What Is Loss Adjustment Expense (LAE)?

A loss adjustment expense (LAE) is an expense associated with investigating and settling an insurance claim. Medically, LAE is an abbreviation for left atrial enlargement. This refers to an enlargement of the left atrium, which is linked to heart failure and atrial fibrillation. 

Key Takeaways

  • A loss adjustment expense is a cost insurance companies shoulder to investigate and settle insurance claims. 
  • Although loss adjustment expenses cut into an insurance company’s bottom line, they pay them so they can avoid paying out for fraudulent claims.
  • There are two types of loss adjustment expenses—allocated and unallocated.
  • Allocated costs are those accumulated during the active investigation of a claim. Unallocated costs are those created by the overhead of having to do investigations.
  • Some loss adjustment expenses can be recouped by insurance companies by requiring the policyholder to pay them.

How Loss Adjustment Expense (LAE) Works

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

The LAE will vary widely depending upon how difficult a claim is to investigate. Even in cases where the LAE is quite high, insurance companies still deem the expense worth it because knowing claims are being investigated acts as a deterrent to those who might file fraudulent claims for an easy payday. The knowledge that companies are investigation claims will stop many people from filing false claims. To that end, paying the LAE is worth it to the companies that otherwise might be bilked by fraudulent claims. 

Fraudulent insurance claims are believed to cost insurers billions of dollars. These claims drive up insurance premiums for the rest of the customers as insurance companies must count fraudulent claims in their cost of doing business.

Special Considerations 

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.

Types of Loss Adjustment Expense (LAE)

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).

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.