Expert Commentary

The Historic Insurance Audit: Investigating External Sources

When reconstructing a company’s historic insurance portfolio, it is often necessary to look outside the firm’s internal records. This article explains how to conduct such a search, where to look and who to contact to find “buried treasure” -- older, less restrictive liability policies that can provide coverage for past occurrences which pose a threat of current liability

Insurance Archaeology
September 2000

The second article in this series, "The Historic Insurance Audit: Investigating Internal Sources," discussed the first phase of the historic insurance audit: investigating internal records to reconstruct the company's complete insurance coverage history and to identify any missing policies. This article addresses the next phase—extending the search to external sources.

Our starting premise is that old insurance policies often provide protection against current liabilities alleged for events that may have taken place years or even decades ago. As a rule of thumb, the older the liability policy, the less restricted it will be by policy limits or exclusions invented in the past 20–30 years. To reconstruct a company's historic insurance portfolio is an essential best practice in our litigious age.

Carrying the Search to External Sources

It is unlikely that corporate records alone will provide complete documentation of a company's missing insurance policies. Decades of mergers, downsizing, and relocations have accelerated the trend to destroy records as a means to reduce overhead. Consequently, risk managers in the New Economy now have to address the liabilities of the Old Economy with seriously reduced internal resources.

In most cases, the paucity of existing internal records will necessitate extending the search to external sources. While even the most exhaustive searches of corporate records may yield only secondary evidence, the actual policies may be waiting to be found in the broker's records or a government archive.

Reconstructing the pre-acquisition coverage for predecessor companies can pose the most difficult challenges because all of the records may have been lost when the operations were discontinued or spun off. It is not uncommon for the closing documents to have disappeared along with the operational records, forcing the search itself to begin in outside sources. Identifying those external records is one the most crucial steps in the historic insurance audit.

The first step to establishing these sources is researching the corporate history. If needed information is not available in company records, then publicly available outside sources—old Moody's reports, Securities and Exchange Commission (SEC) filings, or websites on the history of certain industries—may identify crucial sources of more detailed information, such as former owners, outside counsel, major contracts, customers, and names of former employees.

Former Employees

The internal phase of the insurance audit will likely point insistently toward outside sources, providing a wealth of leads—most importantly, the names of former employees. In this era of short-term institutional memory, it is imperative to track down these people and discuss their recollections of former domestic and London brokers, additional insureds, certificate holders, claims adjusters, and outside counsel, as well as details of major claims or litigation. Reconstructing this type of oral history has time and again led directly to locating actual policies as well as to a variety of significant secondary evidence of coverage in the records of outside sources.

There is one bright spot in current search conditions: while job tenures may be shorter than ever, lifespans are longer. That means it's easier to find former employees capable of recollecting policy history stretching back several decades. Moreover, the Internet has made it much easier to find these former employees quickly. The experience of insurance archeologists provides ample grounds for optimism in this regard. Again and again we have found cooperative former employees able to recall key details from insurance programs dating as far back as the 1950s.

Former Brokers

All of the former brokers who placed the primary and excess coverage in the years where policies are missing should be identified and contacted to request copies of any records that have been retained. Often, companies hesitate to contact brokers once they have located partial documentation of the policies, expecting that insurers will either accept the cover notes, binders, endorsements, or secondary evidence without requiring copies of the actual policies.

Given the unprecedented consolidation of insurers and the ensuing disruption of records over the past 5 years, however, it is imperative to contact the brokers as soon as it becomes clear that a policy is missing. While the insurer should also be contacted, it is not realistic to rely solely on the insurer to provide a copy of a missing policy.

Likely as not, the insurers will have destroyed their records due to the usual pressures of doing business at the end of the 1990s—downsizing, relocations, and mergers—or just plain bad luck. Valuable time will be lost if the policyholder refrains from calling the broker until hearing that the insurer cannot locate a copy of the policy. Brokers have been affected by the same market forces as insurers, so requests for records should be made as quickly as possible to all parties at once.

