Tag Archives: contractor

The Myth About Contractors and Risk

The notion that by outsourcing or contracting you have transferred your risk to another party is a myth. Senior executives, both in government and private enterprise, say, “There is no need to worry about that risk – I have transferred that to the contractor.” This is simply untrue.

If you own the consequences (or at least part of them), then you own the risk.

For example;

In the TV series “Air Crash Investigation,” there is an episode titled “Dead Weight.” In this episode, maintenance staff working for a company that is sub-contracted to conduct maintenance on behalf of Air Midwest’s primary maintenance contractor skip nine of 25 steps detailed in the maintenance manual when adjusting the tension on the elevator control cable. As a result, the cable is unable to traverse through its full range of motion.

When Air Midwest flight 5481 took off overweight, the center of gravity shifted rearward when the landing gear was raised, which pitched the nose higher. Because of the issues with the elevator control cable, the pilots were unable to bring the nose down. The aircraft stalled and crashed into a hangar on the ground, killing all passengers and crew on board.

The issue arose because there was no contract oversight/assurance by either Air Midwest or the primary contractor.

A contract is a control — but a control is only as good as the measurement of its effectiveness. Organizations that outsource simply cannot afford to assume that, because there is a contract in place:

  • They have outsourced the risk to the contractor
  • The contractor’s performance will be as contracted and as reported.

This last point may seem a cynical one, but you need to accept that the primary driver for a contractor is to maximize profit. If shortcuts can be taken, they are likely to be pursued.

What is even more important for organizations to understand is that, if the function that is contracted is a compliance requirement, and if there is a compliance breach, it is the organization — not the contractor — that will be held to account.

So, what are the keys to reducing the outsourcing risks?

Firstly, the organization needs to ensure that, before developing the solicitation documentation for an outsourced function, the risks during the contracted period are identified and assessed and treatments (such as oversight and performance measurement) are fully built into the contract. It is absolutely critical that compliance risks with the highest-level consequences are included in this list.

Secondly, the organization needs to ensure that contract performance is actively monitored and measured (i.e. do not simply accept contractor’s performance reports as fact).

In essence, organizations need to remember that, although you can outsource responsibility for the management of functions, you cannot outsource accountability for the consequences of not managing risk. In simple terms, if the contractor fails, the organization fails. If an organization owns the consequence, it owns the risk.

If your organization is one where contact management and contract assurance are not front of mind, or yours is one where the assumption is that the risk has been transferred to the contractor, you are in a dangerous position.

The Value Game™: A New Class Of Business Methods For The Condominium Reconstruction Market

Part 1: Correcting a Distorted Insurance Market

For many condominium associations, the maintenance, repair, and reconstruction industry has devolved into a minefield of distrust and dysfunction. Countless lawsuits have taken their toll on the industry to the point of near dysfunction where many contractors simply walk away from condominium projects. The worst form of “capitalism” ensues where everyone acting in their own best interest is in fact acting in the counter-interest of their community. The Value Game promises to reset this negative incentives condition while enhancing community resilience.

Here's How The Problems Start:
The board of directors of a homeowner's association is entrusted by the residents to hire a contractor to perform a complicated reconstruction project. Unfortunately, condominium board members are not very good at writing contracts or issuing requests for proposal or collecting bids. When a contractor is selected, the scope of work is often poorly established. The expectations between the community and the contractor begin to diverge. Soon, a law firm is engaged my some residents to sue the contractor for damages. After a long battle, a settlement is awarded, but it is not enough to fix the problem after expenses are paid.

A Chain Reaction:
Fortunately, the contractor in the suit was insured, but this does not cover the personal, professional, and opportunity hardship of defending against the suit. The insurance company also increases the premium for coverage for condo projects. Most good contractors say, “it's just not worth the trouble.” As the pool of available contractors dries up and the price for reconstruction increases, many condos are forced into deferring maintenance in a distorted market.

