"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.