Tales from the Front: Claims-Management Strategies

It is a case study Brew brings up to illustrate the varied tasks the risk manager must tackle immediately following a major crisis. An event like the one suffered by Union Carbide immediately plunges the plant's risk manager into crisis communications with the concerned members of nearby communities, the local government and carriers associated with the triggered policies, which may include Pollution, Casualty and Property payouts. 

According to Marsh, a Fortune 500 risk manager may have an insurance portfolio consisting of 20 to 30 carriers, each carrying a piece of the company's risk. In a worst-case claims situation like a major plant explosion, all of them might need to be brought in, which requires an enormous amount of organizational skill, poise and tact.

Immediately after the event, says Steven Fraser—liability claims leader for Marsh in the U.S.—the state and local government, federal government and environmental agencies such as the Environmental Protection Agency (EPA) and OSHA will be involved, as well as firefighting and emergency responders, to place an evacuation or a "shelter-in-place" order that seals off a single area, like a room, from outside contaminants by shutting off all heating, ventilation, and air-conditioning systems.

After the immediate crisis is dealt with, the company's past practices and safety records will be put under investigation, leading to potential fines and penalties. Insurance carriers will be interested in these requests, so the risk manager should be sure to carefully preserve the documentation by photocopying and scanning it into the computer system.

"The process we find most helpful to the risk manager at the outset is one that will gather and manage information, and to distribute the information in accordance with rules established by [or under the direction of] legal counsel," says Fraser. 

He advocates setting up a dedicated intranet site where all pertinent information approved by the company's legal counsel may be on view to executives, insurance carriers and company executives. Fraser adds that it is helpful to have a process wherein standard information can be posted to each insurer involved; that way, the insurers can review the claim on their own and in light of their individual concerns. "It's a more harmonious process that frees the risk manager from the administrative duties of answering requests," Fraser says, "and allows him or her to spend time with internal management dealing with the event, and coordinating the insurer's response."

Simultaneously, litigation may arise by individuals affected by the event. Fearing for damage to their property or health, they may hire attorneys to represent them. 

A lawyer may represent up to hundreds of allegations from people in the community. Liability insurers will request these attorney-issued legal statements. This information also can be distributed via the dedicated web portal.

Insurers will usually inspect the site a week to two weeks after the loss, searching for understanding of the losses that correspond to its policy. Property insurers will look at the physically damaged equipment and evaluate cost to repair and resume business and liability insurers will determine who was injured and how, although Directors and Officers (D&O) claims people will focus on information requests from lawyers about the company's disclosures and management decisions related to the event. 

"The need for information management as a tool for the risk management department continues past the initial stages of a complex chain," says Brew. "Ongoing investigations, medical monitoring and treatment, and other activity will create large amounts of data that must be shared with interested stakeholders."

Coverage analysis undertaken by each coverage line's claims experts will weigh policies, terms and conditions as applied to the circumstances and allegation of the case before making a decision.

The company will then issue a Reservation of Rights letter and the client will have the in-house counsel, their risk resources and outside counsel to review if they want to accept or challenge those insurance positions. 

Because of the enormity of the situation and separate claims that arise, the insurance settlements surrounding a chemical plant explosion may not be resolved for a decade, says Fraser, and depending on how many third-party claims must be paid, can involve millions of dollars. 

It is therefore important to have all losses and circumstances of coverage at hand.

A flood of problems 

Preplanning, another tried-and-true strategy, has aided Neil Harrison, group managing director of risk control, claims and engineering at Aon Global Risk Consulting, in managing Property claims.

Harrison recalls a claim filed by a manufacturer after one of its main facilities was flooded due to an overflow in a nearby waterway. 

Fortunately—or because of good foresight—the client was able to engage a plan put in place two years prior, specifically designed to guide the company's response to such a disaster. The plan had been shared by all internal corporate stakeholders along with Aon and emergency-restoration firms. 

"As soon as it became clear that damage occurred, the client reported the claim to its insurer, contacted [Aon] and engaged their restoration companies. The severity of the damage was immediately apparent, but equally clear was the fact that the longer the delay between the incident happening and the restoration process starting, the worse the damage was going to be," says Harrison. 

The response strategy relied on a flow chart of steps that began with first reporting to the insurance company, engaging Aon's forensic accountants (those who sort through the details of the damage to build a financial picture of the loss) and setting up and posting data in an electronic communication forum. 

Aon's electronic data room is an online forum where all involved can see the site plan, photos and quantification of the damage compared to the components and limits of the policy. 

"We break it down by different sections of the Business Interruption policy," says Harrison. "For example, we write that $10 million of cover was incurred for one portion of damage, and attach photographs to the document to offer proof to the insurer." 

In this case, the claim process involved 35 people including three or four restoration teams, an engineer, a loss adjuster and insurance companies, all needing information about the situation as information about what caused the damage, and how much it was going to cost, was uncovered. 

Using the online platform freed the risk manager to focus on notifying affected employees of the flood, communicating to investors and customers that the situation was being controlled, and preparing the claim. 

"In any Property claim, the actual physical damage is more straightforward to figure out than the scale of business interruption, into which we factor loss of market share, issues related to suppliers and contingent suppliers, customers, and many other items that impact the loss of future revenue," says Harrison. 

This particular claim totaled around $130 million, approximately 35 percent of which was Property damage and 65 percent of which came from BI. 

Claims adjusters worked with forensic accountants specializing in business-interruption valuation to go on site to record photographic evidence of the ruined facility and collect receipts from all equipment vendors, all posted online for the insurance company to see. 

"The claim took 12 months total to process, but the client received initial advance payments within 14 days of the loss," adds Harrison. The company's active communication policy and risk strategy allowed it to avoid becoming a claim that he says may take up to 24 months to close.