Cascading Failures:
After a while, a condominium springs a few leaks in their piping system. Each leak results in a relatively small water damage claim. When the insurance company notices several claims in the same building, they begin to fear that a mainline is about to rupture next, and threaten the condominium with cancellation of their policy unless the community replaces the entire system immediately. Now the insurance industry is in a double jeopardy: they force the contractor out of the market and they force the condo out of the market to basically avoid suing themselves.

The Dysfunction Deepens:
Banks will not make construction loans to condominiums that are not insured. Likewise, they will not make mortgage loans to buildings that are not insured. The property values plummet and the owners are sent under water. Soon they begin to default on the mortgages that the banks already hold. More maintenance is deferred as owners move out and renters move in. Buildings fall apart and become unsafe. Banks pull out of the market to avoid defaulting on themselves. The wider community suffers.

The Value Game
The Ingenesist Project is currently deploying The Value Game to the condominium reconstruction market with remarkable success. The Value Game is a new class of business methods that alters the incentive structure of a distorted market such that everyone acting in their own best interest is in fact acting in the best interest of the community. Clearly the intention is to demonstrate that asset preservation is the domain of engineering and not the legal system.

Here Is How The Value Game Is Formed:
The first thing is to identify the “shared asset” in whose best interest it is for everyone to preserve. In this case, the shared asset is the physical condominium building where preservation is the context about which a community interacts.

If we look at each of the players individually, we see some consistent patterns.

  • It is obviously in the best interest of the residents to have a safe and well-maintained home.
  • It is in the best interest of the contractors to have a successful and profitable interaction with the building.
  • It is in the best interest for the Insurance industry to reduce the risks that they underwrite.
  • It is in the interest of the financial industry to loan money into a viable, organized, and disciplined community.
  • It is in the best interest of the real estate industry to represent strong values and complete insurability of assets.
  • Finally, the broader neighborhood benefits from the presence of a viable condominium community.

In short, it is actually in everyone's best interest that the others are successful.

About The Value Game Game Board
The first rendition of the Internet was populated by static websites built for a person, or to sell a product, or to deliver entertainment, or to provide information. The next level of the Internet included social media, where users actually create the content that populates a website such as Facebook and Twitter, etc.

The next level of the Internet is taking on a form consistent with the Value Game where a social network is built about an asset that communities share.

Part 2: Case Study — High Rise Condominium Re-piping Project

The current case study is a condominium re-piping project in Portland, Oregon. The actual community consists of 200 units (400 residents) who occupy a single high-rise tower that must undergo a major reconstruction project that will impact everyone. The total value of the project is about 3 million dollars. This is real money in a real Value game.

For this project, we built a website for the physical building with its own social network where all of the different (and willing) players can interact with each other to preserve each other's best interests.

The first thing to accomplish is to reduce the likelihood of diverting incentives that can result in litigation. This may be accomplished by introducing strong community management. In this particular case, a professional engineering firm was hired to represent the best interests of the asset. The engineers represent the needs of the homeowners association to selected construction technologies, defined project scope, wrote the RFP, wrote the contracts, selected the contractors, and managed the project.

The Social Network Dynamics
The website used in this case study is a common open source WordPress platform with a Buddy Press backend to provide “Facebook-like” features (except with privacy). The engineering firm submits all reports, surveys, test results, assessments, photographs, schedules, products, accessories, and plans onto the website for members to see equally (there are some exceptions to protect financial data).

Individual residents are invited to form “groups” and start “threads” in topics for which they have an interest or a concern. People naturally migrate toward other people with similar interests and they build relationships.

Contractors are able to see all of the assessments, conditions, and work scopes directly from the website instead of paper submittals. They can ask questions and post ideas of their own for community review.

Engineering firm(s) can monitor discussions and collect frequently asked questions, which are posted in a FAQ. Everyone gets the same correct answer to their questions without rumors or speculation.

Communities: Community meetings are held. There is no bickering or infighting because everyone is educated and prepared to ask unique and relevant questions of the presenters. When a community is unified, they can easily come together to make important decisions that impact the quality, cost, and schedule of the project.

