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When Not to Trust Your Insurer

What is your insurance company telling you about your business interruption values?

In preparing annual business interruption values and exposure analysis for clients, we have noticed several red flags that indicate something may be wrong with how these values are being reported to the insurance company. It’s not so much what the insurance company is telling you about your business interruption values, but what it is not telling you.

Here are three red flags insurance companies are waving by not saying anything:

Great Rates – “We are paying a lot for insurance, but we are getting a great rate!”

Beware, great rates for property policies have the potential to be misleading. The business interruption values are one of the many variables in determining rates. If you are over-reporting your values and the insurance company realizes it, your rate will appear better than others reporting more accurate values. Sure, a better rate may sound like a win, but it may just mean that the insurance company is calculating your values for you. Just as you wouldn’t trust a car salesman when he says you’re getting a great deal, you shouldn’t rely on the insurance company to do the same.

See also: How to Assess Costs of Business Interruption

Free Services – “Our insurer analyzes our values for free.”

The insurance company may actually offer to calculate your values for you – for free. Everybody loves free things, right? Unfortunately, the insurance company will use a benchmark approach to underwriting your risks combined with COPE data and any other information you provide. The result will likely be a higher business interruption value that is not representative of your exposures. When your story is vague, the insurance company will make assumptions about your business based on what others are doing. Let all of your hard work creating incident response plans, business continuity plans and other contingency plans pay off where it can have a direct effect on your premiums.

No Resistance – “The insurance company accepts what we give them for BI Values.”

Watch out – if there are no questions or pushback on your values, that can mean one of two things: 1) you have done your values perfectly and they require no explanation, or; 2) you are reporting higher values than what your insurer is calculating. If you have done your values perfectly, congratulations on being one of a kind. More likely, the insurance company has calculated your values at a lower level than you have. If this is the case, wouldn’t you want to know?

At the end of the day, no one is more qualified to value your business interruption risks than the people who run your company, but you have to know the criteria being applied and how to apply them. Underwriting is a mysterious process, so it’s better for your bottom line to take the mystery out of it by bringing clarity to your business interruption values. If you leave it up to the insurance company, chances are that the number is going to be higher than it should be.

Don’t expect insurers to guide you to the answer that is best for you. They have a different agenda and process. They will categorize and group your risks based on some information, but if you do not provide what they need, they will default to general assumptions. You may get lucky and end up with a reasonable assessment of your risk. Or you can have a say in your luck by matching your opportunity with preparation.

5 Techniques for Managing a Disaster

Once disaster strikes, the first priorities are always safety and preservation of property, but there are priorities to consider ahead of a loss to avoid unexpected surprises. Disaster mitigation and restoration is a critical service after property damage, and how you manage it may affect the outcome of your claim. Though there are many capable firms that specialize in property damage clean-up and restoration, there are some that will make mistakes, and others may even take advantage of the situation. When it comes to recovering the cost of mitigation and restoration services for an insurance claim, any mishaps can create big problems that may leave you stuck with the bill.

See also: Are You Ready for the Next Disaster?  

Here are five techniques to prevent potential problems before they arise:

