A company filing a property or business interruption claim arising from the September 11, 2001, terrorist attacks will be faced with several challenges in pursuing its claims. Obstacles will range from technical insurance coverage issues to typical challenges faced with any complex business interruption claim. Also, many of the companies affected are financial services companies that typically do not experience property and business interruptions claims.
The nuances of these losses, combined with the history that most business interruption policies are written to address manufacturing or retail type losses, will create a challenging claims adjustment process. Fortunately, these companies can pursue the same recourse that a manufacturer does after a loss, which includes calculating and documenting the claim under the coverage of the policy (should coverage exist) and submitting the claim to the adjuster and their accountant for review and payment. It sounds like an easy process, but is often stymied for various reasons. This article explains why.
Obstacles To Claim Settlement
The primary claim settlement obstacles can be summarized as follows.
Technical insurance claim issues. Either policyholder or insurer may not fully understand the proper application of the policy.
Claim process concerns. Effective settlements begin with a well thought out process that identifies a core claim team and establishes a plan of action.
Claim documentation and consistency issues. Information was not properly documented, communicated, understood, or is not available.
These obstacles are examined in more detail below.
Technical Insurance Claim Issues
Imagine yourself as an insurance executive with the knowledge that any decision you make on any one loss could impact multiple claims in multiple industries all for one event (the WTC). Accordingly, insurers will be very careful as to how they react to a variety of technical claim issues. The insurance industry is currently reviewing how to address certain policy provisions that are discussed in this article. The question that you should ask yourself is: What are you and other policyholders doing to ensure that you have as much information as the insurers have to help you make decisions on your claim?
One immediate step is to be sure to share notes with other policyholders about how they are addressing these issues while simultaneously implementing a systematic fact-gathering plan through your general counsel or insurance broker. From there you will need to explore how your claim could be either scrutinized or paid for under your specific policy.
Here are some of the challenging areas.
Multiple Occurrences/Deductibles. Some insurers or insurance companies may look at each airplane disaster as a separate occurrence and look to apply multiple deductibles. The Silverstein WTC Properties LLC (Silverstein) are at the forefront of this discussion. Silverstein, who holds the insurance on the WTC, contends that each of the two highjacked airplanes that crashed into the towers constitutes an occurrence for the purposes of insurance.
Depending on the magnitude of the loss and the limits of the policy, such an approach may be in the policyholder's best interest. Although the policyholder may be subject to multiple deductibles, this may also allow the application of multiple limits of liability as well. Most likely, however, the insurance industry's position will be to consider this a single occurrence (e.g., a series of related events arising out of an orchestrated act of terrorism), similar to a riot or a hurricane hitting multiple locations.
Valuable Papers/Computer Files. Policies may only provide a small limit for valuable papers or limited coverage to only restore computer files from back-ups. This could be problematic if the only back-ups were stored at the loss site. Also, some policies may provide coverage for the costs associated with recreating or re-engineering information that was lost. Where this coverage is afforded, a methodology must be developed to accurately capture the time and expense required in recreating the information.
Civil Authority. There is normally a component of business interruption that provides coverage if business operations are suspended as a result of an order of civil authority following loss or damage of the type insured against. These clauses vary greatly between policies and need a careful review to determine if coverage is provided.
For example, to invoke the clause, some policies require: (1) that the property of the policyholder suffer physical damage, (2) that physical damage occurs within a specified distance from the affected insured premises, or (3) that there be no physical damage to insured property. The broader the form, the more likely that a policyholder will be able to recover business interruption losses associated with involuntary airport or business shutdowns.
Be sure to check whether civil authority is part of the business interruption period of indemnity or if it is a separate stand-alone clause. A separate clause may provide more coverage than an extension of the period of indemnity.
Ingress/Egress. This provision may provide coverage for the inability to access your business premises due to a covered peril. Wording for this endorsement is as varied as the rest. The policy may require "prevention" of ingress/egress or may only require ingress/egress to be "hindered."
Idle Periods. This refers to a period of time excluded from the policy because such events would have occurred regardless of the loss. A good example of this is a union strike or a scheduled maintenance shutdown. Insurers will look to consider potential idle periods for your business. Discussing these items early in the process may help avoid arguments by gaining answers to the insurers' questions.
Extended Period of Indemnity/Gross Profits Coverage. These coverages may extend to cover any continuing loss of sales for a period of time after business operations are resumed. The period is normally limited to anywhere from 30 days to 2 years and is designed to allow companies the ability to rebuild market share that was lost as a result of an insured event.
