Loss Adjustment Expense (LAE)

A loss adjustment expense (LAE) is an expense associated with investigating and settling an insurance claim. Loss adjusted expenses that are allocated to a specific claim are called allocated loss adjustment expenses (ALAE), while expenses not allocated to a specific claim are called unallocated loss adjustment expenses (ULAE).

When insurers receive a claim, they don't open their checkbooks immediately. They do their due diligence to ensure that the amount of damages claimed by the policyholder are accurate. They send out investigators to ensure what was claimed actually did happen. Not conducting an investigation could lead to losses from fraudulent claims.

Allocated loss adjustment expenses occur when the insurance company pays for an investigator to survey claims made on a specific policy. For example, a driver with an automobile insurance policy may be required to take a damaged vehicle to an authorized third-party shop so that a mechanic can assess the damage. In the case of a third-party review of the vehicle, the cost associated with hiring that professional is an allocated loss adjustment expense. Other allocated expenses include the cost of obtaining police reports, or the cost required to evaluate whether an injured driver is really injured.

Insurance companies can also incur unallocated loss adjustment expenses. Unallocated expenses could be related to the salaries of home office personnel, maintenance costs of the fleet of vehicles used by in-house investigators, and other expenses incurred in the regular course of operations. An insurance company that maintains staff to evaluate claims, but is fortunate enough to never have a claim filed, will have salary and overhead as unallocated loss adjustment expenses, but will not have any allocated loss adjustment expenses.

Some commercial liability policies contain endorsements that require policyholders to reimburse its insurance company for loss adjustment expenses. These expenses can include fees charged by attorneys, investigators, experts, arbitrators, mediators and other fees or expenses incidental to adjusting a claim.

It is important to carefully read the endorsement language, which may indicate that a loss adjustment expense is not intended to include the policyholder’s attorney fees and costs, if an insurer denies coverage and a policyholder successfully sues the insurer. In this situation, where the insurance company has done no actual “adjusting” of the claim, it should not be entitled to apply its deductible to expenses incurred by the policyholder in defending the claim abandoned by the insurance company.