Expert Commentary

Disaster Planning Imperative: Preserve Your Company's Historic Insurance Assets

Sheila Mulrennan explains how today's challenge, both for disaster planning and in disaster recovery, is to maintain access to the full range of a company's historic insurance coverage.


Insurance Archaeology
February 2002

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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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