What is an Insurance Claim?

The important points

An insurance claim is a request by the policyholder to have the insurance provider compensate them for a loss.
Making an insurance claim can result in increased premiums (but not always).
Insurance claims are handled by adjusters, who determine how much the insurer should pay based on the details of the loss and the policy wordings.

When the holder of an insurance policy experiences a sudden and unexpected event that costs them money, it’s called a loss. Following a loss, the policyholder can ask their insurance company to pay them for what they’ve lost. This request is called a claim.

The purpose of insurance is to bring the insured back to the same financial state they were in immediately before a loss. This process is known as indemnification. If the loss is caused by an event that the insurance policy covers, the insurer will indemnify the insured; they’ll pay for the covered value of the loss, no more and no less (as long as it’s within the insurance policy’s limits).

How does an insurance claim work?

Example

A hailstorm damaged Wade’s house last night. It’s going to cost thousands of dollars to repair his siding, windows, and the stuff on his deck, like his patio furniture and barbecue. Luckily, Wade has home insurance that covers hail damage. The morning after the storm, he calls his insurance provider to make a claim. Wade expects that they’ll pay to repair all the damage, so he’ll be in the same financial state as he was before the storm.

When you suffer a loss, you want your insurance company to pay for it. However, coverage is always limited to what the insurance policy states. Insurance companies are responsible for protecting thousands of customers; they can’t pay for excluded losses out of kindness. Insurers craft their coverage to protect as many people as possible, without covering so much that that they would go out of business, or need to charge unaffordable premiums.

When someone like Wade makes a claim, the insurance company will assign an adjuster. Adjusters handle individual claims on behalf of the insurer.

Check out our full explanation of insurance adjusters right here.

Example

Nicole is an adjuster working for Wade’s insurance provider. She takes his call following the hailstorm and records all the details that Wade provides her about the damage. She assures him that the damage to his house will be covered, but not the damage to his patio furniture or barbecue. This is because Wade has a broad form policy. This policy provides comprehensive coverage for his house (dwelling), but only protects his possessions (contents) from a few specified causes of loss (perils). The policy doesn’t specify hail as one of the covered perils for his contents.

Following a significant loss, like damage from a storm or a fire, determining coverage isn’t always straightforward. Using Wade as an example: he wants his insurance company to cover everything that was damaged. The policy he chose, however, states that only his dwelling (the house and things attached to it) is protected from hail; the moveable contents of his home are not.

Wade claimed everything that the storm damaged. His adjuster adjusted that claim to include only what was covered by his policy: his damaged siding and windows. With that settled, the insurance company pays to repair the damage to Wade’s home. He is unfortunately stuck paying for the damaged furniture himself.

There are other aspects of a claim that the adjuster is responsible for determining as well. Insurers use different methods to determine what something is worth, depending on the type of policy that was purchased. One of these methods is the replacement cost basis. Replacement cost coverage means that the insurer will pay whatever it costs to replace that item with a similar new item.

There’s also the actual cash value basis, wherein the insurer pays whatever the item was worth at the time of the loss, factoring in its age and condition. You’ll find these payment bases within every insurance policy. The adjuster has to determine which applies to each claim.

Liability claims are similar, but often much more complex. Rather than paying to replace or repair property, the insurer pays for legal fees and compensatory damages.

Compensatory damages are meant to compensate the victim, whereas punitive damages are meant to punish the offender. Home insurance policies don’t cover punitive damages.

With liability claims, the insurance company still has to determine what’s covered and for how much, but there’s a legal process that plays out before those things can be known.

What is the claim process?

If you’ve experienced a loss and you think your insurance covers it, start the claims process as soon as it is reasonable. The claims process may seem daunting, but it’s actually pretty straightforward (at least here at Square One):

Report your claim to your insurance provider.

You can always report your claim by phone, but many insurance providers (including Square One) also let you report claims online. Once they’ve received your claim, they’ll connect you with an adjuster, who will be your main point of contact throughout the process.
Your adjuster will investigate the claim.

Your adjuster will ask you for information about the loss. The more detail you can provide, the easier the process will be for everyone. Make a list of all the damaged, lost, or stolen property. Include photos or videos to help illustrate the situation.

The adjuster may wish to visit the scene of the loss or have someone do so in their place. They may also want your help identifying witnesses or other parties that might be relevant. Your adjuster will let you know what they need from you to complete the investigation.
Insurance coverage is determined

With the facts in hand, your adjuster will analyze your insurance policy to confirm that your loss is covered, partially covered, or not covered. They’ll let you know what’s covered and for how much, and inform you of any applicable deductible.
Repair and replacement

Once coverage is determined, indemnification can begin. For small claims (like a water-damaged laptop, say), this may be as simple as the insurance company buying you a new laptop and calling it a day (see step 5). For more substantial losses, contractors probably need to get involved. Your adjuster will be able to provide a list of recommended contractors to hire for the repairs. The insurance company will often issue a portion of the final payment upfront so the repairs can get underway.
Final payment

Upon the conclusion of repairs and replacements, your insurance company will settle the claim; they’ll pay you the remainder of the repair costs, up to the policy limits. In complex claims, this stage may see negotiation between insurers and insureds about who pays for what. If you agree with the insurer’s offer, they’ll send you the money and close the claim. If you’re not in agreement, there is a formal dispute process for insurance claims.

How much does insurance go up if you make a claim?

It’s no secret that making claims can lead to increased insurance premiums. The amount that premiums increase—if they increase at all—is determined by the insurer in each individual case; there’s no universal answer. Insurance premiums are the result of complex calculations with dozens of factors. An individual’s claims status is only one of those factors.

Some insurers provide a discount to customers who are claims-free; making a claim would change that status and lead to a premium increase. Other insurers allow a freebie for the first claim, as long as it’s small.

The type of claim is a factor as well. Damage from a lightning strike might not merit a premium increase; it’s a random event that’s not likely to reoccur. On the other hand, water damage from a burst pipe is much more likely to result in a premium increase. Burst pipes can signal problems with the building’s plumbing, and water damage often leads to mould issues. These factors make the home much riskier to insure, so the insurance company is more likely to increase the premiums.

Ultimately, the best approach is to make insurance claims only when you genuinely need to. If you can afford to replace your stolen iPhone yourself, it may be better to do so instead of making an insurance claim for $850 (from which your deductible gets subtracted) and seeing your premiums go up.

Looking for another insurance definition? Look it up in The Insurance Glossary, home to dozens of easy-to-follow definitions for the most common insurance terms. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.

About the expert: Daniel Mirkovic

A co-founder of Square One with 25 years of experience in the insurance industry, Daniel was previously vice president of the insurance and travel divisions at the British Columbia Automobile Association. Daniel has a bachelor of commerce and a Master of Business Administration (MBA) from the Sauder School of Business at the University of British Columbia. He holds a Canadian Accredited Insurance Broker (CAIB) designation and a general insurance license level 3 in BC, Alberta, Saskatchewan, Manitoba and Ontario.

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