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.