What to Do When the Quotes Differ
A loss occurs. When the cost estimates for repairing or replacing the damaged property (residence, car, furniture, etc.) come in, you may notice a difference between the insurer’s quote and that of the insured’s supplier—sometimes, it’s significant. What should a claims adjuster do when this occurs?
This article reviews the relevant best practices and ethical obligations using five real-life situations based on questions submitted to Accent Déonto, the ChAD’s support service for ethical issues, and refers readers to the relevant sections of the Code of ethics of claims adjusters (the Code of ethics). Obviously, these are not the only situations where adjusters must deal with differing estimates of damages. Please do not hesitate to notify Accent Déonto of such situations to help them improve the tools they provide to support professionals.
A reminder of your main ethical obligations when estimating damages
Let’s begin with a useful reminder: the claims adjuster’s role includes determining whether the loss is admissible, and if so, estimating the extent and the amount of damages. Claims adjusters are therefore responsible for deciding on the value of the loss, establishing depreciation, where applicable, and then recommending to the insurer the amount of compensation the insured is entitled to under the terms of his or her contract.
Claims adjusters must enforce the insurance contract and comply with their legal obligations while guiding claimants through the claims adjustment process.
The compensatory nature of the insurance contract
nsurance contracts are compensatory in nature: their purpose is to compensate for the harm an insured (and therefore his or her property) suffered in the wake of a loss. Theoretically, “restoration” (to pre-loss conditions) is neutral, and neither benefits nor harms the insured. The first step is thus to verify whether the insurance contract includes a specific appraisal method or formula (for example: replacement cost or agreed value). If not, the law stipulates that the value of the insured property is determined “in the ordinary manner.”. However, the “ordinary manner” may vary depending on the circumstances. In certain cases, it may be the market value, the book value (for instance, in the case of certain commercial inventories), or the depreciated replacement cost. Often, it is what insurance contracts refer to as the property’s “actual cash value.” Even in this case, there may be differences between the appraisals you receive, since this is not an exact science, and different factors can influence the results. In fact, the courts often have to examine differing damage appraisals when adjudicating on insurance cases. Furthermore, an estimate of damages may evolve during the claims process if, for example, unexpected events arise during the remediation work. You must therefore never lose sight of the goal: “restoration.”
Though the claims adjuster may task a specialist with estimating the damages, it is up to the adjuster to make the final decision regarding the amount of damages. Adjusters must therefore fully understand the appraiser’s report if they want to be able to both provide claimants with detailed explanations and make recommendations to the insurer.
In the event of a difference between the insured’s quote and the quote the insurer’s supplier (or the insurer’s in-house appraisal department) submits, claims adjusters must objectively:
- Identify the source(s) of the difference,
- Decide whether either side needs to make any adjustments,
- Explain the differences to the insured,
- Adjust their recommendation, if need be, and
- Explain to the insured the basis for their decision.
The main reasons for differences
1. Calculation methods
The insured owns a house that suffered water damage; she is concerned about the amount of the insurer’s quote. Initially, the quote was expected to be approximately $18,000 but the claims adjuster revised the amount down to $12,000, while the insured’s contractor estimated that the work would cost at least $17,000. In addition, the documents submitted make mention of various amounts, and the insured is finding it all very confusing.
The quality and quantity of the materials, hourly rates, items that are no longer manufactured, different finishes, and construction techniques are all factors that may be used when calculating how much the work will cost. For instance, the estimated cost of repairs the insured’s supplier submitted might be based on using more expensive and less common materials than those the insurer’s appraiser foresees being used.
Section 21 of your Code of ethics stipulates that you must explain to insureds how you estimated the amount of the settlement, regardless of the situation or the complexity of the file. You must also understand and explain to them why the insurer’s quote and the estimate their own supplier provided differ.
Remember, too, that the insured has the right to choose their own contractor. You must therefore review the differences and come to an agreement with the supplier on who should increase or decrease their quote and why. Has one of the quotes omitted an important factor that should have been taken into consideration, or does a difference in costs or pricing account for the difference? You will thus be better able to justify the recommended compensation.
