Expert Commentary

The Historic Insurance Audit: Investigating Internal Sources

In today's environment of mergers and acquisitions, and litigation run rampant, it is a virtual guarantee that your company's insurance history needs a good deal of proactive reconstruction. The purpose of the audit will be to identify all potential preacquisition coverage including policies of any former owners. Whether a company conducts an insurance audit using internal resources or hires an insurance archaeology firm, the examination of historic records very likely will lead the auditors down a winding trail in search of both primary and secondary evidence of coverage.

Insurance Archaeology
June 2000

"Why should my company need an historic insurance audit? We've always maintained adequate insurance and kept comprehensive records. If we need to access a policy written 2 or 20 years ago, I don't see why we shouldn't be able to find it."

This kind of thinking might have made sense in 1950, when the average company rarely if ever changed hands and when the costs of civil liability were little more than a quarter of what they are now. In today's environment of M&A-per-day and lawsuit-of-the-month, it is a virtual guarantee that your company's insurance history needs a good deal of proactive reconstruction. To assess this need, ask yourself the following questions.

How many times has your company changed hands—or acquired new companies-—in the last 2 decades—or 2 years? How many times has it relocated or caused newly acquired subsidiaries to relocate in whole or in part? Count the liability threats that your company—or, if you are a government official, your municipality or other government entity—has faced or must be prepared to face. Be sure to include retroactive liability for the deeds and alleged deeds of all its acquisitions and predecessors. The list of actual or potential liability threats may include claims involving asbestos or environmental cleanup, perhaps for events that occurred decades ago; product liability, whether for implanted medical devices and pharmaceuticals, tainted beef or apple juice, leaking pipe fittings, or even scalding coffee; construction defects; repetitive motion stress or hearing loss; sick building syndrome; the Y2K bug or online intellectual property disputes. Suits that could entail crippling losses—even the death of a company—can arise out of almost any quarter.

Now consider the primary defense against these multiple threats—your company's insurance portfolio. Can you recall, or easily access, your company or government entity's complete current insurance portfolio, including essential endorsements, exclusions, and limits? What about historic coverage—stretching back 10, or 20, or 40 years—including the coverage possessed by predecessor companies? This exercise is not mental gymnastics for its own sake. As we shall see, both liabilities and currently accessible insurance coverage can extend backward for decades. Recovering and organizing an historic insurance portfolio thus becomes an essential survival measure for virtually every organization in the United States—including corporations and partnerships, nonprofits, insurance companies, municipalities, and other government entities.

Conducting an Historic Insurance Audit

Companies that have survived the corporate tumult of the past 3 decades have typically inherited a legacy of complex environmental and toxic tort liabilities involving the preacquisition activities of numerous predecessor companies. In undertaking an historic insurance audit, all of these programs should be included. A comprehensive, proactive approach to locating pertinent corporate records for the parent company, and all relevant predecessor companies, will save time and ensure that the most assets are located. In this, the second article of the series, we will examine the first phase of an audit, which involves the search of internal corporate records.

Establish a Corporate History

The first step in establishing the scope of the research is to identify all predecessor companies with existing or potential liabilities. Determine if there have been any previous owners for each company, and if so, the dates of change in ownership. The purpose of the audit will be to identify all potential preacquisition coverage including policies of any former owners. It is possible to reconstruct the corporate history of predecessor companies even when the records no longer exist. SEC filings, outside counsel's files, and recollections of former employees can provide details of prior ownership and identify potential sources of coverage.

Organize Existing Records

It is advisable to begin an audit by pulling and organizing all existing primary and excess liability policies or secondary evidence of coverage for the parent company along with the available documentation for the relevant predecessor companies. Detailed examination of the documentation probably will reveal gaps and discrepancies in information. Surprisingly, policies are often discovered that were not considered missing since they had not appeared on any lists. This exercise alone may add millions to the pool of available insurance and avoid jeopardizing valuable coverage because of late notice.

Getting the records organized sounds fairly simple and straightforward, but the logistics can be daunting when setting up individual folders for each policy and then ensuring that every copy of a policy and every endorsement, along with cancellation notices and changes in underlying limits, are placed in the appropriate file. Processing secondary evidence can be even more challenging. References to missing policies can be found in myriad types of records, including schedules of underlying coverage and renewal numbers on declarations pages, bills, letters, and accounting records. The end result of this Herculean effort will allow for clear communication with senior management and insurers, as well as brokers and outside counsel.

The investment in time and resources to organize the records will be greatly augmented if the complex and detailed coverage information for each insurance program is input into a database and illustrated on charts. Being able to quickly search hundreds of policies issued to numerous named insureds will save critical staff time when notifying insurers and dealing with their inevitable demands for records and policy information.

The advantage of a visual presentation lies chiefly in the immediacy with which priorities for further research can be identified and the possible monetary results quantified. Color charts can be used to illustrate changes in the corporate history and corresponding insurance programs, levels of policy limits purchased, amounts of coverage still available, gaps in documentation, and key coverage terms. Understanding the complexities of an historic insurance portfolio at a glance also will be an invaluable negotiating tool.

Once the valuable assets have been painstakingly assembled, working copies should be made and the original records preserved in fireproof vaults or file cabinets.

Research Missing or Incomplete Policies

Whether a company conducts an insurance audit using internal resources or hires an insurance archaeology firm, the examination of historic records very likely will lead the auditors down a winding trail in search of both primary and secondary evidence of coverage. The following points outline the process as it has evolved over the past 2 decades.

  • Include in the search any departments where records might document missing or incomplete policies or provide leads to possible outside sources of information, including the risk management, accounting, legal, contracts, real estate, corporate secretary, and safety departments.
  • Examine computerized indexes of records in storage and review record retention information maintained on a departmental level, which potentially could provide more in-depth information.
  • Interview records retention personnel, as their first-hand knowledge may be invaluable in locating records that might never be spotted in abbreviated entries on database printouts of files in storage.
  • Review the closing documents for each predecessor company to determine whether a schedule of insurance was obtained as part of due diligence and to identify crucial information on former employees, customers, and operations.
  • Investigate whether plant records have been maintained, as they may contain documentation of premium allocations, safety inspections, or audits by insurers, as well as claims information.
  • Interview former employees to establish their recollections of the missing insurance policies and the internal procedures for records retention. Leads can also be developed to outside sources of information, such as former brokers, government entities, or other parties that required evidence of insurance.
  • When reviewing the corporate records, keep an accurate log of where and by whom documents were found. If an insurer should contest the authenticity of your documentation, it may become necessary to prove specifically when, where, and by whom a document was located.
  • In the course of reviewing the corporate records, note any possible external sources of records, such as brokers, additional insureds, or outside counsel.

By this point, corporate managers typically will have assembled hundreds of pages of records relating to scores of policies issued to numerous entities over several decades. All primary and secondary evidence of missing policies should be integrated immediately into the filing system created in the preliminary audit, and the policy information should be added to the charts. This will identify clearly the remaining gaps and establish priorities for further research of outside sources.

The next article in this series will examine how to develop information in sources outside of the corporate records. Expanding the search to external sources is essential, and in some instances where catastrophes have destroyed records or where records have not survived mergers or acquisitions, looking beyond the corporate records may be the only hope.

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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