Unallocated Loss Adjustment Expenses (ULAE)

Unallocated Loss Adjustment Expenses (ULAE)

They are among the expenses for which an insurer has to set aside reserve funds, in addition to allocated loss adjustment expenses and contingent commissions. Unallocated loss adjustment expenses are business costs that the insurer cannot attribute to a specific claim. Allocated loss adjustment expenses are directly attributable to a specific claim. Unallocated loss adjustment expenses combined with allocated loss adjustment expenses represent an insurer's estimate of the money it will pay out in claims in addition to the expenses associated with processing the claims. It is important to carefully read the endorsement language, which may say 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, the insurance company has done no actual adjusting of the claim, and should not be entitled to apply its deductible to the expenses incurred by the policyholder in defending the claim denied by the insurance company. Insurers that use third parties to investigate the veracity of claims or to act as loss adjusters may include this expense in its allocated loss adjustment expenses.

Unallocated loss adjustment expenses are business costs that the insurer cannot attribute to a specific claim.

What Are Unallocated Loss Adjustment Expenses (ULAE)?

Unallocated loss adjustment expenses (ULAE) are costs incurred by an insurance company that cannot be attributed to the processing of a specific claim. They are among the expenses for which an insurer has to set aside reserve funds, in addition to allocated loss adjustment expenses and contingent commissions.

Unallocated loss adjustment expenses combined with allocated loss adjustment expenses represent an insurer's estimate of the money it will pay out in claims in addition to the expenses associated with processing the claims.

Unallocated loss adjustment expenses are business costs that the insurer cannot attribute to a specific claim.
Allocated loss adjustment expenses are directly attributable to a specific claim.
Insurers maintain reserve funds to manage both types of expenses.

Understanding ULAE

Allocated loss adjustment expenses (ALAE) are expenses linked directly to the processing of a specific claim. Insurers that use third parties to investigate the veracity of claims or to act as loss adjusters may include this expense in its allocated loss adjustment expenses.

ULAE expenses are more general and may include overhead and salaries. The most common expenses fall into the categories of operations and field adjusters.

Calculating ULAE

Because unallocated loss adjustment expenses do not apply to a specific claim, there's no loss date or report date for them. This makes calculations tricky. Any of several methods are available for calculating ULAE:

Liability policies may contain a clause that allows the insurer to charge the client for some unallocated loss adjustment expenses.

The process of loss reserve development requires the insurer to adjust estimates to its loss and loss-adjustment expense reserves over a period of time. Analysts can determine how accurate an insurance company has been at estimating its reserves by examining its loss reserve development.

Reimbursement for ULAE

Some liability policies contain a clause, called an endorsement, that requires the policyholder to reimburse the insurance company for unallocated or allocated loss adjustment expenses. These expenses may include fees charged by attorneys, investigators, experts, arbitrators, mediators, and other costs incidental to adjusting a claim.

It is important to carefully read the endorsement language, which may say 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, the insurance company has done no actual adjusting of the claim, and should not be entitled to apply its deductible to the expenses incurred by the policyholder in defending the claim denied by the insurance company.

Related terms:

Accounting

Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more

Introduction to Allocated Loss Adjustment Expenses (ALAE)

Allocated loss adjustment expenses (ALAE) are part of an insurer’s expense reserves that are attributed to the processing of an insurance claim. read more

Contingent Commission

A contingent commission is a commission paid to an intermediary by an insurance or reinsurance company with a value dependent on an event occurring. read more

Loss Adjustment Expense (LAE)

A loss adjustment expense (LAE) is an expense associated with investigating an insurance claim. Learn how LAE helps measure a company’s profitability. read more

Loss Reserve

Typically comprised of liquid assets, loss reserves are an asset that allows an insurer to cover claims made against policies it underwrites. read more

What Is Losses and Loss-Adjustment Expense?

Losses and loss-adjustment expense is the portion of an insurance company’s reserves set aside for unpaid losses, investigation and adjustment for losses. read more

Losses Incurred

Losses incurred refers to benefits paid to policyholders during the current year plus changes to loss reserves from the previous year. read more

Mandatory Binding Arbitration

Mandatory binding arbitration requires the parties to resolve contract disputes before an arbitrator rather than through the court system. read more

Subrogation

Subrogation is the right of an insurer to pursue the party that caused the loss to the insured in an attempt to recover funds paid in the claim. read more