The road to resolving property and business interruption claims can be a rough one for a company's risk manager, chief financial officer and in-house counsel.
While insurance companies deal with the nuances of insurance claims on a daily basis, policyholders typically don't consider the insurance claim process until they experience a loss. Therefore, it can be a struggle when confronted with the inevitable issues that arise such as:
- Coverage: The insurer contends that the policy doesn't cover what the policyholder thinks it covers.
- Engineering: The insurer thinks that repairs can be done cheaper and/or quicker than the policyholder thinks.
- Quantification: The insurer thinks that the claim overstates the actual loss sustained by the policyholder.
Let's look at some aspects of the claim process and how policyholders can make it more efficient, avoid disputes and increase the chances of reaching a reasonable settlement:
Pulling together the right team can help ensure all facets of the claim are addressed. (Photo: Shutterstock)
1. Assemble a team
Ideally, when a risk manager is confronted with a loss, there is a team already in place waiting to take action. If this is not the case, it is important to assemble a proper team as soon as possible that includes resources who understand the claim process, the insurer's expectations, and the most effective and efficient way to prepare the claim. The team should include a "company champion" such as the risk manager, as well as participation from the insurance broker, forensic accountants, and possibly other consultants/engineers depending on the circumstances of the loss.
In addition, if a claim is complex and/or is expected to have significant coverage issues that may have a sizable impact on the claim, it is generally beneficial to hire coverage counsel shortly after the loss. Generally, coverage counsel will work behind the scenes to provide a detailed review of the insurance policy and advise as to how it should respond to the loss. Insurers typically do the same on a sizable claim, especially if it is expected to have coverage issues.
Most policies include coverage for claim preparation costs or professional fees. These provisions generally exclude coverage for public adjusters, but do provide coverage for forensic accountants to prepare the claim. Many policyholders retain forensic accountants that are independent of their insurance broker and their auditors, especially when the claim involves coverage issues or there is a potential for litigation because the policyholder's auditors and forensic accountants affiliated with insurance brokers typically are prohibited or unwilling to testify as expert witnesses.
The team should establish an effective communication plan with the insurer, the adjuster, and the insurer's forensic accountants to manage expectations regarding the claim and expedite insurance payments. Having experienced resources on your team will give credibility to the claim, streamline the process and ultimately provide for more informed decisions regarding settlement.
An accurate estimate can help manage expectations of the policyholder and insurer. (Photo: Shutterstock)
2. Prepare a preliminary estimate of the claim
It is often difficult to assess the impact of a Business Interruption loss shortly after the event.
The policyholder may not yet have a good understanding of the extent of financial loss, the duration of time required to repair damage and restore operations, the prospects of successfully mitigating the loss, and the potential for coverage issues.
However, it is important to manage the expectations of the adjuster and the insurer, especially as they are setting reserves for the loss. Generally, it is helpful to prepare a preliminary estimate of the loss (with appropriate caveats) within 30 days of the event. This estimate should be submitted as "preliminary" and should be updated periodically as additional information becomes available.
Many insurers will work with the policyholder to provide money up front to cover some costs incurred. (Photo: Shutterstock)
3. Request cash advances throughout the process
Policyholders are entitled to receive cash advances after a loss. However, if the policyholder does not ask they will not receive; therefore they should ask early and often. To facilitate a smooth advance request process it is important that the policyholder communicate with the adjuster regarding repair/replace decisions or any other significant issues that may require adjuster investigation, specific documentation or raise coverage questions.
In addition, insurers will typically only pay for costs that have been incurred and fully documented. Therefore, it is critical that policyholders establish proper loss accounting procedures, maintain appropriate records to justify the work performed and the related cost, and even discuss with third-party vendors the appropriate level of detail required on their invoices. These steps, along with proper coordination with the adjuster and the insurer's consultants, will expedite review and in turn the advance payments.
Will an insurer provide cash advances to fund repairs that have been made, but have not been fully investigated and approved by the adjuster and the insurer? It would seem fair, but some insurers contend they are entitled to fully review and vet all issues before they make a payment. (Other insurers will work with the policyholder and pay a cash advance to reasonably cover all costs incurred, but will be careful not to pay more than the final claim amount.)
It is important to manage expectations on both sides so reserves are realistic and policyholders understand what is covered. (Photo: Shutterstock)
4. Manage expectations
In light of the uncertainty that can accompany the claim process and ultimate outcome, it is important that the policyholder manage internal expectations regarding the claim and prospects for recovery. For example, the risk manager does not want to have to respond to the following comments from the CFO:
- "I thought all our losses would be covered — that's why we have insurance!"
- "Our losses were much greater than the claim you submitted!"
- "You agreed to settle for $5 million? I booked a receivable for $10 million!"
It is equally important that the policyholder manage the expectations of the adjuster through regular communication. This will help to avoid unnecessary (and in some cases irreversible) surprises such as:
- "Your claim is now $10 million? I only reserved $5 million."
- "You replaced the damaged equipment? We thought it could be repaired."
- "You are claiming the payroll for your employees who helped with the clean up? While we appreciate your resourceful approach, it is not covered since you would have paid them anyway."
Related: Do you know the difference between Extra Expense coverage and 'expense to reduce'?
These unpleasant questions can be avoided if the policyholder manages expectations internally and externally through appropriate communication and solicitation of feedback during the claim process.
An honest discussion is necessary to resolve any differences related to the claim. (Photo: Shutterstock)
5. Identify differences critical to recovery
Most claims have issues that result in a difference of opinion between the policyholder and the insurer. The types of differences include, but are not limited to the following:
- Coverage: Loss of market, application of deductibles, covered peril, concurrent causation.
- Engineering: Policyholder says repairs will take 12 months, insurer says 6 months,
- Quantification: Policyholder says business would have grown at 10%, insurer's accountants say 5%.
While resolving these differences is often tricky, it is critical that the policyholder anticipate them, identify how they affect the claim, and determine if there is a reasonable path to resolution. If that seems unlikely, dispute resolution approaches including litigation may need to be considered.
The road to resolving property and Business Interruption claims does not have to be rough. By using a team approach, and managing expectations through coordination and communication, policyholders will be able to confidently navigate the claim process and hopefully achieve a reasonable settlement.
Stephen C. Moseley is a managing director and the Midwest practice leader of Washington, D.C.-based business advisory firm FTI Consulting's business insurance claims practice. He is based in Chicago.
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