    1. Vet your emergency response team prior to loss — Preparation is the key in any endeavor, and with property damage claims you cannot be too prepared. Recovery service providers should be identified and interviewed. Make sure the company you choose will be able to handle your potential issues. Involve your insurer during vetting. There are “approved” vendors that insurance companies recommend; however, just because they are “approved” does not mean there will not problems. Notify the insurance company of who you plan to use, as well.
    2. Clarify and document scope of work — Be clear on scope of work with the recovery firm and make the adjuster part of that conversation. Often, emergency response does not follow the normal protocols of a typical project. There likely won’t be time for detailed estimates, so try to get the adjuster to approve work in real-time to avoid second guessing.
    3. Take a hands-on approach — Your property may still be underwater, but once access is granted you must be hands-on. No one should have access to your facility without the presence of a company representative. Assign a property supervisor to the affected site to keep track of who is there and what they are doing. It’s your property and your responsibility. The bigger the loss, the more people there will be coming in and going out, so it is vital to have a company representative onsite to observe and answer questions.
    4. Audit contractor charges before approving — The first weeks after a loss are chaotic. It’s important for policyholders to put controls in place to monitor activity and to verify that work has been completed to specifications and according to the terms of the agreement. Reimbursable insurance expenses should be separated and audited prior to payment for proper detail and accuracy. This needs to be done efficiently in real-time. If you don’t have the resources, this step can be completed by your claim preparation accountants, i.e. forensic accountants. Having forensic accountants on your team, along with your technical experts, can let you process this information in the context of insurance recovery. Don’t assume your forensic accountants will automatically audit invoices. Identifying errors or, worse, fraud is critical to avoid delays in payment or project completion.
    5. Address issues immediately — When the first invoice arrives, insurance companies may act surprised and even deny coverage, especially if the steps above have not been followed. Make sure to get the parties together to discuss the issues. Don’t procrastinate and don’t assume. It is important to be proactive with any potential discrepancies. The policyholder is responsible if there are unresolved differences. If the adjuster disagrees with the work performed and the invoices are paid, it may be difficult to recover all your expenses.

See also: A Real Checklist for Real Disasters  

The immediate aftermath of a disaster is stressful and hectic. Preparation and communication can help you weather the storm and minimize unwanted surprises when you’re looking for claim payment. Having an experienced and independent forensic accounting team will reduce the stress, the workload and reimbursement issues. Per the tagline for one of the largest restoration firms, in the end you want it to be “Like it never even happened.”

What Is an Extra Expense? (in English)

I am not sure why policy language has to be so confusing. Truly, there are some complicated risks that insurance covers, but even the simple ones seem to be made complicated by the language used. One example is extra expense. The words themselves seem pretty self-explanatory; a policyholder spends extra money due to an occurrence and submits the expenses as part of the claim. Though it sounds straight forward, within a property claim these expenses require different types of measurement, documentation and coverage. To ensure you are buying the right coverage for your risks, it’s important to understand the details and the differences.

Per the International Risk Management Institute (IRMI), extra expenses are defined as:

“…additional costs in excess of normal operating expenses that an organization incurs to continue operations while its property is being repaired or replaced after having been damaged by a covered cause of loss. Extra expense coverage can be purchased in addition to or instead of business income coverage, depending on the needs of the organization.”

This is true, but there is another kind of “extra expense” that is included as part of your business income – this is commonly known as “expense to reduce loss.” These expenses meet the definition of extra expense, but they are incurred to reduce the duration or magnitude of the business income loss.

See also: The Most Effective Insurance Policy

Consider this scenario: A manufacturer is shut down because of a covered cause of loss. Despite damaged machinery, they manage to resume operations in the facility by performing work manually with more than normal labor. The extra labor costs enables the insured to maintain some production that reduces lost sales. Is this a business income loss, extra expense loss or both?

In this case, extra expense coverage in excess of the business income would not be necessary since the extra expenses reduced the business income loss. Any sales that were lost could still be recovered as well. If only extra expense coverage was purchased, the manufacturer could recover the extra expenses but not any lost sales.

The distinction between “extra expense” and “expense to reduce loss” is important when you are placing coverage. Quantification and documentation of extra expense exposures depends on the types of expenses and the scenarios envisioned. If the only extra expenses that are foreseen would be to reduce a greater business income loss, then it might not be necessary to purchase the additional coverage. If business income is not at risk or can be avoided entirely with extra expenses, extra expense coverage may be the way to go.

Another category of coverage that gets confused with extra expense is expediting expense. Per the International Risk Management Institute (IRMI) expediting expenses are defined as:

“…expenses of temporary repairs and costs incurred to speed up the permanent repair or replacement of covered property or equipment.”

The need for expediting expense coverage came from a time when boiler and machinery coverage applied to specific objects written on separate policies. Modern all risk policies will include expediting expense as a part of expense to reduce loss or extra expense coverage.

