An insurance claim is a request made by an insured individual to receive coverage from an insurance company. The claim is made after a covered incident occurs. The compensation that the insured individual receives will cover financial losses resulting from the incident.
After an insurance claim is filed, the insurance company will validate the claim to ensure that the incident occurred and that the insurance policy covers it. Once the insurance claim is approved, the company will provide payment to the insured individual or associated third parties.
How Does an Insurance Claim Work?
Depending on your insurer, you may need to make a claim within a certain period of time in order to receive payment. It is recommended to file your claim as soon as possible. You will also need to provide information in order to prove that there was damage or injury. You may need to provide proof about how the incident happened, the location of the incident, who was involved, and the contact information of witnesses (if applicable).
The insurance company will need to approve the insurance claim before releasing payment. For example, for claims that are associated with property damage, a real estate appraiser will perform an analysis of the damage that occurred and estimate the value of the property.
Once the insurance company gives you approval for payment, they will release payment to you, another individual entitled to the insurance policy, or a third-party organization. The payment may be provided in several installments, so you may not get the full amount at one time.
Additionally, the amount of payment that one individual gets may be different than another individual if they both suffered the same damages or injuries. It is because the amount of compensation you will get depends on the type of insurance policy and the amount of premium you paid. In general, the higher the premium, the more you will receive in compensation.
Who Should an Insurance Claim Be Paid To?
In most cases, the payment will go towards the individual who is named on the insurance policy. However, depending on the type of insurance, the payment for the insurance claim can be made to someone other than the insured individual.
For example, if you file an insurance claim for renter’s or homeowner’s insurance, the payment will be made to the owner of the property or another individual who is also named on the insurance policy.
If the property is damaged, the payment may be made to a third-party entity or a contractor who will do the repairs for the property. It is for the insurance company to ensure that the insured individual will use the funds for their appropriate use. In other situations, the payment may even be made to the condominium management or the mortgage company.
How Should an Insurance Claim Be Paid?
When you purchase an insurance policy for homeowner’s insurance or other types of property insurance, you may be given a choice between receiving a cash settlement or a replacement cost settlement. The actual cash value of the property is the current value while taking depreciation into consideration. On the other hand, a replacement cost is the price of replacing the property or a personal belonging inside the property.
If you are getting paid based on the actual cash value, then you will not be receiving enough money in the claim to cover the entire initial cost of the property or personal belonging because of depreciation.
For example, suppose you bought a computer for $1,000 five years ago. Due to a fire, the belongings in your house, including the computer, are now damaged. The value of your computer is now $700 due to depreciation over the past five years, so you will be receiving $700 in compensation from the insurance company.
On the other hand, if your insurance coverage provides you with compensation for the replacement cost, you will be able to receive the full amount of the value of a brand-new computer that is of a similar model.
Depending on your insurance coverage, you may also get the option to switch to a replacement cost settlement for a higher price instead of a cash settlement. Other than property insurances, you may also opt to receive a replacement cost settlement for auto insurance.
Subsequent Effects on the Insurance Premium
Filing insurance claims may affect the rate of your premium when you purchase insurance coverage in the future. The more you file for insurance claims, the greater the risk that the insurance company will need to provide you with compensation for insurance coverage.
As a result, the more you file insurance claims, the higher the chances that your premium will increase. Situations such as property damage that you caused or a low credit rating are factors that may increase your premium as well.
CFI offers the Certified Banking & Credit Analyst (CBCA)® certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:
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