Reviewed by Stefan Tirschler
Updated May 26, 2023
sett·le·ment | ˈse-tᵊl-mənt
Definition: Payment or other indemnification from an insurance provider to an insured to resolve an insurance claim.
He was completely satisfied with the settlement for his insurance claim.
An insurance settlement is the payment that an insurance company offers to a customer in response to a claim.
The settlement is the final amount paid to the customer, after their claim has been adjusted (and assuming their claim is covered by their policy). Once the insurer pays the settlement, the claim is settled—another way of saying it’s closed or resolved.
Between the filing of the claim and the settlement, the two parties discuss how much the settlement should be. Often, the claimant has a choice about what type of settlement they want to receive.
A claim settlement isn’t always cash; it will take the form of whatever type of indemnification the policy was designed to provide. Many claims involve the insurance provider paying to replace or repair damaged property instead of offering cash.
An insurance settlement isn’t something the insurer pulls out of thin air, nor is it automatically the amount that their customer wants. Insurers calculate settlements based on the terms of the customer’s insurance policy.
Regardless of how the settlement is calculated, it’s still subject to the policy’s coverage limits. There’s also nearly always a deductible subtracted from the amount, too.
All insurance policies state the basis on which the insurer calculates loss payments. There are many different forms, including:
Most insurance policies feature more than one basis of loss payment. Different bases apply depending on the scenario, the type of loss, and whether the customer wishes to replace an item or not.
Haruka had a small fire break out in her kitchen. It damaged her appliances, her cabinets, and her kitchen equipment. She calls her home insurance company to make a claim.
Her policy states that, if she decides to repair or replace damaged property, it will do so on a replacement cost basis. But, if any of her stuff was in very poor (basically unusable) condition before the fire, those items would be covered on an actual cash value basis.
The adjuster assigned to Haruka’s claim goes through her list of damaged stuff and researches the cost of replacing everything. The grand total for buying her a new dishwasher, oven, and fridge, plus replacing the cabinets and the stuff inside them, comes to $9,500.
However, Haruka tells the adjuster that her old dishwasher didn’t actually work. It was broken when she bought the house and she never bothered to replace it, because she didn’t need it.
So, the dishwasher won’t be eligible for replacement cost coverage, which the adjuster had figured to be $1,000. The adjuster instead determines that its actual cash value was $50, and adjusts the total accordingly.
The calculation from the insurance company is: $8,500 to replace the damaged fridge, oven, cabinets, and kitchen equipment, and $50 for the broken dishwasher—a total of $8,550. Subtracting Haruka’s $500 deductible, her insurer’s settlement offer is to pay $8,050 of the repair and replacement costs. She thinks that sounds fair, and agrees to it.
In this scenario, the settlement is $8,050.
However, that won’t necessarily come in the form of a cash payment—it’s conditional on Haruka actually replacing the damaged property with the equivalent new property that the adjuster researched. When there’s contracting work to be done (like replacing the cabinets), the insurer would get a quote from a contractor. Haruka would need to authorize the work, and the insurer would pay the contractor directly in most cases.
In other cases, insurance polices offer other settlement options that might be a better fit for certain types of property.
For example, Haruka may have the option to choose a cash settlement for items that she no longer wishes to replace. Say, for example, she had accumulated three roasting pans over the years. She likely only needs one in the future. In that case, she might replace just one pan and choose a cash settlement for the extra two.
Typically, cash settlements are based on the replacement cost minus depreciation. That would make it a smaller settlement in total, but there are some cases where it still makes sense—it’s up to the policyholder to decide.
Looking for another insurance definition? Look it up in The Insurance Glossary, home to dozens of easy-to-follow definitions for the most common insurance terms. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.
About the expert: Stefan Tirschler
Stefan is responsible for underwriting leadership, market expansion, and product research and development for Square One's operations. Stefan has earned his Fellow Chartered Insurance Professional designation, and maintains a level 2 general insurance license in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. Stefan is also an Education Committee member and CIP/GIE instructor for the Insurance Institute of Canada.
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