum insured shall at the
commencement of any damage be also covered by any more specific
insurance, then this policy shall only insure the same for any value in
excess of the amount of such more specific insurance(s) which excess
value shall be deemed to be the value of the property covered hereby and
subject to 1 above.
For the purpose of 2 only a more specific insurance is one which at the time of
damage applies only
(a) to property as described herein, and
(b) at any but not all of the locations to which this insurance applies.
Note: The Two Conditions of Average are intended for use on Contents and/or Stock
insurances arranged on a floating basis where specific insurance also applies”.
The first condition is simply an Average clause and the calculation remains the same. The
second condition relates to contribution. The full extent of the calculation for the Two
Conditions of Average is beyond the scope of this course.

Activity
Review some commercial Policy wordings and identify the penalties for
underinsurance.

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 10
REPUDIATIONS
CILA CH 2 – Introduction to Claims Handling

68
 Repudiations

10. REPUDIATIONS
Contents
10.1 The Rationale for a Repudiation
10.2 When and How to Repudiate
10.3 What to Tell the Policyholder
10.4 Signposting a Repudiation

Introduction
This small section deals with repudiations. It concentrates on the message that should be
given to the Policyholder and considers when repudiations should be made. When a claim
is turned down or repudiated. The Policyholder will almost always be disappointed and the
repudiation may well result in a complaint if it is not handled carefully and sensitively. The
principles here can be applied equally to partial repudiations as well as the repudiation of
a claim in full.

10.1 The Rationale for a Repudiation

It is of utmost importance to understand the Policy and appreciate why the loss is not
covered by the Policy. Advising someone erroneously that there is no cover for a loss and
subsequently being corrected by the Policyholder or perhaps another professional will be
highly embarrassing and potentially damaging to both your personal reputation and that of
the company you are working for.
Further, should the claim be repudiated incorrectly and the repudiation not be
challenged, the Policyholder has not been treated fairly (TCF). Although unbeknown to
the Policyholder, the principle must be that this is in breach of the FCA requirement of
TCF. Competence in this must surely extend to ensuring that claims are not incorrectly
repudiated.
To ascertain whether or not a loss is covered, it is necessary to review the Policy and
consider the relevant insurance principles. You should already be familiar with the layout
of a Policy and therefore will appreciate the following examples of when a claim might not
be covered:
● The item claimed for falls outside of the definition of property covered by the Policy
● The cause of the loss is not an insured Peril
● The cause of the loss is excluded by a Peril, eg frost damage is frequently excluded
under the Storm peril
● The loss is excluded by one of the General Exclusions
● There has been a breach of a General Condition
● There has been a breach of a Warranty
● The Policy was not in force at the time of the loss
● There has been an element of fraud
● There is a breach of the Claims condition
● The Policyholder does not comply with a condition subsequent to liability.

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Activity
Select a Household Policy wording and locate within the Policy a rationale
for repudiating claims in the following circumstances. Be careful as the
loss described may be partially or entirely covered by the Policy you have
selected.
a. Victoria has a specified engagement ring on her Policy. She participates
in a triathlon and after the event she takes a shower at a public
swimming pool. Victoria takes off the ring and leaves it on the bench in
the changing room while she is showering. The ring, valued at £3,000, is
missing on her return.
b. Mick has a specialist amplifier that he uses for his band. Mick’s sole
income is from playing in the band. His home is broken into and the
amplifier is stolen and he claims for this.
c. The Policyholder has a Contents Policy. His claim is for his Koi carp which
have been killed in a storm.
d. Donald can hear running water in his ground floor bathroom but cannot
see any dampness. He claims the cost of tracing the leak and the cost
of accessing and fixing the water pipe which is known to be in excess of
80 years old.
e. Theo has a claim for impact damage to his garden wall caused by a
motor vehicle. It is believed that the vehicle was being driven by a
friend of Theo and for this reason Theo refuses to provide the details of
the motorist. Theo simply restates that as his Policy covers damage by
impact by a motor vehicle his claim should be paid.

10.2 When and How to Repudiate

The decision as to when to repudiate will depend on some or all of the following:
● Your role
● Your authority to repudiate
● What other parties are involved
● Your personal safety
● The availability of all relevant information
● The likely reaction and whether steps can be taken to produce a more acceptable
outcome.
If you are involved in the handling of claims then most likely you will be required to
repudiate claims from time to time. However, the decision to repudiate will be based on
your authority to do so. For instance, Insurers often delegate authority to Loss Adjusters
but this may not always include the authority to repudiate. The particular agreement
should be verified to ensure that it is not breached.
There may well be other parties involved who should be party to the repudiation. For
instance, if you are acting as a Claims Handler for an Insurer or in an outsourced unit for
the Insurer, you should consider what involvement the broker might like. The broker will
be interested particularly if the claim:
● is for a new client
● is a major loss
● is for a major or important client.

