Risk Managers: For a specific Tornado Insurance Loss Case Study this informative article from Brian Dodd is essential reading
Introduction
Most large industrial and commercial businesses share a serious commitment to sound risk management, and have loss prevention programs and Business Continuity Plans (BCPs) in place. Together, these help minimize the chance of disasters or catastrophic events from ever happening, and if by chance they do, the BCPs help the companies in most respects for its employees, data and technology, public relations, logistics, and a multitude of other continuity issues necessary to resume operations with minimal disruption as quickly as possible.
Businesses also rely on custom tailored insurance programs with unique and unusual coverages to help them meet their risk management challenges. These insurance solutions for property damage and business interruption balance the business’s appetite for risk versus the costs of the insurance and the substantial self-insured retentions.
It is easy to imagine that with top-notch planning and loss prevention programs in place, such a thing could never happen to your company. Yet complex property losses to facilities and equipment resulting from natural or manmade causes occur to other companies every day.
No matter how many scenarios are considered, it is impossible to imagine everything that might go wrong after facilities and equipment are damaged or destroyed. What is certain is this: After a significant loss, the business will get a first-hand look at the effectiveness of it Business Continuity Planning, whether or not the insurance coverages in place will ultimately fund the required financial recovery as intended, the financial realization of its self-insured retention, and an understanding of the actual property and business interruption claims handling process.
There will always be disputed issues, and a misconception that insurance should pay for virtually everything. In truth, even the most comprehensive insurance program does not pay for everything claimed, and in a claims situation, the insurer and the insured have naturally opposing interests.
Following a loss, companies quickly realize that the insurance claim process itself can be a risk if not properly executed by either party!
Insurer Notification and Initial Mitigation
After the loss is reported to your broker or insurer, which should happened immediately, a staff or independent adjuster will be assigned to the claim. The adjuster will play the leading role for the insurer(s), but may not have actual financial authority. He or she will report to key decision makers within the insurance company for approval on significant dollar items and disputed elements of the loss, who may in turn report to reinsurers.
The adjuster can be quite helpful in advising on what steps to take to prevent further damage and to mitigate the loss. They can direct the insured to firms that can provide the necessary cleanup and emergency repair services.
This is usually quite a relief for the damaged company right after a loss. (Try a Google search on “emergency damage mitigation.” The number of companies that appear in the search results is overwhelming).
Because these firms are known to the insurer, they will respond quickly and the cost of their services will be budgeted or approved on a time-and-materials basis with oversight by a clerk of the works appointed by the insurer. You should feel free to check references and conduct brief interviews of any mitigation firms suggested by the insurer, and in fact, the insurer would prefer that you make your own decision on what firm to hire.
The initial cleanup and make-safe activities are performed quickly by experienced personnel which is usually reassuring to the insured, particularly since such mitigation efforts post-loss are required under the policy. In this article we will not discuss losses where contaminants or other environmental factors that may come into play.
The Process of Preparing, Documenting, Settling the Claims
PreludeThe “Process” is a difficult topic to research for many Risk Managers, Senior Management, and Owners. Why? Many assume that since each business is different, because the type and extent of damages caused by each loss vary so much, and insurance coverages and other factors in play make every loss so different that there is no hard and fast process.
Another big factor is that the insurer and the policyholder prefer and usually require confidentiality not only for business reasons, but because at the end of the day, disputed elements of claims are usually “negotiated” in dollar amounts without admitting coverage exists for the disputed items.
The good news is that the process will be the similar for most significant property losses. Here is simplistic overview of the process you should expect:
After or concurrent with the mitigation activities, the process of presenting and settling the Property and Business Interruption (“B.I.”) losses will include everything required to reach agreement with the insurer on the following major categories:
- The cause of the loss.
- Whether everything claimed is covered by insurance, based on a close review of the policy's terms and conditions.
- The entire scope of damage and necessary repairs or replacement of equipment and facilities including the salvage value of any equipment to be replaced.
- The extent of demolition and where the debris should go.
- The building code compliance updates, if any, for reconstruction and when they will be funded.
- The necessary time to complete all of the work at the loss site, even though certain policies allow the insurance to rebuild differently, or even at a different site if the loss is extreme.
- Business Interruption and Special Coverage/Extra Expense calculations backed by schedules and historical data.
- Properly documenting all other aspects of the claim in a means to suitable to the insurer.
- The value of all of the items above.