Another reality facing companies that attempt to track down their former brokers is the difficulty in identifying the current corporate successor. This can be a research project in itself, particularly with small- to medium-sized domestic brokers and their correspondents in London. Insurance libraries, state insurance departments, insurance archaeology consultants, and old-timers at existing brokerage firms may all be able to help to identify the current entity which may have retained records.

A common practice among retail insurance brokers is the use of specialty brokers to place excess coverage in the surplus lines market. Since these firms (or their successors) may also be a source of records, they should be contacted as well. Former employees of these firms may also be able to identify their London correspondent if excess coverage was placed with Lloyd's.

Mining Lloyd's

Traditionally, the London brokers have been one of the best sources for documentation of missing policies for U.S. policyholders. Most of the excess coverage in the North American market prior to 1960 was placed with Lloyd's, and the London brokers retained much better historical records than their U.S. counterparts.

Since much of the communication was relayed either by cable, telex, or letter, the microfilm correspondence files reveal a wealth of information on the details of the primary coverage, major claims, and amendments to the excess program. One of the most important types of records that London brokers retain are "slips." These documents were used to record the respective percentages underwritten by Lloyd's syndicates and the London market companies. Slips typically contain details of the type of coverage provided, the form and limits of liability, and information on the underlying primary limits.

Significant finds have resulted from locating as small a scrap of information as a letter referring to the missing policy by number. In one case, the policy number contained a three-digit prefix code that identified the London broker. The broker was then able to retrieve documentation of both slips and policies, documenting over $150 million in policy limits, all issued prior to 1971 with no pollution exclusions.

Additional Insureds and Certificate Holders

Because so many contracts contain hold harmless and indemnification provisions, it has been a routine requirement for companies to arrange to have customers, lessors, vendors, railroads, and financial institutions added as additional insureds onto their primary policies. Depending on the policy limits specified in the contract, the excess policies might also be amended to add third parties as additional insureds. Any of these parties may have retained copies of certificates and, in some instances, copies of actual policies. Tracking down these types of leads has been an essential part of insurance archaeology research.

Government Entities

Red tape can work in favor of companies when they need information from municipalities and state and federal agencies as well as various branches of the military. Government contracts have historically been the most bureaucratic in terms of insurance requirements and documentation. Now companies that complied with these requirements can access records by making Freedom of Information Act requests, retrieving the valuable evidence of coverage that has often survived simply due to bureaucratic oversight.

In one instance where the successor company had no records of a predecessor company that had been spun off, an interview with the former president uncovered details of defense contacts which required evidence of insurance. Copies of the actual policies issued between 1948 and the early 1960s were then retrieved from federal archives.

Outside Counsel

In negotiating terms for the commercial contracts mentioned earlier, companies have routinely sought legal advice. The files of law firms that acted as general counsel are frequently one of the most fruitful external sources of documentation of old insurance coverage.

Old litigation files of defense firms retained by insurers are another significant resource for information on missing policies. Not only copies of policies surface in these contacts, but also correspondence with insurers identifying names of claims personnel along with details of settlements.

If the research involves predecessor companies, the closing documents will typically identify numerous leads to external sources, including names of outside counsel, major contracts, customers, and details of civil litigation that may have involved insurance. If this information cannot be located in internal files, it can often be tracked down in the records of outside counsel for both the buyer and the seller.

Buried Treasure

While it is often a convoluted trail that leads to evidence of old insurance policies in external sources, the search for such evidence is a genuine treasure hunt. That "treasure"—in the form of millions or tens of millions of dollars worth of insurance policies—can provide coverage for past occurrences that pose a threat of current liability. In the past 20 litigious years, risk managers have come to appreciate that past insurance assets can be as crucial to a company's financial health as future revenue sources. An essential aspect of reconstructing the historic portfolio of pre-paid assets is locating evidence of missing policies in sources other than the corporation's records.

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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