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 Repudiations

Gaining the support of the broker can be highly valuable. If you discuss the repudiation
with the broker they may be able to identify other policies that do in fact cover the loss,
or they may identify extensions to the policy that provide the necessary cover. Sometimes
the broker may wish to inform the policyholder themselves, or alternatively they may
have already informed the Policyholder that they believed this would be the most likely
outcome, or the broker will agree that the loss is not covered. At worst the broker will
disagree with the decision, but their opinion can be taken into account and if the decision
is reversed due to the argument put forward by the broker you have ensured that the
Policyholder has been treated fairly and most likely avoided a complaint.
With regard to personal safety, this really applies to situations where meetings are face
to face. On very rare occasions there could be such a strong reaction to the repudiation
that your personal safety is threatened. It is vital in such situations to use tact and
diplomacy.
A claim should not be repudiated until you have exhausted the possibility that cover does
exist. Therefore, if some material evidence is unavailable, it is better to explain the
position to the Policyholder. In this way the Policyholder will be likely to accept he has
been given every opportunity to have the claim considered and therefore that he has been
treated fairly.

10.3 What to Tell the Policyholder

The information concerning the repudiation that should be given to the Policyholder
should be as complete as possible. This will ensure that the Policyholder has understood
that you have considered the matter in detail and that the repudiation is not a rash
decision.
The information should include:
● Your understanding of the loss and circumstances of the loss
● The limitation of cover in respect of the loss and why the claim is not covered
● Supporting evidence such as a quotation from the Policy
● A polite softener to close the matter off.

Activity
Consider a claim for storm damage to a flat felt roof. List the evidence you
would require to ascertain whether this constitutes a storm claim.

Ideally the Policyholder will be advised verbally, giving them the opportunity to put
forward other arguments or to clarify what you might have misunderstood. This should
then be followed up in writing.

10.4 Signposting a Repudiation

A common complaint concerning a repudiation is that the policyholder was led to believe
that the loss was covered and that the repudiation came out of the blue.
If there are any doubts about Policy coverage, these should be explained at the outset to
allow the Policyholder the opportunity to put forward other rationale that may affect the
decision. It is far better to gain the confidence of the Policyholder by explaining that the
loss may not be covered but that you wish to make enquiries to establish that the loss is
covered. You can also use this as an opportunity to explain their duty to mitigate the loss.
So in effect the message is passed on step by step so that there are no surprises.

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Putting this into practice

Discuss your repudiation process with a senior colleague. Find out what
evidence your colleague usually obtains to support the repudiation of a
claim. Ask the colleague about a claim that has been repudiated but the
decision was subsequently overturned and the claim paid. Discuss the
reasons why the original decision was overturned.

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 11
FRAUD, DETECTION AND
PREVENTION
CILA CH 2 – Introduction to Claims Handling

74
 Fraud, Detection and Prevention

11. FRAUD, DETECTION AND PREVENTION

Contents
11.1 The Definition of Fraud
11.2 Offences Under the Act
11.2.1 False Representation
11.2.2 Dishonest
11.3 Intent
11.4 Identification of Fraud
11.5 Fraud Indicators

Introduction
This section provides an understanding of what constitutes fraud, the indicators of possible
fraud, how fraud may be prevented and how fraud can be identified.
Fraud costs the insurance industry millions of pounds per year and as a result costs the
insuring public additional money in premium. Attitudes towards fraud vary and have
changed over a period of time. Research indicates that on occasions Insurers are seen as
a soft target. Even when a criminal is convicted of fraud against an Insurer, the courts
sometimes give the impression that punishments should be restricted.

Activity
Locate your company policy towards fraud. Note that the company will be
interested in fraud by Policyholders but should also have protections in
place to prevent internal fraud. Consider for example who may authorise
payments and what happens when larger sums are involved.

11.1 The Definition of Fraud

Fraud is defined in the Fraud Act 2006. Section 1 of the Act creates a general offence of
fraud and details three ways in which fraud is committed:
1. False representation - Section 2
2. Failure to disclose information when there is a legal obligation to do so – Section 3
3. Abuse of position – Section 4.
To be guilty of fraud, the Defendant must have been dishonest and there must be intent to
make a gain or to cause or to intend another to suffer a loss. No gain has to be made nor a
loss suffered for the offence of fraud to have been committed.

