Insurance claims on a business insurance policy are comprised of two main components for accounting purposes, costs already incurred by the claim and costs expected to be incurred by the claim before it is settled also called “reserves”. All commercial insurance policies account for “open claims” this way including auto, liability, property and workers compensation policies. Liability claims (auto, gl, work comp) are much more open ended than property claims and their total reserves costs are just a guess, especially when the end of the claim is nowhere in sight.
When a claim is settled the insurance company has accounted for all expenses the claim has incurred such as defense costs, appraisal costs, medical expenses etc. Often a liability claim is settled or mostly settled the with the claimant but, the claim will remain “open” on the books of the insurance company with thousands of dollars of reserves attached to it. At this point all the hard costs have been paid such as medical expenses and repair bills but, a settlement contract has not been signed by the claimant or the insurance company just hasn’t decided if they feel they can officially close the claim. The inability to close the claim by the insurer becomes a problem for the insured customer when the customer’s annual policy renewals are approaching, especially within 3-4 months of the policy renewal date.
As the the customer’s insurance policy renewal date approaches the insurance company’s underwriters begin deciding the rates for the renewal policies. One of the main factors for determining the customer’s rates for new policies is the recent claim history of the customer, this is when closing out any open claims becomes very important. An open claim with $50,000 in reserves and only $2,000 in costs paid can potentially turn a $2,000 claim into a $52,000 claim when new rates are being determined. An competent insurance agent performing their due diligence on behalf of their insured customer will contact the claims department before the renewal rates are determined and seek to get any reserve amounts reduced and the claim closed out if possible. By reducing reserves the customers rates are likely to be much more favorable than if the agent had taken no action.
If your agent is not following your claims closely you could be paying too much on your insurance renewals. Be sure to ask them about the status of any liability claims you may have incurred throughout the last few years.