Expert Commentary

Insurance … The Other Side of the Chinese Wall

Are you prepared to deal with a significant claim (beyond expected losses and cash flows)? Are your expectations in alignment with those of your underwriters/claims adjusters?


July 2006

When faced with a significant claim (relative to the corporate balance sheet), that was not intended or necessarily expected, the insured may be in for "a bumpy ride." You may have met your underwriter(s), but do you know the claims people on the other side of the "Chinese Wall"1 dividing departments of some insurance companies?

An Insurer's Credibility

The Chinese Wall, built by insurance companies, separates the underwriting and claims departments. There may be some legitimate business reasons for the separation; however, insurers need to be mindful of the impact this has on their credibility. An insurance company is one economic family of departmentalized functions and usually one brand.

Many insureds are blissfully unaware of this segmentation. When the claim service runs contrary to the insured's expectations, the insurer's reputation and brand suffer. Insurers need to communicate a clear message following a claim to set reasonable expectations. Then, they must meet their responsibilities and pay as represented. Insureds expect that what they purchased will be delivered fairly, as represented in underwriting discussions as well as reflected in the insurance contract by any and all underwriting firms that participate on an insurance program.

If insurers want to change the terms of their agreements, insuring terms, or claims practices with clients, they should do it prospectively with as much notice as possible (preferably a year), not next month nor right now. If insurers lose their credibility, then what do they have to sell?

Insured's Expectations

Many insurance purchases are transacted based on a great deal of discussion about limits, retention levels, credit quality of insurers, policy terms and oh, do not forget all the discussion about pricing (premium). During this process, it is easy to lose sight that the objective is to buy protection. When a claim occurs, the insured will expect to be protected and will expect payment. However, if most of the insurance placement endeavors are about pricing, there may be a totally different set of expectations, on the part of the insured versus the insurer(s), for the handling of claims. Risk managers should place more emphasis on making sure the claims practices are aligned with expectations.

Aligning Expectations

While it is important to do the due diligence on the credit quality (ability to pay) of insurers that you deal with, it is of equal importance to determine their willingness to pay. The willingness factor often deals with a clear set of procedures/expectations that need to be spelled out, discussed, and agreed. Insurer expectations, including that of their senior management, can be aligned with the expectations of the insured.

What can be done to align claims practices with expectations?

  1. Appoint independent claims adjusters with agreement from the key underwriting firms (insurers).
  2. Meet the insurer's key claims personnel who are responsible for various types/sizes of claims. Determine the circumstances and the extent of involvement desired by senior insurance company claims personnel with the appointed adjusting firm.
  3. Draft claims guidelines to include:
    • Notice of certain types and/or sizes of losses
    • Reporting and communication requirements
    • Investigation processes, appointing adjusting firms/individuals
    • How expenses are to be shared

    All of these issues can be negotiated to help set reasonable expectations before a claim occurs.

  4. Ask your appointed adjuster to critically read your insurance policy to help eliminate ambiguities contained within the insurance policy before serious claims arise. (Good timing would be prior to renewal.)
  5. Use attorneys as "coaches" and not as immediate litigators (if you can avoid it). This approach will help preserve relationships with key insurance carriers for future claims and fair settlements can be achieved with less cost for all parties.

At the time a significant claim occurs, the risk manager will be asked to answer to his or her senior management: "Do we have a receivable OR an expense?" The steps above will provide a great foundation and support for helping to arrive at the answer that, "We have a receivable." The all-too-easy excuse is to state that the claims process is unreasonable and the insurance companies are to blame. However, the risk manager will still need to be able to answer the questions that will inevitably follow about specific efforts to clarify the claims protocol with insurers and/or the appointed adjuster prior to significant loss(es).

No Surprises

Another key fundamental point to aligning claims practices with risk managers' expectations is for the risk manager to be very certain as to the accuracy and clarity of the underwriting information presented to underwriters for consideration. Make certain that underwriters comprehend the key risks. No claim is likely to go well when the information submitted about various risks differs widely from the facts involving a claim.

A case in point is the serious "underreporting" of information that was discovered when claims from the 2005 hurricanes were being adjusted. Many claims were brought for recoveries far higher than the values reported to underwriters when coverage was negotiated. In these cases, underwriters believe they were not dealt with on an equitable basis. The insurers may have grounds to deny coverage. In any event, expectations are clearly out of alignment, and there are likely to be significant problems settling these claims.

In addition to the claims-adjusting guidelines cited earlier in this article, risk managers need to inform their operating units about what mitigation actions need to be taken at the time of a loss. The operating units should also have a good understanding of claim-reporting protocol such as:

  • To whom do they report an incident
  • What facts are required
  • What guidelines exist for emergency repairs
  • What actions can and should be taken to mitigate business interruption

Insurance, to the casual observer, is confusing at best. The many nuances and idiosyncrasies associated with insurance tend to be forgotten when a significant claim occurs. The overriding concern: Is the claim covered or is it not? If not, why not? Careful planning can align expectations of the insurers and the insureds to eliminate surprises at the time of loss and obtain expected loss settlement when claims occur.


1"Chinese Wall" is a common business/banking/finance term meaning "an insurmountable barrier, esp. to the passage of information or communication." See Wikipedia for further definition.


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