“There is probably more dissatisfaction over businessinterruption insurance than about all other types of insurancecombined,” according to James Costner, senior vice president ofWillis Risk Solutions in Nashville, Tenn.

Costner was speaking before an audience at the recent Risk andInsurance Management Society Conference in Philadelphia, where hewas joined by John Dempsey, managing partner of the accountingfirm, Dempsey Myers & Co. The two presented ideas oncontrolling costs by implementing effective systems for gatheringand reporting annual business interruption values andexposures.

As in any field, documentation is only as good as the time andthought that go into it, Costner said. Risk managers who givebusiness interruption worksheets superficial treatment may learnlater that they are barely worth the paper on which they areprinted. The more thought, care, and time that go into pre-lossworksheet analysis increase the odds of complete financialprotection for time element losses.

Risk managers should seek their brokers' help on businessinterruption worksheets, advised Dempsey. This includes completingworksheets, clarifying questions which the underwriter may haveabout them, assessing business interruption limits, and weighingdifferent self-insurance options. All these are issues that a welldrafted business interruption worksheet will help highlight as arisk management tool.

“The more time risk managers spend carefully consideringbusiness interruption worksheet pre-loss,” Dempsey noted, “perhaps,the less time they'll spend in heartache and stress post-loss.”

Risk managers must go beyond just completing worksheets andthinking that their jobs are done, however. They must decide whatthe exercise implies for insurance limits, coinsurance percentages,retention levels, loss control, and self-funding mechanisms.

“Business interruption worksheets typically are designed to helpthe insurance underwriters set a proper premium,” said Costner.They are not necessarily designed to help determine genuinebusiness interruption values. This is one reason businessinterruption worksheets can be frustrating, he added.

The concept of maximum foreseeable loss has substantial meaningfor risk managers, according to Dempsey. An analytical tool, itpresumes a worst-case scenario, such as when a blaze spreads,sprinklers fail, or fire-suppression personnel are unavailable. Oneblind spot, for example, is that most business interruptionworksheets do not identify bottlenecks in manufacturing processes.In the case of clothing, which may be manufactured as a result ofsequential steps undertaken at five different locations, if one ofthose locations goes down, the entire clothing process halts.

Costner described a situation involving a Phillips Electronicmanufacturing center in Albuquerque, N.M., that made Ericsson cellphone components. Fire damaged “clean rooms” in which workersfabricated cell phone chips. Essentially, this interruption to themanufacturing process knocked Erickson out of the cell phonebusiness, Costner observed.

Contingent business interruption is crucial, but often notcaptured by business interruption worksheets, he added. “Ninetypercent of all the people who visit Las Vegas are there eitherbecause they fly in to the local airport or drive in via Interstate15,” he said, by way of example. Dollars are dollars, and it doesnot matter whether the hotel in Las Vegas has a physical loss orwhether there is damage to the airport or interstate; aninterruption at either will cause severe financial loss.

Few policyholders buy ordinary payroll coverage, simply because,in cases of severe loss, most management teams will not keepemployees on the payroll for long. Costner recalled the example ofa Massachusetts mill that had burned down, whose owner “charitably”announced that he would continue payroll for a month. What theowner did not disclose, according to Costner, was the fact that themill had two months of ordinary payroll coverage on tap.

Insurance underwriters have their own concerns regardingbusiness interruption values, Dempsey noted. Risk managers mustknow these and brace for questions. Underwriters will bepreoccupied with location exposures and values. For example, arelocations with high maximum foreseeable losses properly identified?Are there earthquake or windstorm exposures? Are there anysignificant interdependencies that the underwriter shouldrecognize? Has the insured disclosed any significant contingentbusiness interruption exposures? Are adequate loss control measuresin place to reduce loss exposures? On the latter point, Dempseynoted, risk managers can get better pricing deals on coverage ifthey can demonstrate strong loss control programs.

Similarly, risk managers have their own business interruptionvalue concerns. These relate to whether the business unitsunderstand the purpose and importance of accurate businessinterruption value reporting. Also, are reported values calculatedconsistently among business units and locations? Risk managersshould weigh mundane factors, such as whether the right amount ofdata is reported, and whether the collection process is rationaland efficient.