To learn more
Read this article: “Coût de reconstruction : mieux comprendre les écarts pour bien les expliquer. [“Cost of rebuilding: Better understand the differences in order to explain them properly,” in French only]
2. Legal provisions (or “bringing up to Code”)
After a fire severely damages her home, an insured receives a quote from her contractor for $250,000; the insurer, on the other hand, has estimated the cost of rebuilding at $167,000. Verifications show that the main reason for the difference stems from her contractor including the cost of bringing the home up to Code. The insured is shocked to see that the insurer’s quote is based on the standards in force in 1960, the year the house was built.
Legal provisions are a complex topic. The introduction of new municipal regulations, changes in certain regulations, and updates to building standards can have a major impact on insureds.
When analyzing a case, you must always take into consideration the nature of the loss and the type of building, as well as the regulations that apply to the location and the time when the loss occurred.
If you learn of any special provisions that concern rebuilding the property (for example the obligation to install sprinklers in a commercial building after a fire), make sure to fully understand them. For example, check with the municipality. If need be, consult a specialist.
Review the insured’s insurance contract to verify whether they have coverage for new building standards, either in the basic contract or via an endorsement if the basic contract contains any limits or exclusions. Also check the stipulated limits for this coverage (and the wording in the insurance contract). If the insurance contract includes no specific coverage for this issue, you must explain how this will impact the insured. For example, the insured might have to incur additional expenses in order to comply with the new standards if they are mandatory when rebuilding.
What matters is being transparent with the insured and explaining the procedure to her. Sections 21 and 58 (1) of your Code of ethics stipulate that throughout your mandate, you must explain to the insured the whys and wherefores of how her claim is adjusted. This obligation is particularly important at the beginning of the claim, when the insured is usually more vulnerable, however it continues to apply until the claim is fully settled.
To learn more
Read this article: “ L’imbroglio des règlements municipaux ” [The Imbroglio of municipal regulations, in French only].
3. Suppliers suggested by insurers
In the wake of a car accident, an insured lets his garage owner know how much compensation the insurer will pay him; the autobody mechanic responds that this amount is insufficient to cover the cost of repairing his BMW. Since the insured has decided to have the repairs done by a garage that specializes in BMWs, the reason for the difference between the estimates may be due to the BMW garage’s higher hourly rate, especially if the insurer deals with a company that is a member of its own network of certified suppliers.
Insureds are not obliged to do business with the insurer’s supplier. However, certain clients who have never had to deal with a body shop feel reassured when they are given a list of insurer-certified suppliers.
Remember that pursuant to section 15 of your Code of ethics, you must remain objective when the claimant submits a quote, and provide him with all the necessary explanations throughout the claims process. You must be fair (section 27), give the insured what he is entitled to receive under his contract, and let the insured choose his own supplier in full knowledge of the facts.
In addition, you must never lead the insured to believe that he must do business with the insurer’s supplier or penalize him if he chooses not to. Doing so means violating several sections of your Code of ethics, including the obligation to not mislead or make any representations that are false (sections 16 and 20) and the obligation to act fairly (section 27). However, you may explain to the insured the advantages of choosing an insurer-certified service provider, without pressuring him to do so.
Explain to him the reason for the difference between the estimates (for example, the fact that the service department of the manufacturer’s authorized dealership charges a higher hourly rate for repairs) and the impact of the insured’s final decision to choose the more expensive supplier. For instance, the insured might have to pay extra to use the autobody mechanic of his choice if there are no special circumstances or market conditions to justify how much this mechanic charges.
To learn more
Read this article: “ Le choix d’un fournisseur revient à l’assuré ” [Choosing the supplier is up to the insured, in French only.]
4. Task sharing
An insured disagrees with the assessment of the damages that his home suffered in the wake of a fire. He asks the claims adjuster assigned to his file some questions; the adjuster responds that it is up to the insured himself to call the appraiser to find out the reasons for the estimated amount of damages.
A service provider, such as an appraiser, can explain his estimate of damages to the insured. However, the claims adjuster cannot simply rely on the appraiser; he is obliged to provide the insured with advice and explanations regarding the evaluation and the claims settlement, since the adjuster has an overall view of the file, is governed by a Code of ethics, and is bound to act equitably.