Contingent Time Element. Many insurance policies provide coverage for business interruption and extra expenses in the event there is physical loss or damage to customers or suppliers of the policyholder. In the hospitality or entertainment industry, this arguably extends to damages suffered by "patrons" of the business, such as the airline industry. Insurance Services Office, Inc. (ISO), forms now include "dependent business coverage," which is similar in scope to contingent business interruption but may have more restrictive wording.
War/Terrorism Exclusions. Many of the largest insurers have taken public positions indicating that they will not invoke war exclusions to deny coverage. As a result, the insurance industry will not attempt to use the war exclusion to deny coverage. At the same time, however, reinsurers may challenge this. Of course, any terrorism exclusions underwriters added to World Trade Center (WTC) tenants' and landlords' policies as a result of the 1993 WTC bombing will most likely apply. Legislation is currently being considered that may provide relief for some policyholders subject to these exclusions.
Where To Begin. Look to identify your business interruption loss in three categories. First, start with how your business was physically impacted from operating or generating revenue. Second, consider how your business was affected, either by physical damage to your customers and suppliers, or through other constraints that could be covered, such as ingress/egress or civil authority events. Third, for extended indemnity period or gross profit coverage, consider the ongoing effects of these events and how your business was and will be affected.
Where possible, the allocation of the components of the claim will help you gain a better perspective of the real claim issues in an effort to move to settlement. The additional allocated claim information may also help you better manage expectations of your own management and the insurance adjusters. This approach may not be practical if the information is limited or speculative.
Claim Process Concerns
Now, consider where you are in the claims process. Have you received advanced payments? Have you provided your insurers a preliminary claim estimate? Are there areas of the claim such as "fixed assets" or "scope of damage" where you have obtained agreements in principle with your adjuster? Have you completed a preliminary business interruption estimate? Don't be discouraged if your responses to the above are not all a resounding "Yes." The elements of the WTC claims will be far more reaching than most losses.
Adding to the complexity of the claim process is the scope of the environmental damage that is now being measured in many of the downtown Manhattan buildings left standing. These buildings experienced a surge of foreign material that was contained in the gray dust clouds that enveloped New York City's downtown area after the two towers collapsed. Many tenants and landlords are still sorting out the extent of the damage to such sites.
The scope of property loss, cleanup, and rebuild time can directly impact potential sublimits, the period of your business interruption loss, and a general disruption to your business. If you are overwhelmed as to where to start, be sure to seek the advice and insight of a claims professional who has handled large complex losses in the past and is familiar with the claims process. A good settlement is not solely based on a good insurance policy but rather on the ability to effectively identify issues and communicate to your management and the insurer to help manage expectations throughout the process. Here are some specific areas to consider in developing an effective claim process.
Form a Team. Many companies have formed a Claim Recovery or Risk Management Task Force that addresses these issues in an effort to stay focused on the claim while running their business. These boards consist of in-house and outside consulting expertise. The Japanese proverb, "None of us are smarter than all of us," will hold true during this effort.
WTC Center claims have affected all areas of a company's business. A claim team would include facilities engineers, risk management, financial and accounting, outside claim accounting expertise that is independent of the insurer or broker, and possibly outside coverage counsel should liability be challenged.
Prepare a Critical Path Schedule. Be sure to develop an action-based claim management plan that takes into account all foreseeable issues and establishes a timeframe to research and resolve those issues. Obtain agreement from the adjuster's team and your own management team as to the overall goals and timeframe to work toward the claim resolution. If some of the technical insurance policy issues appear that they will not be resolved, then consider an alternative resolution approach. Many policies define the use of appraisal or arbitration to resolve disputes.
Effective Leadership. Good project management requires that a definitive leader be appointed and be held accountable for the project results. Typically, the claim leader could be the risk manager or someone in the controller's or finance group. Either way, it will have to be an individual who has broad knowledge of the business and is deeply involved in the claim. Pick a team leader who has the knowledge and authority to corral the troops needed to develop an effective team.
Be Aware of Delayed Settlement Process and Extended Timeframes. Insurance companies were already overloaded with claims prior to 9/11. The aggregate exposure to insurers and reinsurers across multiple lines of coverage will tax the resources of the insurance industry. Many insurers were already busy as a result of Tropical Storm Allison, which deeply impacted the Texas Medical Center in Houston. Adjusters and the experts they hire will be overwhelmed with the amount of claims that they are now required to adjust.
