What Does Claim Expense Mean?
Claim expense relates to other costs that are incurred in relation to the payment of an insurance claim. This does not include the actual claim cost or amount of the claim. These costs are associated with preparing, handling and adjusting claims.
An example of claim expenses are things such as court costs, registration fees, and expenses for adjusters, lawyers and witnesses. These costs are incurred by the insurance company and included in the total claim amount, but not the actual payout to the insured.
When a claim includes extensive preparation, presentation, and negotiation it is common for the process to take an extended amount of time. Usually, there is a long claim process before a policyholder receives payment from an insurance policy. Various professionals, such as consultants, accountants, lawyers, investigators, and others are involved in the claim process. All related fees and expenses of employing professionals form part of the claim expense. These are referred to as allocated expense costs.
A claim expense may either be allocated or unallocated. An example of unallocated claim expenses is salaries, in-house investigators and other overhead expenses that are incurred in adjusting the claim but cannot be charged directly to the claim.
Claim expense is also known as claim preparation expense or adjustment expense.
Insuranceopedia Explains Claim Expense
Insurance companies, including property and casualty insurers, life insurance companies and healthcare providers all use the term claims expense. A claim expense includes all the costs paid by the insurance company in the form of claims adjustment expenses. For a property and casualty insurer, it would include all expenses for hiring an investigator to take pictures or document the activities of a person with a bodily injury claim.
For example, let’s assume Carl has a slip and fall accident at his neighbours’ Sam and Rita's house. Carl then makes a claim for a back injury and is said to be bedridden due to pain. A few months later, Carl has a BBQ in his backyard and is dancing and having fun while still being off work and injured. A private investigator is hired to investigate the ongoing severity of Carl's claim.
In addition, a request is made for one of the insurance companies partner physiotherapists to reassess Carl’s back. These additional expenses would be considered allocated claims expenses due to them being a result of the processing of Carl’s specific insurance claim.
These costs are separate from the amount that Carl will receive for his injury, but still considered part of the claim costs. If it takes six months for Carl’s claim to be settled, then there would also be unallocated costs associated with the claim such as the proportionate amount of salaries for those working on this file and overhead costs. Typically insurance companies have reserves set aside to cover all claims expenses whether allocated or unallocated directly to each claim.