In other areas, risk managers and underwriters share certainconcerns with regard to business interruption values. They bothwant to know whether reported values are based on reality and arecomputed in ways consistent with industry standards. Are reportedvalues suitable for calculating probable maximum losses and maximumforeseeable losses, and for allocating insurance capacity? Arereported values a reasonable basis for calculating premiums anddetermining location limits and deductibles?

Completing a business interruption worksheet is an opportunityto review contingency and business continuity plans. What factorsaffect the maximum foreseeable loss scenario? Can the risk managerquantify these factors? Can risk managers line up alternatelocations for producing excess capacity? Can they use temporaryfacilities, obtain replacement inventories, or make emergencypurchases from third parties or competitors that can compress thetime of the business interruption?

Labor-Saving Devices

Also presenting a session at the conference was Ann Schnure,claim director for Federated Department Stores; Paul Przysiecki,risk management analyst for ADP TotalSource; and Robert Steggert,vice president of casualty claims for Marriott International.

Schnure outlined the changes that technological advances havebrought to claim handling, and how they may be integrated into theprocess to achieve greater efficiency and efficacy. The currentclaim environment is being led by companies willing to invest ininformation technology infrastructures, she said. Although,traditionally, claim handling is labor intensive and suffers fromscarce resources, a balance of technology and human expertise canresult in reduced claim costs.

Because Schnure works for a retailer, her employer hascustomized techniques to help manage, and even prevent, claims. Forexample, due to electronic data interchange, a claim person cansend gift cards to potential claimants, when appropriate. This isdone automatically, without human intervention. It increases speed,responsiveness, and reduces legal expenses. It also builds goodwilland helps avoid aggrieved individuals' becoming claimants orplaintiffs.

Przysiecki discussed systemic claim oversight, focusing onemployment through professional employer organizations. PEOsprovide dual employment relationships, whereby clients controlday-to-day activities, but the PEO becomes an employer of recordfor employee administration purposes.

A seasoned group of claim professionals oversees the third partyclaim administrator, evaluating it for specific performancestandards. This may include online claim reviews and litigationoversight. Effective practices identified by Przysiecki includeroutine review and documentation on claims for medical bills,working on litigation status with adjusters, coordination ofreturn-to-work efforts, and coordination of all legal aspects ofworkers' compensation claims.

He also emphasized that good litigation oversight involvesfinding out the rationale behind claim litigation. In other words,“Why did an employee retain counsel?” It also should be determinedwhether plaintiff law firms are targeting employees associated withparticular companies or particular clients. Technology can providequick access between the client and defense firms for informationexchange.

Steggert noted that the Marriott Corp. is self insurednationally for workers' compensation and general liability. Thecompany, which handles about 25,000 claims per year, is strivingtoward a paperless process. One objective is to align technology tomeet claim goals, including increased efficiency of claimprocesses, reduced medical and indemnity costs, improved quality ofcare for injuries, and integrating vendors electronically into theclaim process.

Marriott has had mixed success with medical cost managementfirms, he said. The company has come full circle and often paysmedical providers above scale for services, finding that thosehigher costs can be offset by better medical outcomes and earlierreturn-to-work dates.

Call centers help Marriott receive prompt notice of all losses.Steggert would like to have 24-hour loss reporting systems inplace, but noted that it is difficult, given the corporation'sthousands of locations and the fact that many of them are operating24 hours a day. Nevertheless, having a centralized claim hub forreceiving accident and loss reports is a key component foreffective claim management.

Questions from the audience revealed concerns about privacy ofemployees' medical information. Steggert observed that HIPAAregulations do not apply to the realm of workers' compensation.Nevertheless, employees handling claims at Marriott must signannual agreements pledging not to divulge sensitive and privatemedical information. If a Marriott claim person were to handle ajob-related injury sustained by someone who is HIV-positive, andlater carelessly disclosed that fact, the employee could beterminated for cause. Steggert believes that privacy concerns aremanageable.

Kevin Quinley, CPCU, is senior vice president for MedmarcInsurance Group in Chantilly, Va. He can be reached [email protected].