The insurance company is given limited access to the website which demonstrates that the community is acting to mitigate the risks that the insurance company underwrites — this keeps the policy in force.

With website access, the insurance industry can also see that licensed engineers professionally manage the project in a vibrant community. This reduces the likelihood of litigation against contractors. The insurance industry can now classify this project among “commercial” insurance pool instead of the litigious condominium insurance pool.

Contractors feel comfortable with this professional engineering management and insurability, which brings more contractors to market thereby increasing the talent pool and reducing costs. At the end of the project they may get 400 likes on Facebook, YELP!, and Angie's List.

The bankers will have access to the website to monitor progress. With insurance policies fully enforced, banks will lend favorably to the homeowner's association which needs to fund a major reconstruction project. Banks will also lend favorably to mortgages in this structure because it is well maintained.

It is in the best interest of the community to be civil and thoughtful in their discussions knowing that they are being observed by some of the other stakeholders. This eliminates the incentive to be disruptive and increases the incentive to be engaged and productive in the project.

Over time, the website becomes a forensic record of all matters associated with the project. Everyone knows who said what, when, where, and why with an electronic time stamp. There is little to be disputed.

Interaction With The Wider Community:
Real estate agents always describe property in poetic hyperbole — they rarely tout the improvements that a community works so hard for. The website could be a place where a real estate agent can advertise their services in exchange for a promise to mention the re-piping project. The market will respond to a well-maintained building by an engaged community, which will drive real estate valuations up.

Hotels, restaurants, theaters, art galleries, service groups and civic organizations benefit from prosperity and resilience in their community.

In the end, the shared asset is preserved and everyone is profitable.

Update: Important Observations

In deploying the Value Game, we need to be careful of how much collaborative innovation we are able to introduce to a system that is normally adversarial. A general distrust of new ideas and the technological platforms that they depend on is still fairly high. For this reason, we estimate a 40% adoption level of the principles discussed here.

Risk Performance Metrics

For the past several years, up to three of the top five concerns expressed by respondents to CFMA's Construction Industry Annual Financial Survey have been insurance-related. And, contractors continue to seek how to leverage their investment in safety and risk management.

The traditional view of safety has been as a line item expense calculated within administrative overhead or as a cost center. Construction Financial Managers use a variety of techniques to evaluate the cost effectiveness of recommended safety and risk reduction investments. These include: ROI, ROE, and/or ROC calculations; cost benefit analyses; and breakeven analyses.

However, some forward-thinking contractors have gone beyond seeing the direct link of profitability from safety and risk management to establishing safety as a profit center. A select few have captured even greater value by making safety part of their brand image.

Either way, a program that measures safety — and risk-related leading indicators, loss analysis rates, and indirect costs can provide contractors with a competitive advantage that goes far beyond lower insurance rates.

Leading Indicators

Some companies understand that the fixed cost of insurance, the premium, is the smallest piece of the insurance pie. They recognize that true savings more often result from decreasing the variable costs of their insurance program — the loss dollars from claims.

These companies have learned that proactive safety and risk management programs increase profitability — they reduce risk, prevent claims, and contain costs through aggressive claims management.

What is their secret? Through the ongoing measurement of risk indicators, these contractors establish goals for improvement and continuously monitor their company's performance. Some traditional measures include such frequency and severity incidence rates as:

  • Total OSHA recordable cases
  • Total lost workday cases
  • Total lost workdays
  • Number of fatalities1

Called lagging indicators, these measures are passive metrics of prior results without consideration of the activities that influence the results. Also called downstream measures or trailing indicators, lagging indicators provide feedback on data collected and analyzed “after-the-fact.” These metrics are diagnostic and sometimes prescriptive; they reveal past performance and highlight improvement opportunities.

In contrast, current and leading indicators provide different views of safety and risk performance. Designed to influence real-time outcomes, current indicators provide almost immediate feedback on present activities. Current indicators include a supervisor's same-day completion of an incident report or the number of job safety observations completed on a project each day vs. an established goal.

