Minimizing Impact

Some of the 10 most common mistakes made in property damage and business interruption claims could be avoided by undertaking a few rudimentary tasks, such as identifying risks and negotiating favourable policy terms.

A large property claim carries with it a number of different consequences, including loss of income, extra expense, loss of market share, damage to reputation, delay of strategic initiatives and closure of a location or even an entire company, delegates at the 2008 Risk and Insurance Management Society (RIMS) conference in San Diego heard.

“No matter what your business is, these are all important to you,” Roberta Martoza, first vice president of enterprise risk management at Washington Mutual, said.

A lot of these consequences could be minimized through preventive measures such as business continuity planning and property loss prevention, but oftentimes these don’t go deep enough.

“There’s the little things that come up during a property claim process that strip through you,” she noted, “so it’s important to plan and anticipate any type of things that may happen that you are not expecting.”

Kirk Pasich, partner with Dickstein Shapiro, Michael Korn, managing principal with Integro Insurance Brokers, Greg Thaler, director, national leader of property insurance claims with LECG, and Martoza listed their top 10 most common mistakes made when handling a business interruption claim.

The Top 10

According to the panelists, the top 10 worst mistakes made on property and business interruption claims are:

1. Failing to identify risks — This is the most important step in the risk management process. “You’ve got to know what can happen to your company so that you can prepare for it from a coverage perspective,” Korn noted. Engineered studies can help determine exposure rates, as can a broker. Evaluating risk is not a one-time process as exposures change all the time in business. Risks need to be continuously reevaluated as things change within a company, Korn added.

2. Failing to negotiate favourable policy terms — After determining what the exposure is and what can be done to mitigate risk, some decisions need to be made about coverages, limits, deductibles and how those deductibles are applied. Because of the increasing frequency of outsourcing, a company needs to be aware not only what its own coverage is, but also what type of coverage its suppliers have, and even its suppliers’ suppliers, Korn noted. In addition, extra expenses need to be evaluated — how will things work if a business needs to be run out of another location, how will overtime be handled, and so forth. “What kind of costs are we talking about here and how will that go beyond business insurance coverage supplied to us,” Korn said.

Further to this, what will happen if a loss which occurs away from the business impacts the employees or customers ability to get in and out of the facility, such as an airport closure, transit concerns, a closed mall entrance, etc. Policy wording should be analyzed to determine whether there is available coverage for impaired or prevented (100% shutdown) access to a business.

A policy should be further analyzed to determine replacement cost coverage and whether monies can be used if a business does not repair or specifically replace what was lost or damaged. “Make sure that you’ve got wording that allows you to use that same amount of money for unclaimed capital expenditures, things that weren’t in the works at the time of the loss, but that you were going to do,” Korn advised.

3. Failing to explain business continuity plan (BCP) and mitigation strategies to insurers– By discussing BCPs with insurers it helps both parties understand the exposures and recovery from said exposures. This knowledge of the risks and what’s needed to mitigate risks, allows a business to purchase programs that are meaningful — such as purchasing lower deductibles taking more risks or lower premiums, Martoza noted.

Insurers want to know how you are minimizing not only your risk but their risk as well, she noted.

“You should always think of insurance as your last resort,” Martoza said. Operate your business as though insurance does not exist.”

4. Failing to take charge — A lot of companies believe they can prepare the claim themselves,” Pasich said. “The problem is knowing when you need to put a team together and when you need to take charge of it.”

Part of the solution is to assemble a designated claims team to manage the claims process, including forensic accountants, coverage attorneys, brokers and an internal claim champion — someone who is willing to talk about the intricacies of the claim and of the coverage issues.

However, there are legal considerations that often get overlooked when working with the claims team, most importantly attorney-client privilege. There might not be privilege when working with an engineer or others on the team.

“Do not inadvertently waive privilege,” Pasich warned.

Additionally, document everything — including all correspondence with an insurance company. Be aware of deadlines, “if you are late giving notice after an event, you lose your coverage,” he added.

5. Communications breakdown — “This is actually the biggest mistake I think most people make is not communicating enough,” Martoza pointed out.

It is very important to communicate both internally and externally with those involved.

“You don’t want to surprise an adjuster, they are like a rhinoceros,” Thaler said. “You equally don’t want to surprise your CFO.” Keep the adjuster in the loop — communicate all activity — and ask for feedback and objections.

6. Ignoring the coverage issues — This is just as detrimental as not being aware of coverage issues.

Common ignored or disputed items include efficient proximate cause, civil authority, ingress/egress, repair/replacement and interruption or restoration period, Pasich noted.

7. Preparing an inaccurate claim– Often the best way to prepare a business interruption claim is to use the three-column approach, showing projected income statement, compared to actual income statement and then the difference, Thaler said.

This will capture lost sales, mitigation, non-continuing expenses, continuing expenses and extra expenses, he added.

“This is something an insurance company is used to seeing and they often use it,” Thaler said. “Therefore, it’s much easier to reconcile [any discrepancies].”

8. Preparing an unconvincing claim — Ensure the claim matches the policy language; document your claim in gory detail; describe claim items accurately; discuss documentation and description with contractors, subcontractors and vendors before they issue invoices; and use photographs wherever possible.

9. Failing to understand goals of all parties — Understanding the roles of each person involved in a claim is key, because there are competing interests between the risk manager, the adjuster, the insurance company, the CFO, etc. Keep the process very friendly and open, Thaler noted.

10. Failing to maximize the recovery — During the reconciliation analyses, don’t simply split the difference. Go through the process and break down each of the differences and fight for the ones you’re strong on, Thaler advised. Spend the time it’s well worth it.