11.2 Offences Under the Act

The first offence under the Act is false representation. To understand this offence, the
following three principles must be appreciated:
● What amounts to a false representation
● The legal definition of dishonest
● What amounts to intent.

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11.2.1 False Representation

Representation has a very wide meaning in terms of the Act and can range from
presenting a credit card, wearing identification or clothing such as a uniform implying
status, sending a letter or e-mail or even simply by body language such as a nod of the
head. Representation can also be by a failure to disclose information. For instance, if a
Policyholder fails to advise Insurers of previous convictions in order to represent that he is
of good character, the Policyholder may be guilty of fraud, providing the failure to disclose
the convictions was done dishonestly and with intent to gain or to cause or expose the
Insurer to the risk of loss.
It would also be the case that should someone falsely provide evidence to support
someone else’s claim this false representation may amount to fraud. So the Policyholder’s
friend who writes or confirms verbally to the Loss Adjuster that the Policyholder lost goods
knowing that he did not may also be committing fraud. The recording of representations
made is therefore highly valuable as the record can be used as evidence.

11.2.2 Dishonest

To be guilty of fraud, the representation must be dishonest. R v Ghosh (1982) defined

dishonest as “dishonest by ordinary standards of reasonable and honest people and that
the defendant must have known the act was dishonest by those standards”.

Activity
In the following circumstances consider applicability of “dishonest by
ordinary standards of reasonable and honest people and that the defendant
must have known the act was dishonest by those standards”.
● Matt works for a firm of accountants. His friend Brian is seeking to
obtain a mortgage and asks Matt to provide evidence in support of
his earnings. Brian needs to show that he earns in excess of £50,000
whereas in fact last year he earned only £45,000. He is entitled to a
bonus of £15,000 if he meets his sales targets, but he knows that he
will be unable to achieve these targets. He explains this to Matt. Matt
provides supporting evidence explaining that Brian has the potential to
earn £60,000 but is unlikely to achieve the full sum this year due to the
constraints on his bonus provision. Have Brian or Matt been dishonest?
● Graham is waiting for a bus. He has a prepayment card which he has to
register electronically on boarding the bus. As he gets onto the bus, his
mobile rings. It is his father who tells him that Graham’s mother has
been taken seriously ill. Graham forgets to register his card, and due to
the situation gets off the bus at the next stop. He hails a taxi and goes
to the hospital. Several days later he realises he never paid the fare. Has
he been dishonest?
● Sheena owes her flatmate Scud £5. Sheena leaves a £5 note on the
kitchen table before going to bed to remind her to take it to work the
next day to pay for lottery tickets. Scud sees the money and thinks that
it might be for him so takes it. Has Scud been dishonest?
● Bill works in the meat department of a supermarket. Cheryl, his
girlfriend, comes to his department asking for some beef. Bill weighs the
beef and puts the ticket on the bag showing the cost. He winks at Cheryl
and places more beef in the bag. Cheryl says “no that’s not right”. Bill
says “no it’ll be fine”. Cheryl goes to the checkout and pays. Have Bill or
Cheryl been dishonest?

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 Fraud, Detection and Prevention

From the examples above, you will see that it is sometimes difficult to decide whether
someone has been dishonest by the standards set in the case of R v Ghosh.

Activity
Go to the Financial Ombudsman website and review some of the cases that
have been considered by the FOS concerning dishonesty.

