Claim Expense

What Does Claim Expense Mean?

Claim expenses refer to the additional costs incurred in relation to processing an insurance claim, excluding the actual claim amount or payout. These costs are associated with the preparation, handling, and adjustment of claims.

Examples of claim expenses include court costs, registration fees, and expenses for adjusters, lawyers, and witnesses. These costs are borne by the insurance company and are included in the total claim amount but are separate from the actual payment made to the insured.

When a claim involves extensive preparation, presentation, and negotiation, the process can take a significant amount of time. Generally, there is a lengthy claim process before a policyholder receives payment from an insurance policy. Various professionals, such as consultants, accountants, lawyers, and investigators, may be involved in this process. The fees and expenses related to these professionals form part of the claim expenses, specifically referred to as allocated expense costs.

Claim expenses can be categorized as either allocated or unallocated. Allocated claim expenses are directly tied to a specific claim, such as fees for external experts. Unallocated claim expenses include costs like salaries, in-house investigators, and other overheads related to claim adjustment that cannot be directly assigned to a specific claim.

Claim expense is also known as a claim preparation expense or adjustment expense.

Insuranceopedia Explains Claim Expense

Insurance companies, including property and casualty insurers, life insurance companies, and healthcare providers, commonly use the term claims expense. A claims expense includes all the costs incurred by the insurance company as part of claims adjustment expenses. For a property and casualty insurer, this would encompass expenses like hiring an investigator to gather evidence or document activities related to a bodily injury claim.

For example, let’s assume Carl has a slip-and-fall accident at his neighbors, Sam and Rita’s house. Carl subsequently files a claim for a back injury, stating that he is bedridden due to pain. A few months later, while still on medical leave, Carl hosts a BBQ in his backyard, where he is seen dancing and having fun. To verify the ongoing severity of Carl’s claim, the insurance company hires a private investigator. Additionally, they request one of their partner physiotherapists to reassess Carl’s back condition.

These additional expenses are considered allocated claims expenses because they are directly related to the investigation and processing of Carl’s specific insurance claim.

These costs are separate from the compensation that Carl will receive for his injury, but they are still part of the overall claim expenses. If it takes six months to settle Carl’s claim, there would also be unallocated costs associated with the claim, such as a portion of the salaries for those handling the file and general overhead expenses. Insurance companies typically maintain reserves to cover all claims expenses, whether allocated or unallocated, for each claim.