Leading indicators are proactive measures of focused activities to prevent incidents of a general or specific nature. Also called upstream measures, these metrics are “beforethe-fact”2 and can predict future performance.

For example, a high number of safety orientations should help decrease the frequency and severity of onsite accidents. (The first table below compares lagging, current, and leading indicators for safety performance. The second table lists examples of emerging leading indicators for productivity, quality control, and risk management.)

Lagging, Current & Leading Indicators
Lagging
(Past Results)
Current
(Present Snapshot)
Leading
(Prevention Activities)
  • Workers' Comp Experience Rating Modifier
  • OSHA recordable rate
  • Total lost workdays
  • Average cost per claim
  • Daily record of incidents
  • End-of-shift record of incidents
  • Daily job safety observations
  • The number of safety orientations conducted
  • The percentage of project pre-plans completed
  • The number of safety meetings held
Emerging Leading Indicators
Productivity
Measured by the Number of:
Quality
Measured by the Number of:
Risk Management
Measured by the Number of:
Field supervisors with laptops or hand-held technology Independent third-party expert reviews on prototypical designs or materials Pre-bid constructability, scope, and schedule reviews completed
Administrative staff trained on automated functions Architect and engineer approvals for changes to specified materials or design specifications Pre-qualified or pre-approved subcontractors on the eligible bidding list
Open trade/craft employee positions filled compared to percentage needed Quality assurance inspections completed Subcontracts signed before starting work
Days with no idle equipment Detected defects corrected Project sites properly planned and laid-out for logistics, traffic control, and work zones
Projects with proper sequencing of trades Project files with digital photos of conformance to specifications Project sites inspected for compliance to safety and risk controls
Projects completed on time Completed projects with no open punch list items Projects that had a post-mortem review of project risk performance

Loss Analysis

While many contractors know their basic loss picture, fewer understand the factors that cause or contribute to accidents and claims. To leverage safety and risk management, contractors need to identify where to invest time, staff, and other resources. An analysis of historical claims and loss experience provides an excellent starting point.

There are many methods of analyzing claim and loss data, but it's important to conduct both macro- and micro-level analyses, which provide the clearest perspective on what types of accidents are loss leaders, in addition to clues about necessary prevention activities. Trend, type, causal, and lost workday case analyses are four basic and reliable methods.

Trend Analysis
A trend analysis determines the number of claims and the total incurred losses (the dollars paid plus the dollars reserved to pay for the future cost development of the claims) for each line of insurance coverage over a period of time. This provides a quick “big picture” view of claim count and loss experience by policy year.

Type Analysis
A type analysis summarizes the frequency of claims and the resulting incurred claim costs by type of loss. This method uncovers the leading types of loss for your company. For example, you may learn that two or three leading types of loss account for greater than 70% of your loss dollars.

By highlighting the areas that have the greatest impact on risk management performance, this analysis helps focus prevention efforts.

Causal Analysis
A causal analysis determines the reasons for accidents and resulting claims by evaluating various causal factors for each leading type of claim. It indicates areas for possible incident prevention activities and safety management controls.

Ideally, you'll be able to determine the job classification with the greatest number of claims and highest claim costs. For example, you might learn that “falls” are your company's leading type of workers' comp claim, making up 20% of your total claim count and 65% of your total incurred losses.

By evaluating the causes of your company's losses, you may discover that 60% of the falls were the result of a fall from an elevated surface — with 40% resulting from slips, trips, and falls on the same level. You might also learn that 10% of the total falls from elevation claims occurred from a scaffold or ladder, but that the other 90% resulted from getting into or out of vehicles or heavy equipment.

The safety and risk management controls for each of these causes are different. Depending upon the findings in the causal analysis, additional drill-downs should provide even better clues.

