In the wake of September 11, the business press has been full of electronic
backup success stories—tales of businesses damaged by the attack that managed
to swiftly recover core records preserved in electronic storage. The widespread
adoption of electronic backup storage throws into sharp relief the one key business
function that still relies primarily on hard copy: insurance. In most cases,
insurance recovery requires that the insured furnish a copy of the original
policy document. Storage of these crucial documents remains dependent on file
cabinets and warehouses.
Today, of course, disaster recovery planning has taken on new urgency as
an essential best practice for all organizations—private or public, large or
small. That new focus should put insurance front and center. In the aftermath
of catastrophe, a business's ability to maximize insurance recoveries for business
interruption, ensure replacement of real property, and protect itself against
third-party liabilities is critical to its survival.
With coverage for terrorist events abruptly written out of most policies,
insurance-related disaster preparation has understandably focused mainly on
buying adequate coverage at increased rates. A less obvious but equally crucial
imperative is the need to maintain and protect records of historical insurance
coverage; that is, old liability policies that can address current environmental
and product liability for past events.
In the wake of disaster, the need to maintain protection against liability
for events that may have occurred decades ago may seem less immediate than recovery
for losses stemming directly from disaster. But the long-term effects of liability
exposure resulting from a hole being blown in the company's historic insurance
records may prove even more devastating than the immediate loss.
Rescuing Insurance Records from the "Dustbin of History"
The first step in physically preserving a company's insurance assets is to
create an electronic database for existing insurance records, that last bastion
of hard copy. In order to preserve current records:
- Make images of all policies and store discs off site, preferably in
more than one location.
- Maintain basic coverage details for all commercial policies in a database
that can be hosted on the Internet for immediate access in the event of
a natural disaster or catastrophic loss.
- In addition to policy terms, include in the database any information
necessary to report claims, such as, names of contacts and addresses for
the brokers, insurers, consultants, as well as any claims-handling facilities.
Protecting Your Company's Future from Its Past
Preserving current insurance records is only the first step in ensuring that
the full range of a company's insurance assets can be accessed when needed.
A comprehensive organization of insurance assets should include documenting
the corporate historic insurance coverage along with the past insurance programs
of predecessor companies. Companies that survived the mergers and acquisitions
frenzy of the 1990s have often inherited a legacy of complex environmental and
toxic tort liabilities involving operations or products that were not considered
to be toxic in the past. In addition, significant liabilities can arise from
any real estate transactions as well as the activities of predecessor companies.
Liability threats on multiple fronts have been proliferating for decades
and show no sign of abating. The cost of civil liability as a percent of GDP
has climbed from 0.6 percent in 1950 to 1.4 percent in 1970 to 2.6 percent by
1995, according to a study by Tillinghast-Towers Perrin. While new threats,
such as sick building syndrome, repetitive stress claims, and computer-related
"techno torts" keep emerging, older founts of liability refuse to run dry.
Asbestos liability, for example, just keeps going and going. But as the chain
of litigation spreads from traditional asbestos targets—such as asbestos miners,
manufacturers, and distributors—to nontraditional targets—such as automotive
parts manufacturers, refineries, textile mills, and retailers—litigation surged
again in the late '90s. A recent RAND Institute for Civil Justice study found
that thousands of firms spanning more than half of U.S. industries have been
enmeshed in asbestos litigation, including firms with as few as 20 employees.
RAND also reported that asbestos-related bankruptcies have surged in the past
18 months.1
As new sources of litigation proliferate, the value of old insurance policies
increases proportionately. There is no statute of limitation on liability. Fortunately,
there's also no expiration date on most forms of commercial liability insurance,
if the alleged damage occurred within the policy period.
A rule of thumb is that the older a policy is, the less restrictive and more
valuable it's likely to be. Comprehensive general liability (CGL) insurance
policies issued before 1970 are particularly valuable because they generally
contain no pollution exclusions, no aggregate limits, and no limits to defense
costs. Policies from the 1970s, which contain a so-called sudden and accidental
pollution exclusion, are easier to apply to Superfund liabilities than policies
purchased after 1985, which contain a less ambiguous "absolute pollution exclusion."
Policies from the 1960s and earlier generally have no pollution exclusions at
all.
For many companies, the value of a typical portfolio of insurance assets
can exceed $1 billion. Of course, the older a policy is, the less likely it
is that its documentation will be neatly tucked away in a well-marked and easily
accessible file cabinet. The corporate downsizing and merger and acquisition
activity in the 1980s and 1990s, as well as the relocation of many corporate
headquarters from the Northeast to the Sunbelt, displaced both people and records.
As a result, institutional memory has been shortened.
Over the past two decades, insurance archaeologists have developed and refined
a complex methodology for reconstructing a company's complete insurance portfolio
extending back several decades. A blueprint for mining internal resources to
reconstruct historical insurance coverage can be read in an earlier article, "The Historic Insurance Audit: Investigating
Internal Sources." When gaps remain after such a search, it is often possible
to reconstruct the insurance record from external sources, a subject covered
in a companion article: "The Historic Insurance
Audit: Investigating External Sources."
Conclusion
Given the scope of current liability for long-past events, the disabling
of a company's access to its historical insurance coverage can be devastating.
In the event of disaster, the struggle to recover damages directly related to
the event are just the tip of the iceberg. The complete challenge, both for
disaster planning and in disaster recovery, is to maintain access to the full
range of a company's historic insurance coverage.
1Deborah Hensler, Stephen Carroll et al.,
"Asbestos Litigation in the U.S.: A New Look at an Old Issue," Santa Monica,
CA (August 2001), pp 10–11.