Delays in claim handling could become the rule rather than the exception. However, an increased adjuster's workload could be your opportunity to discuss an early settlement with your insurers rather than extend the claim process to the entire indemnity period.
Where To Begin. Early communication and agreements with the insurance company can speed up the claims process and lead to a more equitable settlement. Early in the process you will need to identify potential coverage issues that may be argued, develop an initial estimate of the loss, and agree with the insurer on specific steps and timelines to be followed. The earlier these issues are defined, the greater the amount of time to develop strategies for an effective preparation of your claim.
Claim Documentation and Consistency Issues
There is one small additional item that must be completed before actually getting your check from that insurer. A claim must be prepared that will be submitted not only to your insurance adjuster but will be reviewed and scrutinized by their accountants, underwriters, coinsurers, reinsurers, and other experts. Because the claim will be reviewed by so many parties, including your own management, it is important to compile a stand-alone document and well-documented road map of your loss and the corporate documents that support your analysis. "While business interruption policies define the nature of the indemnity, they do not define the exact documents required to support a claim." (IRMI— "Beyond the Policy: Documenting a Business Interruption Claim," by Daniel T. Torpey, February 2001).
Finding the right balance of what information is actually needed to support your claim, specifically business interruption, is no easy matter. The subjectivity of earning projections and other business interruption issues can create a protracted settlement path simply due to someone's perspective or personality. Here are some ideas to consider.
Business Interruption. As mentioned, forecasting business interruption losses will be very challenging given the volatility of the markets and dramatic changes in the economy since 9/11. How will the change in the business economy be considered in your claim?
Insurers will expect comprehensive, well-documented claims that address the dynamics of the market. The insurer will hire experts in the area of business interruption, not simply to audit your claim, but to develop their own independent analysis of your loss. Determining the most logical, well-supported approach that anticipates the insurers' arguments, if any, in order to provide for an effective and productive claim adjustment process can be a long and arduous process.
One way to avoid confusion is to analyze the claim through a variety of methods, such as sales trending, market share information, daily sales and transaction flow before the event, and other statistical methods that will allow you to take a critical look at a variety of loss projections.
Extra Expense. Policies containing extra expense provisions may be used to compensate companies for the added costs of relocating and resuming operations. Many companies have already incurred substantial extra expenses by relocating to new office space, setting up temporary services, such as telephone, and increasing existing services, such as cellular telephones and remote computer access. Other extra costs have ranged from buying new handheld PDAs, to employees buying clothes so they can go to work because they could not gain access to their apartments in Battery Park. Insurers will see the extent to which policyholders' employees tried to get back into business as quickly as possible. Policyholders should be accurately identifying and capturing these costs and should look to these and other provisions to secure advance payments from their insurers as quickly as possible.
You ultimately need to demonstrate that these costs are incremental and that providing a box of invoices to the insurers marked "extra" does not result in immediate payments. A properly documented extra expense claim will specifically identify the extra costs incurred along with any analytical tests that demonstrate that such costs are indeed incremental.
Interdependency of Property Damage or Property Loss. Here is where consistency comes into play. How does the nature of the items claimed in your property loss relate to your business interruption claim? In other words, the insurer will need to understand how the physical or insured impairment of your operations affected your business. If a hotel is only operating at a 50 percent occupancy rate, and the physical damage is limited to one hotel room, there is likely to be no business interruption.
Keep in mind that physical damage and physical loss are sometimes different items, yet both may be insured. Entire articles and case law surround this topic.
Where To Begin. Discuss with the adjuster the types of claim documentation and business interruption analysis that you are evaluating to develop your claim. Provide them some sample data and preliminary analysis or estimates if available. The more you engage the adjuster in this process, the less homework they need to do when reviewing your claim. This can also save some unnecessary work on your part. At the same time you will need to manage the expectations of your own company so that management is not expecting the insurance proceeds to create a banner year in a downward economy.
How will companies overcome some of these challenges and obstacles in order to pave the road to settlement? By addressing obstacles early in the process, many companies will establish a healthy rapport with their adjuster team. The more you understand and accept the fact that the adjusters and their experts will have many questions about your business and the claim you submit, the better off you will be in dealing with the minutia of the claim process. In addition, a little patience and a sense of humor can't hurt either.
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.