The success of this analysis hinges on the depth of your company's accident reporting and investigation process, as well as the quality of the claim coding information. Some of the best factors to evaluate include:

  • Day of week
  • Time of day
  • Date of loss vs. the date of hire
  • Objects and materials involved in the loss

Lost Workday Case Analysis
Why focus on lost workday cases? After fatalities, lost workday cases are among the most serious type of workers' comp claims.

Greater than a third of all workplace injuries result in lost workdays. According to the National Safety Council, the average cost of lost workday cases across all industries in 2005 was $38,000, an increase from $28,000 in the year 2000.3

The average for the construction industry is not calculated separately. However, the construction industry figure should be significantly higher for three reasons:

  1. The median number of days for each lost workday case is higher for construction than across all industries. The Bureau of Labor Statistics (BLS) reports seven days as the median number of lost workdays per case for all private industries in 2005.

    In contrast, the median is eight days on average for specialty trade contractors, nine days for general building contractors, and 11 days for heavy and civil contractors.

  2. The construction industry has some of the highest average labor wage costs among major industry groups.
  3. Modified or restricted duty assignments in formal return-to-work programs appear to be increasing throughout the construction industry.

    Yet, pockets of resistance still exist among some employers, employees, labor groups, and medical practitioners — even though such resistance results in longer absences and higher costs per case.

A lost workday case analysis determines the number, type, and severity of lost workday cases by occupation and body part. The most important portion of this analysis is the comparison of minor and major lost time cases.

“Runaway claims” can be identified by comparing the average length of cases greater than nine days (the overall median for the construction industry) vs. the average for cases less than nine days.

The distribution of lost workday cases by duration metric helps underscore the need to evaluate policies, procedures, and administrative controls to improve accident prevention and claim management.

Here's how it works: The chart below summarizes one contractor's average duration of lost workday cases. The contractor's totals were benchmarked against the average Bureau of Labor Statistics totals for the construction industry. In this case, 54% of lost workday cases exceeded 31 days of lost time, slightly more than double the construction industry average.

Distribution of Lost Workday Cases by Duration

Further analysis revealed that the median number of lost workdays for each case was 37 days (four times higher than the figure for the construction industry). The average length of cases less than nine days was only three days each; however, the average for cases longer than nine days was 90 days.

This meant that, on average, this contractor incurred a “runaway” claim after the fourth day of lost time for every injured worker. In effect, excessive days of lost work time unnecessarily increased this contractor's total loss costs.

From the contractor's point of view, this analysis helped demonstrate the importance of injury prevention. Severity reduction of lost workdays was identified as the goal and the contractor decided to partner aggressively with the claim service team on:

  • prompt reporting and thorough investigation of all injuries;
  • coordinated identification of modified duty assignments; and
  • better nurse case management to help injured employees return to work sooner.

Indirect Cost Assessments

New, sophisticated tools are now available to help contractors measure, monitor, and align safety and risk goals with overall financial performance.

As already mentioned, risk performance metrics provide useful information about the following key performance indicators:

  • leading types of losses,
  • their causal factors, and
  • possible corrective actions.

The next factor plays to the Construction Financial Manager's expertise: demonstrating the financial impact of insurance claims.

Not only does this metric show the financial benefits of safety, but it also creates a compelling business case for proactive safety and risk management.

Direct vs. Indirect Costs
Like other areas of construction financial management, insurance claims have both direct and indirect costs. For our purposes, the insured loss costs are considered direct costs, and the uninsured loss costs are indirect costs.

The indirect costs are the “hidden” costs and share three key characteristics:

  1. They act as a multiplier upon direct (insured) costs that increases the total cost of insurance claims.
  2. They are often not captured or calculated and, therefore, are not consistently charged-back or recovered in job costing systems.
  3. The net effect of factors one and two is a drain on contractor profitability.

There are many different estimates used by safety and risk management professionals for calculating the impact of indirect costs. Safety industry sources indicate an average ratio of indirect to direct accident costs from 2:1 to 4:1.

