In a recent meeting about a loss insured by a major U.S.carrier, an adjuster told me that a mechanics lien had been placedon the insured by one of the vendors involved in the post-lossrestoration work. This, the adjuster said, was something he hadnever witnessed in his more than 30 years of claim handling. Theadjuster attributed the vendor's startling action to the currentstate of the economy.

Even if one does not fully comprehend the complexities andcauses of the current financial crisis, the enormity of the crisisand its impact on confidence in the economy is not lost on anyone.Credit and liquidity issues are placing additional pressures onbusiness owners. The worsening economy compounds these pressures,as well as the downgraded sales forecasts, increasing costs of rawmaterials, and energy prices. Consequently, this results in reducedmargins. If we add to this a catastrophic event that interruptsbusiness, then the problems a business can face is multiplied.

Claim handlers have always been sympathetic to the pressuresthat such events place on the industry. However, the pressure onbusiness owners is inevitably passed to the claim professional, asthe insured reacts to restore the business while seeking assistancefrom the insurance carrier.

What's Different Now?

In the period leading to the current financial crisis, cash flowwas good in many businesses. Receiving money from insurance claimswas not irrelevant, but certainly less imperative than it is now.Today is a different story. Cash is once again “king,” and claimprofessionals are feeling the squeeze from both insureds and theirrepresentatives — namely, brokers and claim consultants.

In the previous, less-volatile economic climate, it was fairlycommon for a claim professional to review the pre-loss saleshistory of a business for two years prior to the loss whenanalyzing a business income claim. This is done to develop a salestrend factor that would then be referenced to project sales duringthe period of restoration. Today, the past may not necessarily bean accurate predictor of the future. Depending on the type ofbusiness involved, past results may not accurately indicate whatthe future would have been had the insured event not occurred.While it is still necessary to review past performance as part ofthe process of projecting future sales, it becomes more importantto analyze the economic climate of the insured's business toproperly predict sales during the period of restoration.

Current market conditions have created additional pressures onclaim organizations, including the following:

Increased demand for advance payments. In thetypical life of a large insurance claim, two or three advancepayments on an account might be requested and processed prior tothe final settlement of a loss. Today, with increased pressure on abusiness' cash flow because of market conditions, the frequency anddemand for such advance payments is likely to increase. In turn,this means increased pressure and a more frequent need for theinsurer to respond to internal reporting requirements that allow apayment to be processed. For claim professionals, this translatesto increased demand for efficient analysis and reporting so that anadvance payment can be processed. In many cases, the insuredoverlooks this aspect of the claim process and simply expectspayments as requested.

Reduced timeframe between advance paymentrecommendations and receiving payments. More than ever,insureds are expecting overnight payments. They will anticipatepayments the moment they believe that they have provided everythingnecessary to support the claim. Even though it may have taken threemonths to piece the claim together, the insured may want a checkcut the day the claim is delivered. For the insured, the clock hasbeen ticking since the date of the loss. The fact that a documentedclaim is just now being received is irrelevant. This invariablyresults in pressure being placed on the insurer to make an advancepayment immediately. Brokers and consultants will also be chasingupdates and advance payments.

Increased trend towards settlementnegotiations. It is likely that an increasing acceptanceof negotiated claims will outweigh the desire to fully analyze aclaim for a long period. For many insureds, the security of cashnow will be worth more than cash later. Insureds will seek cashflow, as well as the opportunity to end the insurance claimprocesses and return to focusing on operations. The upside of thissituation is that the insurer will have an improved bargainingposition from which to develop a favorable settlement. While thismay be a beneficial shortcut to a closed file, increased pressuremay exist for an abbreviated review process to enable settlementdiscussions. Care should be taken if this route is chosen.

More difficult settlement negotiations. It isalso likely that settlement negotiations will become moredifficult. The impact of the economy and the increased pressure onthe insured's business is likely to make the policyholder seekevery possible dollar in a negotiated settlement. Fewer concessionsshould be expected.

Risk of inflated claims. With pressure onmanagement to produce results in line with prior years' budgets —meaning before the financial crisis — losses caused by insuredevents may create an opportunity to blame the performance of theorganization completely on the insured event. Claim professionalsneed to consider the cause and the effect even more carefullyduring claim review. Increased pressure to identify the actualimpact of the event on the business will be more important thanever. Inflated claims could result if the impact of the insuredevent is misunderstood, and the event is used as a scapegoat forpoor performance.