11.3 Intent
Intent can be difficult to prove. The definition of theft in the Theft Act 1969 requires
that the offender had the intention to permanently deprive the owner of the property.
So the principle of proving intent is well known and it is therefore essential the evidence
concerning intent is obtained and recorded.
The second offence under the Fraud Act 2006 is the failure to disclose information when
there is a legal requirement to do so.
The legal duty to disclose information may come from a statute or from the principle of
utmost good faith so it is of considerable interest to those handling claims.
The elements of the offence are that the Defendant:
1. failed to disclose information
2. had a legal duty to disclose that information
3. was dishonest
4. intended, by that failure, to make a gain or cause a loss.
No actual gain need be made by the defendant and no loss need be suffered for the
offence to have been committed; it is the dishonesty and intent that have to proved. It
may be difficult to demonstrate that the failure to disclose a material fact at inception of
a Policy was done with the intent of gain several months later.
When assessing such matters, it is worth considering the attitude of the Crown Prosecution
Service (CPS) who will take account of any public interest and the relative standing of the
parties. Any explanation for the failure to disclose the information will also be considered.
It can be expected that the CPS will see Insurers in a relatively strong position and if
Insurers do not question information that the Court may consider they ought to have done
a prosecution is unlikely to be secured.
It is worth considering when there is a duty to disclose information. Comment on this
was provided by the Law Commission in its report on fraud No 276 Cm 5560 (2002) which
included the following comments about the circumstances in which a legal duty might
arise:
7.28 . . . Such a duty may derive from statute (such as the provisions governing
company prospectuses), from the fact that the transaction in question is one
of the utmost good faith (such as a contract of insurance), from the express
or implied terms of a contract, from the custom of a particular trade or
market, or from the existence of a fiduciary relationship between the parties
(such as that of agent and principal).
7.29 For this purpose there is a legal duty to disclose information not only if
the defendant’s failure to disclose it gives the victim a cause of action
for damages, but also if the law gives the victim a right to set aside
any change in his or her legal position to which he or she may consent
as a result of the non-disclosure. For example, a person in a fiduciary

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position has a duty to disclose material information when entering into a

contract with his or her beneficiary, in the sense that a failure to make such
disclosure will entitle the beneficiary to rescind the contract and to reclaim
any property transferred under it.
With regard to the measure of dishonesty and the meaning of intent, the same meanings
apply as for Section 2 as detailed above.
The final offence relates to abuse of position. The elements of this offence are that the
Defendant:
● occupies a position in which he is expected to safeguard, or not to act against, the
financial interests of another person
● dishonestly abuses that position, and
● intends, by that abuse of that position
◦ to make a gain for himself or another, or
◦ to cause a loss to another or to expose another to a risk of loss.
● the abuse may consist of an omission rather than an act.
The offence is complete once the Defendant carries out the act that is an abuse of his
position. Again it is immaterial whether or not there is any actual gain or loss.

11.4 Identification of Fraud

Fraud can result from:
1. A completely fictitious event, such as a staged accidental loss
2. A deliberate real event, such as arson by the Policyholder
3. A genuine event but exaggerated in terms of magnitude, such as a burglary where the
Policyholder adds claims to the list of missing items that either never existed in the
first place or were not stolen.
Identifying each of these situations varies. For instance, in example 1 above, it will be
necessary to demonstrate that the incident simply did not occur.

Activity
Take a look at a Policy wording and try to locate parts of the policy that may
protect insurers against a claim from a completely fictitious event. Consider
claims for accidental loss, robbery and burglary where there is no forced
entry. In each of these cases, there are no physical signs of the event.

From the previous activity, you may well have found that for each of these situations there
is a requirement to report the incident to the police. While this does not prevent the
submission of fictitious claims, it is certainly a deterrent.
Insurers may also seek to protect themselves from the second example, a deliberate real
event.

Activity
Take a look at a Policy wording and try to locate parts of the policy that
may protect insurers against a claim for a deliberate real event. Consider
a staged burglary where there is evidence of a forced entry, arson by the
Policyholder, paint spillage or deliberate water damage.

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From the Policy, you will note that usually Insurers state their right to involve others
in the validation of the claim. A Loss Adjuster may well spot inconsistencies with the
Policyholder’s version of events and could locate evidence that the event was caused
deliberately. Of course it is important to ensure that it can be proved that either the
Policyholder or someone on their behalf has caused the damage. Forensic evidence
obtained by forensic scientists may well be a way of dealing with this.
Example 3 above mentions the exaggerated claim. Remember that a claim exaggerated
purely for negotiation purposes will not be considered to be fraud. Requesting evidence of
the loss will assist in this respect.

Activity
Review a Policy wording and locate the clause(s) that give Insurers the right
to require evidence to substantiate the loss.

11.5 Fraud Indicators

There are many indicators of fraud and they are often broken down into categories such
as:
Attitude – This could include being rude, insulting, aggressive, over familiar, offering to
compromise at an early stage or being over helpful
Work habits – Taking on lots of overtime, taking on several jobs
Lifestyle – Involvement with illegal drugs, association with known criminals, gambling,
vices etc
Economic stress – Living beyond means, redundancy, unserviceable debts etc
Opportunity - The opportunity to commit fraud may present itself in many ways. It could
be as a result of the nature of the person’s position at work, or their knowledge of how
the system usually operates, or the fact that they are so well known that they could be
considered to be beyond reproach.
All of the above are possible indicators of fraud. However, it is of utmost importance that
you never jump to conclusions. Remember too that different cultures and upbringings
may cause people to act in different ways. Many people simply believe that it is immoral
to claim a benefit to which they are entitled. This may result in behaviour that might not
have been expected.