One conservative method is available at the OSHA Web site, where a sliding scale multiplier is provided that depends on the total direct cost. Note that the indirect cost multiplier decreases as direct costs increase. To calculate your company's ratio using this method, go to www.osha.gov/Region7/fallprotection/safetypays.html.

Required Revenue Replacement
Achieving buy-in for safety and risk management programs from other construction executives and operational managers can be a challenge. However, the revenue replacement tool is a convincing way to show the additional sales needed to offset the cost of insurance claims.

This number varies based upon total cost of losses and the company's profit margin expressed as a percentage:

Annual Losses (in dollars) ÷ Company's Profit Margin

With this metric, it's simple to see the total additional sales required to offset the cost of claims. Once upper management appreciates how substantial claim costs can be, it's much easier to obtain buy-in for proactive safety and risk management practices.

Conclusion

The most important outcome of risk performance metrics is the focus on continuous risk improvement initiatives. Incident prevention and claim management initiatives can significantly improve a contractor's jobsite productivity, quality control, risk management, and safety programs.

The net effect of this investment is a potentially significant increase in profitability, not to mention a bidding advantage for contractors.

More Resources

  1. National Safety Council
  2. BLS Table R65: Number of nonfatal occupational injuries and illnesses involving days away from work by industry and number of days away from work, 2005
  3. BLS Table R66: Number and percent distribution of nonfatal occupational injuries and illnesses involving days away from work by occupation and number of days away from work, 2005
  4. Harvard Business Review: “Competing on Analytics” by Thomas H. Davenport (January 2006)

Endnotes

1 Petersen, Dan, “Setting Goals, Measuring Performance: Frequency Versus Severity,” Professional Safety, Vol. 50, No. 12. December 2005, pp. 43-48.

2 Janicak, Christopher A., Safety Metrics: Tools and Techniques for Measuring Safety Performance, Government Institutes/ABS Consulting, Rockville, 2003.

3 National Safety Council. (2006). Injury Facts®, 2006 Edition. Itasca, IL.

Claims In A Catastrophe, Part 1

This is Part 1 of a two-part series on claims management in the wake of a disaster. Part 2 in the series can be found here.

Presenting a Claim
If your house was damaged or destroyed by fire, windstorm, or flood as a result of state declared catastrophes and you had a fire, homeowners, flood insurance, tenant's homeowners or condominium policy, you will be dealing with an insurance adjuster. You should recognize that dealing with an insurance adjuster in a catastrophe is usually fairly easy because of the number of claims the adjuster is required to deal with in a short time.

Insurers will be in a very generous mood. They will be seeking good publicity by taking care of victims of the catastrophe quickly and fairly. To make the claims process go easily, the insured person must understand that both the insured and the adjuster have duties when damage caused by fire, windstorm, flood or other insured perils are discovered. The following list outlines the most important of these duties:

  1. You should be sure there is no unnecessary delay in reporting the fact of the discovery of damage to your insurer as a claim.
  2. You and the adjuster should establish that there is no unnecessary delay in responding to any fire, fire fighting, flood or water-related cause of loss where “mold” may result as a natural result of water, warmth, and existence of mold spores in all building.
  3. You may be asked to sign a non-waiver agreement.
  4. You may receive a reservation of rights letter advising you of your duties under the policy, the conditions that apply or might apply, and the exclusions that may apply to the facts of the loss.
  5. You, as the insured, should readily, and without objection, sign the non-waiver agreement or accept the reservation of rights as an expression of the status quo.
  6. The adjuster should remind you, as part of the reservation of rights letter and explanation of the duties of the insured, to preserve and protect the damaged property and to mitigate the loss with due diligence and dispatch.
  7. You can request from the adjuster the identity of respected, competent, and professional contractors experienced in fire reconstruction or the drying out of buildings and the prevention or restriction of further loss including mold growth.
  8. You should follow up regularly with the adjuster to ensure that he or she is meeting contractual obligations since a catastrophe often makes communications difficult.
  9. If you have failed to protect the property from further loss, the adjuster must remind you, in writing, of your failure and how that could effect your claim.
  10. The adjuster should consider advance payments to avoid any unnecessary difficulties so that you and your family will have a place to live while your house is being rebuilt.