You must explain to the insured how the calculations are done (the basis of calculation and the percentage of depreciation, if applicable), and the potential impact on compensation and the claims settlement. Your explanations allow the insured to clearly understand the reasons behind the differences, the evaluation and the amount of damages, and how his claim will proceed. You remain responsible for making the final decision regarding the amount of damages, negotiating with the insured (if necessary), and making the recommendation on the amount of “Sharing of roles and responsibilities”.
To learn more
Please review this tool: “Sharing of roles and responsibilities”.
5. Disfiguration damage
An insured has a “replacement cost” insurance policy. The carport attached to his house collapses, ripping away much of the aluminum siding on one side of the house. The claims adjuster notifies the insured that the aluminum used to repair the damaged area will be a slightly different shade from the siding used on two other walls of the house. The insured then asks to have the siding on all three walls replaced. However, the contractor’s estimate differs from the amount the insurer is offering for the repairs since the insurer’s compensation only covers replacing the damaged side.
A claim is always settled based on the insurance contract. The general principle is that the insurer is bound to repair only the damaged part, regardless of esthetics.
Usually, it is the “parts that make up the whole” clause—found in certain home insurance contracts and used only in property insurance—that insurers refer to when deciding on whether or not to compensate. This clause could stipulate, for example, that “in the case of loss affecting parts that make up the whole, when complete for use, and whether or not this is insurance on scheduled property, compensation is limited to the insured value of the damaged property, including the cost of installation.” This also applies to the “pairs and sets” clause that insurers and courts rely on to determine a fair and reasonable amount of damages that is proportional to the total value of the property.
When you observe damage to a part of a whole, verify the potential options with the insurer before making any commitment to the insured or refusing any settlement for disfiguration damage. Furthermore, section 26 of your Code of ethics stipulates that you must take into account the limits of your knowledge before advising a client on this issue. When in doubt, seek advice from an experienced claims adjuster colleague before dismissing any possibility of a settlement for disfiguration damage. Make sure to record all the steps you take in the client’s file.
To learn more
Read this article on “Disfiguration damage.”
Including the taxes: yes or no?
Including the taxes can also play a role in the total amount of the estimate. Normally, the amount of applicable taxes must be added to the amount covering the property requiring replacement, regardless of whether the insured is entitled to the replacement cost or the actual cash value. The claims adjuster must therefore calculate the amount of the replacement cost, add the amount of applicable and non-recoverable (non-refundable) taxes, and then subtract the percentage of overall depreciation, when applicable.
To learn more, read: “Should the amount of compensation include taxes or not?“
In conclusion, remember that the claims adjuster plays the role of an orchestra conductor in the claims adjustment process. He or she :
- Takes the statement of the insured person;
- Collects additional information from third parties;
- Reviews the coverage included in the insurance contract with the insured;
- Explains the claims process and expected timelines to the insured;
- Prepares his evaluation report of the claim for compensation that is submitted to the insurer.
The adjuster remains ultimately responsible for processing and settling the claim, even though he may delegate some of his tasks to service suppliers whose work he then supervises.
In the event of a difference between quotes or a disagreement between suppliers, the adjuster must analyse the quotes in order to identify and understand the differences and discuss his findings with the appraiser and the contractor. If need be, he must suggest solutions to try and break the deadlock; for example, he can suggest a meeting between the contractors in order to arrive at fair compensation under the insurance contract.
 Sec. 10 ARDFPS.: Investigates insured losses, appraises damages and negotiates the settlement of claims.
 Art. 2490 of the Code civil du Québec
Best practices: a checklist
- Review the quote provided by both the insurer’s supplier and the insured’s supplier and make sure to fully understand how they were determined.
- Verify whether the quotes were determined following an on-site inspection of the loss or only based on photographs.
- Identify the source of the differences (e.g.: nature and extent of the work, surface area, quantity and cost of materials, hourly rate, provision for contingencies, depreciation rate used, etc.) and adjust them if need be.
- Identify the method the suppliers used to calculate hourly rates and the cost of materials and discuss any differences you noted with them.
- Take time to carefully go over the details of the quote with the insured and ensure that the explanations have been clearly understood.
- Scrupulously document every step of the process in the client-file (timeline of events, discussions with suppliers, contact with the insured, etc.).