Putting this into practice

Talk to persons within your organisation who are responsible for the
detection and prevention of fraud. Ascertain what your firm’s policies are in
relation to fraud.

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 12
FINANCIAL CRIME
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 Financial Crime

12. FINANCIAL CRIME

Contents
12.1 Definition of Financial Crime
12.2 Definition of Fraud
12.3 Money Laundering Regulations
12.4 Key Points to Remember

Introduction
Any role within the insurance industry requires you to be alert to the possibility of
financial crime. This section outlines what is meant by financial crime and fraud. It
also provides an overview of the Money Laundering Regulations 2007. This aspect partly
overlaps with the Data Protection Act 1998, which is considered in detail in Book 1.

12.1 Definition of Financial Crime

The definition of financial crime is provided in Section 1(H)3 of the Financial Services
Act 2012 as any offence involving:
(a) fraud or dishonesty;
(b) misconduct in, or misuse of information relating to, a financial market;
(c) handling the proceeds of crime; or
(d) the financing of terrorism.
“Offence” includes an act or omission which would be an offence if it had taken
place in the United Kingdom.
Examples of financial crime are often in the news, particularly “identity theft” and
“money laundering”.
Identity theft occurs when the details of an individual are put together and used by
another individual to open bank accounts and obtain loans and credit cards etc. The
honest individual can then find themselves being asked to repay loans or debts that they
did not incur. This in turn can affect their credit rating and ability to borrow money in
the future. Once an individual’s identity has been stolen, it can be costly and difficult to
recover it and prevent further misuse. There can also be long-term issues with monies
owed to various parties.

Activity
Consider the type of information that is captured about Policyholders when
dealing with a claim. Find out what controls your company has in place to
prevent this information falling into the wrong hands and being used for
identity theft.

Money laundering is an attempt to turn illegitimate money into legitimate money. For
example, Miss X sells drugs and pays £3,000 from drug dealing into a bank account. Later
Miss X uses a debit card for that bank account to buy jewellery which she then sells for
cash. When following the chain of money, the proceeds from the sale of the jewellery
appear legitimate as the money has been “cleaned” or “laundered”.

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There are several methods by which money laundering can occur in the insurance sector.
One example is when an insurance policy is purchased using illegitimate funds but is then
cancelled within the “cooling off” period. The insurance company reimburses the premium
and so the money appears “clean”.

12.2 Definition of Fraud

Fraud is defined under the Fraud Act 2006 and can arise by four methods:
a) By misrepresentation
b) By failing to disclose information
c) By abuse of position
d) By making or supplying items for use in frauds.

Activity
Consider a claim for flood damage and the points noted above. What
opportunities for fraud exist, who could commit fraud and what steps could
be put into place to prevent fraud?

12.3 Money Laundering Regulations

The purpose of the Money Laundering Regulations 2007 is to ensure that certain businesses
operate adequate anti-money laundering controls.
The Regulations cover a wide range of businesses including:
● Financial and credit businesses
● Independent legal professionals
● Casinos
● Estate agents
● Accountants, tax advisers and auditors.
Businesses covered by the Regulations must have systems and processes in place to:
● Assess the risk of the business being used by criminals to launder money
● Check the identity of customers
● Monitor customer activities and report suspicious activities
● Retain all documents that relate to financial transactions, the identity of customers,
risk assessment and management procedures
● Ensure staff are aware of the Regulations and receive necessary training.

Activity
You are dealing with an insurance claim following a fire with an element
of Alternative Accommodation. An Estate Agent asks the Policyholder to
prove his identity in order to secure a rental property. Unfortunately the
Policyholder’s documents were destroyed in the fire.
How would you explain to the Policyholder that it will be necessary
to provide proof of his identity to the Estate Agent? Discuss with your
colleagues how you might assist the Policyholder in a practical way.

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12.4 Key Points to Remember

● In the claims handling environment, we tend to think of financial crime in terms of
fraudulent insurance claims. However, there are many more ways that financial crime
can occur in the insurance industry and it can be committed by any party.
● One of the statutory objectives of the FCA is to reduce the extent to which it is
possible for a financial business to be used for a purpose connected with financial
crime. Irrespective of the role you perform or the type of company you work for in the
insurance industry, you should be aware of the regulations of the FCA and understand
your responsibilities in relation to financial crime.

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