Responsiveness to requests for information.Insureds may not be willing to provide all of the requestedinformation. They may instead want to compromise certain claimcomponents without thorough review to shorten the time frame. Itwill be necessary to evaluate their positions and determine howimportant the information is to the overall picture.

Going concern. So if companies ultimately failbecause of the financial crisis, then whom will be blamed? Claimprofessionals need to take care in responding quickly to claims toavoid becoming the obvious target. In such cases, there must be afull review of the financial health of the insured — before,during, and after the loss — to understand the root cause.Additionally, a company may not be in a position to survive for thefull length of the period of restoration — irrespective of the loss— because of the economic climate. Thus, paying for a losscalculated on the basis that there is no going concern issue maylead to an overpayment of a claim.

Liens on insureds. As the credit crunch gripsmany claim response operations, such as salvage companies,restoration companies, engineering consultants, and so on, it islikely that these entities will become more aggressive in respectto the payments for their services. Failure to make such paymentscan lead to liens on assets. The result is that when a settlementpayment or a payment on an account is made — rather than being usedto advance restoration and get the company back in business — itwill be drained by payments due to creditors.

What to Expect

As previously discussed, a number of businesses will undoubtedlyfail over the course of the next 12 months because of the economicdownturn. For those that also experience an insurable event, it isfeasible that this event will be blamed for the failure. As aresult, it is highly likely that the insured will point the fingerat the claim industry for not handling the claim appropriately andcausing the business failure. Cause and effect is key here. Theclaim professional must be able to separate the impact of the lossfrom the underlying financial crisis.

Litigation of any dispute, be it an insured event or otherlitigious action, requires cash flow. Any litigated matter istantamount to an investment decision. It requires an injection ofcash to cover legal expenses and costs for experts in theanticipation of a return on that investment. This comes in the formof an award for damages.

As with any investment, the timing needs to be appropriate. Thecurrent economic crisis is likely to lead to more litigation forsome of the reasons cited above, but it is also possible thatlitigation will be delayed until the required cash is available forfunding the case. The upside for the claim professional is that thedelay will allow time to assemble a team to respond to thelitigation.

Practical Steps

The following measures may be helpful to claim professionalsdealing with the additional pressures stemming from the currenteconomic climate. First, partner with experts like forensicaccountants whose reports are concise yet clear and who can provideyou with a thorough understanding of the issues. This will allowyou to get through the information and handle the claim paymentprocess diligently yet quickly.

Secondly, research current market trends to assist in theprojection of sales during the period of restoration if you areinvolved in a business income claim.

Thirdly, be sure to communicate with your experts. Let them knowwhat you are dealing with, be it increased demands for advancepayments or troublesome insureds. Make certain that they are awareof deadlines and response times.

Fourthly, educate the insured about the claim review process.Discuss the payment process and timing related to reports fromexperts, review of reports, recommendations for payments, andpayment processing. Let the insured know what to expect.

Next, make use of technology. Shared database products exist toallow claim handlers to simply log onto a secure shared system toobtain immediate updates about the status of a review performed byan external consultant.

Lastly, be prepared for settlement negotiations. Arm yourselfwith alternate calculations and strong support for any assumptions.Take advantage of the potential for an early settlement.

The Real Silver Lining

So where are the opportunities in the deluge? The financial andeconomic crisis offers claim handlers the opportunity to recognizethe increased pressure on insureds and to demonstrate theirresponsiveness and support to both the carrier and its customers.This enhanced response and support during difficult times willremind insureds as to why they chose a particular carrier. It willalso remind the carrier why it chose you as the claim professional.Good service enhances the carrier's ability to stand out from thecrowd while doing the right thing for its customers.

The far-reaching impact of the depressed economy is yet tounfold. Dealing with the insured's increased tension in the claimprocess creates an opportunity to reassure the insurance marketthat it is still “business as usual” amid the current perceptionsof doom and gloom surrounding the economy.

Simon Oddy, ACA, CFE, is a director at the New York officeof RGL Forensics. He focuses on business interruption, inventoryvaluation, damages litigation, and fidelity and fraud claims. Hemay be reached at 917-237-4801, [email protected].