Expert Commentary

Managing Property and Business Interruption Claims

Working to reach a reasonable and timely settlement on a complex property damage and business interruption insurance claim has been a goal that has befuddled many risk managers, CFOs, and corporate counsel.


Catastrophe Risk Management
August 2015

Issues are to be expected and may include:

  1. Coverage issues—the insurer contends that the policy doesn't cover what the insured thinks it covers.
  2. Engineering issues—the insurer thinks that repairs can be done more cheaply or faster than the insured believes is possible.
  3. Quantification issues—the insurer thinks that the claim overstates the actual loss sustained by the insured.

But, regardless of the specific issues that may arise, both sides should generally be in agreement as to the "claim process," right? This article addresses the specific nuances of the claim process and how the insured can work to best expedite the claim and reach a reasonable settlement.

Items to consider include the following.

Seeking Outside Help

When should we seek outside help to prepare the claim, and what are our options? Generally, the insured should use a firm to help to prepare its claim, especially when the claim is either significant or complex, or both. Most policies include coverage for "claim preparation costs" or "professional fees." These provisions are helpful, as they will cover fees incurred by insureds to have their claims prepared by outside forensic accountants. Most insureds like to use a forensic accounting firm that is independent of their insurance broker, especially if the claim involves coverage issues. In addition, most forensic accountants affiliated with brokers will not serve as expert witnesses should the matter go to litigation. Insureds also tend to avoid using their auditors, as they are concerned with Sarbanes-Oxley issues, and they understand that their auditors may audit their insurers as well.

Seeking Coverage Counsel

When should you retain coverage counsel, and how should you manage their role? If a claim is significant or is expected to have 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 understand specific issues and to provide a detailed review of coverage.

Submitting a Preliminary Claim

How soon should we submit a preliminary claim after a loss? It is often very difficult to assess the impact of a business interruption loss shortly after the incident. The insured may not have a good understanding of how long repairs will take, how successful they will be at mitigating the loss, how to measure the specific quantification of the loss, or how to account for coverage issues, if any. However, it is important to manage the expectations of the adjuster and the insurer, especially as they consider reserves for the loss. Generally speaking, it is helpful to prepare a preliminary estimate of loss amounts (with appropriate caveats) within 30 days of the loss. This estimate should be submitted as "preliminary" and should be updated periodically as additional information becomes available.

Managing Expectations

How important is it to "manage expectations"? When a loss occurs, it is often very difficult to assess and predict the final recovery. When preparing a claim, it is critically important that the insured work to manage the internal expectations of its management so they don't assume unrealistic expectations. For example, if the risk manager and the adjuster agree to a settlement amount of $15 million, but the CFO was expecting $20 million, the agreed value will be questioned and problematic.

It is equally important for the insured to manage the expectations of the adjuster, who needs to establish reserves. For example, if the initial estimate of the loss is $20 million, it will be very difficult to wrest $25 million from the insurers, even if the amount is reasonable. Communication internally and externally is very important to an efficient claim process.

Seeking Cash Advances

What should we expect for cash advances? This should be simpler than it sometimes is. The insurer should provide adequate advances to fund repairs. Insurers can be reticent to pay, as they clearly understand the benefit of holding money as long as possible. Consider this example:

An insured suffers a $10 million loss, including cleanup, loss of inventory, and damage to equipment. It is covered for property at "replacement cost value" (RCV). If the insured does not replace the assets, it is only entitled to "actual cash value" (ACV). (Assume that both sides agree that ACV is 60 percent of RCV.) So, suppose the insured spends $7 million for cleanup and repair or replacement. What should it receive in cash?

  1. $10 million
  2. $8.8 million
  3. $6 million
  4. $0
  5. Enough that the insured can pay all costs without affecting its own cash flow.

If you answered A, you've probably never had a significant claim. If you answered C, you probably work for an insurance company. Insurers may contend that they only need to pay the ACV until the insured has demonstrated that it has exceeded that amount. The correct answer is E. It is very simple. The insured bought insurance and shouldn't be forced by the insurer to tap into its own cash to fund repairs. If the insurer insists on paying only the ACV, it needs to pay B ($7 million + (60% of $3 million)).

This can be an important issue, especially if cash flow is as important to the insured as it is to insurance companies. It might be helpful to pose this question to your insurer before a loss occurs and your cash flow is strained.1

Further, should the insurer provide cash to fund repairs that have been made but have not been fully investigated and approved by the adjuster and its accountants? It would seem fair, but some insurers contend that it is their prerogative to fully review and vet all issues before they make a payment. (Other insurers more reasonably will pay a cash advance to reasonably cover all costs incurred but will be careful not to pay more than the final claim amount.)

Seeking Engineering Advice

When should the insured consider engineering assistance? Outside engineering assistance is most necessary when the "period of indemnity," or the time to complete repairs, is questioned. This can be particularly important when the insured decides not to rebuild "as was." For example, if a chemical plant is badly damaged by a fire, and the insured decides not to rebuild—or to rebuild in a very different way—it may require an outside engineer since the actual time to complete repairs is not available. Outside engineering assistance is often also important on a builders risk claim, where the planned time that a project would have been complete had the incident not occurred is often questioned.

Filing a Proof of Loss

What is the benefit of filing, and when should I file, a proof of loss? The proof of loss is a legal document that is signed by the insured that specifies the claim amount. In many cases, it is filed only when the claim is fully resolved and shows the actual settlement amount. But, the filing of a proof of loss often provides a "line in the sand" for insurers that either need to pay the claim or specifically assert why they are not paying the claim. Should the matter go to trial, the date that the proof of loss is filed often marks the date at which pre-judgment interest is calculated.

Filing a Lawsuit

If the claim gets contentious, when do we file suit? Most coverage attorneys—on both sides—work hard to avoid litigation as they recognize that litigation can be costly and time consuming. However, if a claim can't be settled amicably, it may be necessary to file suit. The right time to file suit is probably when it is clear that a reasonable settlement is not achievable. Be mindful of limitation to file suit clauses in the policy. Should you be approaching that limitation and remain optimistic that a settlement can be reached, ask your insurer for a "tolling agreement" that will extend the time to file.

Conclusion

The insurance claim process should not be too difficult. Both insured and insurer should work together to assess the impact of the loss and should manage their own and the other side's expectations. If the process goes smoothly, it allows both parties to focus on the critical claim issues, such as coverage issues, engineering issues, and quantification issues.


Christopher M. Brophy is a senior managing director at FTI Consulting in the Business Insurance Claims Practice of FTI's Forensic and Litigation Consulting business segment. He writes the catastrophe risk management column for www.IRMI.com. For background and contact information for Mr. Brophy, see his full biography.

James Dunn is a principal in the Property Insurance Practice at Integro Insurance Brokers. See his full biography.


1Note that the insured should receive an amount to cover all costs incurred plus an amount to cover costs that will be incurred before it receives the next advance.


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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