Disasters in the last decade–such as flooding in the Midwest, hurricanes along the Gulf Coast and wildfires in California–have caused catastrophic property damage and business interruption losses totaling hundreds of billions of dollars. What’s one of the first questions a risk manager’s boss always asks? “Were we covered?”
Insurance policies can play an important role in helping businesses recover from these types of disasters, but only if claims are managed properly.
These policies may provide coverage not only for physical damage to, and loss of property, but also for the extra expenses incurred in dealing with the aftermath–losses resulting from the interruption of business and during the time of recovery, or even expenses incurred in advance to minimize any damage and loss.
To make sure they obtain the full recoveries to which they are entitled, insureds should pay careful attention to these eight lessons learned in connection with disaster-related losses:
#1: Protect Internal Conversations!
Property insurance policies can be long and complicated. Early on in the process of loss investigation and adjustment, risk managers should consult with their counsel to ensure they understand the nuances of how their policies may apply to their claims.
Because most discussions with counsel are privileged and protected from disclosure, the involvement of counsel will allow insureds to both legal opinions on the merits of the claim while protecting confidential communications regarding the claim from being released.
#2: Fully Understand Procedural Requirements!
Property policies contain a number of procedural requirements that must be understood and carefully followed.
For example, “notice” provisions generally require that an insured alert their carrier within a reasonable time after an insured event occurs. Therefore, an insured should give notice as soon as possible.
Most policies also require that an insured provide a “proof of loss, signed and sworn to by the insured” within a certain number of days after “inception” of the loss.
It is not unusual for the effects of a disaster and the resulting loss–particularly rebuilding efforts and time-element losses–to continue well beyond the date specified for submitting a proof of loss.
Insureds should calendar the earliest day for when the proof of loss is due, therefore, and consider seeking an extension of the proof-of-loss date until some time after the claim is adjusted and both sides reach agreement on the amount of the claim.
#3: Be Aware Of Client Confidentiality Issues:
After disasters, many businesses turn to their insurance brokers and accounting firms for advice about how to handle and present their claims. In that context, they have candid discussions about coverage issues, relevant facts and evaluation of damages.
In many states, however, communications between insureds and their brokers and accountants are not subject to attorney-client privilege or treated as confidential.
#4: Don’t Overlook Less-Obvious Coverage!
All coverage starts with a comparison of what has been lost with what is covered under the policy. Immediately upon suffering a loss, an insured should review their policy to determine what categories of coverage may be available.
Some of the categories of loss covered in a typical property policy are property damage, extra expense, accounts receivable, leasehold interest, rental value, royalties, demolition of buildings or structures, decontamination costs, fire extinguishing expenses, interruption by civil authority and debris removal.
#5: Document Actual Losses!
One lingering area of uncertainty in disaster claims is how to determine how much an insured actually lost. For this reason, risk managers should document all property damage and keep a detailed account of all costs incurred to repair or to replace property that has been damaged.
In many cases, it is wise to use the resources of forensic accountants to document a business’ losses. In fact, the costs of retaining such an accountant often are covered under the policy.
Business interruption claims can be particularly difficult to quantify because they involve estimations and expectations. Insureds should preserve historical sales data as soon as possible and carefully document all repairs and other financial hardship as a result of the disaster.
#6: Don’t Short-Change Your Coverage When Measuring Losses!
Insureds frequently measure their loss by comparing the income they would have generated without the disaster to the income they actually generated. Under at least some policies, however, this may result in a lower insurance recovery than the law permits.
An insured may be entitled to measure its loss based not on what it would have made if there had been no disaster, but on what it would have made if there had been increased demand for its goods or services after the disaster and it had been able to conduct business.
#7: Establish A Good Working Relationship With Your Insurer!
Carriers will seek supporting information from insureds to make payments on claims.
Striking the proper balance between legitimate requests for substantiation of a loss and endless demands for more information requires good-faith activity on both sides, as well as a working relationship with a goal to close the claim with an agreed-upon adjustment.
#8: Don’t Lose Your Right To Pursue Legal Action, If Necessary!
Most property insurance policies have a contractual limitations provision–that is, a contract equivalent to a statute of limitations that states when a lawsuit against the insurer must be filed.
Many policies require that any suit be filed within one year (sometimes two years) of “inception” of the loss. Some states do not count in this period the time from first notice to the insurer until the insurer conveys its coverage position, while some permit parties to extend the period or waive the deadline.
Additionally, it is not always clear what state’s law may govern this issue or how a policy is interpreted. Therefore, don’t assume that the law in the jurisdiction where the insurer is based or where the loss occurs is the law that will control.
Learning these eight valuable lessons will spare risk managers, insurers and brokers many problems after a disaster strikes.
Linda D. Kornfeld, Kirk A. Pasich and Barry J. Fleishman are all partners at Dickstein Shapiro LLP, where they serve together in the firm’s Insurance Coverage Practice, which is chaired by Mr. Pasich. Ms. Kornfeld is managing partner of the firm’s Los Angeles office.