    1. If your house is destroyed, you can expect an advance of $10,000 to $20,000 to carry you over.
    2. Even if your house was not damaged, you are entitled to additional living expense payments if you were ordered out of your house by the state government, federal government, Homeland Security, or the local fire department.
    3. Remember that additional living expense coverage does not pay all of your post loss expenses, only those over and above your normal expenses.

Insurance claims require personal attention to detail by the insured. You and the adjuster must meet in person. If the claim is to be resolved expeditiously and fairly, both you and the adjuster should work to establish a personal relationship and to resolve, if coverage is available, the problems caused by the damage to the dwelling or business structure.

Once the rights, obligations, and duties of the insured and the insurer have been stated, and the initial investigation is complete, the insurer is obligated to conduct a prompt analysis of the policy wording and the law to determine whether coverage exists for the damage claimed. Once the investigation is complete and the decision made, it is the adjuster’s obligation to advise you, promptly and in detail, of the decision of the insurer. If coverage is available, it is also the obligation of the adjuster to advise you of your duties and obligations to obtain complete indemnity from the insurer and to protect the property from further loss.

The Notice Of Loss
If you believe that your property was damaged or destroyed by a peril insured by your policy, you should call or write the insurance agent, broker or insurer immediately (or as soon as practical) to report your claim. Follow up the phone call with a fax, an email, and a letter. If the house was not destroyed but a great deal of fire fighting water or subsequent rain or flood water entered the property, try to get a remediation team into the home or business within the first 48 hours to begin drying out the property. If you do not know one, ask your insurer for a referral. This is crucial to preventing or containing mold growth and rot.

If the agent, insurance company, independent adjuster, or restoration company delays the claim, follow up with a fax, an email, and a letter confirming their delay in responding. It would be helpful to send copies of the follow-up letters to the consumer protection unit of the state’s Department of Insurance. Take detailed notes of every conversation, including the name, company, phone number, address, and job title of every insurance adjuster, representative, consultant, and contractor you deal with. Confirm all agreements in writing and insist that appointments and deadlines be honored. Keep a log of all notes and letters and ask for and keep business cards from everyone involved in your claim.

Immediately after the telephone call, write a letter to the broker or agent, with a copy to the insurer, providing the same information. The letter need not be formal. It can be handwritten on any available paper. Make a photocopy.

The notice of loss should include the following information:

  • Your full name.
  • The location of the property.
  • The policy number.
  • The effective dates of the policy.
  • The date when damage first occurred.
  • The type of property damage.
  • The cause or causes of the damage.
  • How the adjuster can contact you.
  • That you need immediate contact from the adjuster.

By providing the information to the agent, the broker and/or the insurer, you have fulfilled the first obligation under the policy: to provide immediate notice of loss to the insurer.

If the insurer is working effectively and has a catastrophe team of adjusters in place, you should receive contact from an adjuster within 24 hours of the notice. The first call should arrange an appointment to inspect the property. You should arrange for inspection as soon as possible and have the entire property available for the inspection if possible. If emergency efforts are required, you should so advise the adjuster so that he or she can help you take emergency measures to protect against further loss.

If possible, you or the adjuster should arrange to have one or more contractors present at the first meeting to determine the extent of the damage. If the damage is extensive, consider retaining the services of a public insurance adjuster [if you determine a public insurance adjuster would be helpful, it is appropriate to seek one who is a member of the National Association of Public Insurance Adjusters (NAPIA), a professional membership organization that seeks to instill professionalism in the trade] or an attorney experienced in representing policyholders in the claims process to represent your interest. The lawyer will usually work on an hourly fee basis while the public insurance adjuster will expect a percentage of the amount paid by the insurer. You must recognize that the public insurance adjuster will ask for a 10 – 15% negotiable fee. Do not hesitate to negotiate with the public insurance adjuster. Never pay the first fee quoted. Considering the volume of work in a catastrophe, you should be able to negotiate a fee between 3% and 10%.

Insurance Company Response
Your insurer should respond to typical catastrophe claims by written or verbal contact within 24 hours of your notice of the claim. The insurer should share information regarding emergency repairs, additional living expenses, temporary advance payments and prevention of further loss with you.

Your insurer should, and in California is obligated to, advise you of your responsibilities under the policy. Many require their representatives to be at your home within 24 to 72 hours of notice of claim. If you explain that your fire loss is severe, the insurer should attempt to have a representative at your house within 24 hours.

The insurer is obligated by statute, state administrative regulations, or by the terms of the policy to determine whether your claim is covered and provide an initial estimate of damage within seven to 14 days after the insurer’s first on-site visit. This first estimate is subject to change. Within the same time frame, your insurer should attempt to provide you with a written statement confirming or denying coverage. These time limits are usually waived in catastrophes and may be impossible to meet with regard to Hurricane Katrina event and other massive catastrophes.

You should expect your insurer to return all phone calls within 24 hours. Initial contact may be with your insurance agent or broker or a claims office or the toll-free phone number included in the policy. Because of the volume of claims after a catastrophe like those in the 2005 hurricane season and the 2008 California wildfire season, this time frame will probably not be feasible.

First Contact With The Adjuster
Your first contact with the adjuster is usually an informative meeting where you discuss the cause of the loss, the type of loss, when the loss was discovered, and make an initial effort to agree on a tentative scope of loss.

You should expect the adjuster to do the following:

  1. ask for a walk-through inspection of the entire dwelling or building.
    1. You should make every effort to point out each item of damage or suspected damage during the walk-through inspection.
    2. You, or your representative, should assist the adjuster in viewing both the damage and the source of the damage.
  2. ask you to submit to a recorded statement;
  3. ask you for the identities of each family member or vendor who can give the adjuster information about the loss;
  4. ask for the recorded statements of the persons identified;
  5. ask permission to allow experts retained by the insurer to inspect the property and do minor destructive testing to establish the appropriate methods of reconstruction and repair; and,
  6. ask permission to contact others who know information about the loss and to obtain from those people within your control a detailed recorded statement and documents relating to their knowledge of the loss and the extent of the loss.

First Meeting With The Adjuster
An adjuster is a person professionally trained to assess the damage to your property. He or she will probably visit your home or business before you are asked to complete any forms. The more information you have about your damaged home or business and belongings, the sooner your claim will be settled.

Your adjuster generally will come prepared to do a thorough and complete evaluation of the damage to your property. If the adjuster is unable to complete a thorough inspection due to time constraints or the extent of damage, he or she should prepare a scope of the loss report. This is a brief listing of the findings of damage determined at the initial inspection of the damage. The adjuster should ask you to agree to the scope of loss. Agreeing to a scope of loss is not presenting a claim. It is understood by the adjuster that the scope is incomplete and will be added to as new damage is discovered. It is usually supplemented with a second visit after the reports of experts are received to complete the inspection.

The “scope of loss” should include the following:

  • degree of damage;
  • a description of each location where damage was observed;
  • a description of the adjuster’s and your own best estimates of the type of damage observed;
  • a list of all personal property damaged or destroyed;
  • quality of the materials and workmanship; and,
  • measurements needed to calculate quantities, including length, width, and height of rooms and the number of “openings” (windows and doors) in each room.

The scope of loss, usually referred to by claims people as the “scope,” differs from the finished estimate in two ways:

  • the scope does not necessarily list any prices, although prices can be used to describe quality; and,
  • the scope does not list the calculated quantities — it includes just the raw counts and measurements needed to calculate quantities for the estimate.

This article is adapted from Barry Zalma’s book, “Insurance Claims: A Comprehensive Guide” and his book “Mold: A Comprehensive Claims Guide” published by Specialty Technical Publishers, Vancouver, BC, Canada; 800-251-0381; http://www.stpub.com.