See also: Shouldn’t Your Insurance Coverage Become More Than An Expense?

Again it is important to understand how you might incur these loss related expenses when placing coverage. To the extent that you can save the insurance company money by expediting, you are less likely to meet resistance. If you will need to expedite repairs for other reasons, regardless of cost or time savings, you may need to get coverage that provides full reimbursement.

Understanding the different types of expense coverage and how they apply to your business is critical when buying insurance. You don’t want to find out how your coverage works during a claim or that you’ve been paying for coverage you don’t need. Think through your potential scenarios, consult your broker and a forensic accountant to explore what coverages and limits are best for your risks. Then, share your conclusions with your underwriter to make sure everyone is speaking the same language.

How to Avoid Common Tactic by Insurers

Remember the classic ’80s film “War Games,” where the computer system (named War Operation Plan Response, or WOPR for short) asks Mathew Broderick in a See’n Say computer voice, “Shall we play a game?” The movie was a tense thriller that was topical for my Cold War childhood, but it showed, among others things, that not all games are fun. Insurance claims should not be a game — where one side is playing games as a tactic to delay or reduce claim payment. Unfortunately, I see this sort of ambush all too often when preparing property and business interruption claims for my clients.

My client is usually struggling to recover from a major loss to its business. My client has done its best to protect itself via loss control, insurance procurement and a proper claim filing. So when the client documents losses and presents the claim, the client should not have to battle bullying, stall tactics and misguided theories.

As an example, a chemical company client’s business depended heavily on the supply of raw materials from specific international locations. The exclusive relationships with these international suppliers and their governments took decades to forge and represented a distinct competitive advantage. The company’s business was cyclical, and, during a low point, a hurricane devastated its manufacturing plant. If it was not able to get back up and running quickly, the long-term contracts with suppliers would be canceled, undoing years of supply chain efforts.

The CEO recognized the real possibility that his company would not recover if its insurance didn’t reimburse the company for its losses in a timely manner. The CEO knew he might have to lay off more than 1,000 employees.

The insurer chose to overwhelm the client with requests for information, including sending a large group of insurance investigators that my client had to accommodate at his chemical plant while it was still under water.

Contractually, the insurance company has the right to gather information. However, tact and decency should be observed.

The insurer leveraged the policyholder’s crisis to establish reasons not to pay the claim based on misguided theories about the business. Because of the chaos, when the insurance consultants arrived to survey the damage, the client was not prepared. The company did not have a proper escort for the consultants, who made incorrect assumptions about the damaged equipment that formed the basis for a theory on the valuation of replacement equipment and lost production.

See also: Power of ‘Claims Advocacy’  

The client was not informed about these conclusions until some months later. The company was ambushed and had to disprove the incorrect information. All the while, claim payment was being withheld.

This tactic is common. While the insurance team may just be doing its job as instructed, a company’s existence is at risk. Adjusters are often cavalier about this process and will hide behind the “duty” or policy wording while, in reality, just playing games with the money owed to the policyholder.

I am happy to report that we were able to secure advanced payments to stabilize the client’s operations, maintain supplier relations and create an equitable settlement.

The success required an effective strategy and careful execution. Here is the approach we know works best:

  1. Take Control — You do not want to put off the insurance company too long, but it is okay to let the company know you are going to control when its people get access and whom they can interview. Claims are often derailed in the first week because of uncontrolled access and miscommunication. 
  2. Agreements in Real Time — One of my favorite risk managers uses this mantra during claims: “We make decisions in real time.” What he means is that when confronted with a decision — say the rebuilding or replacement of equipment — you must use all the information you have at that time to make a decision. As long as the adjuster is aware of the decision and your reasoning, he should not second guess what you have done once more information is known. For example, immediately after a loss, you think you need two cranes to move equipment and debris. After the fact, you realize you could have gotten by with just one. You made a decision based on what you knew; if the adjuster does not object at the time of the decision, he has no grounds to object after the fact.
  3. Clarify Requests  The insurance company is going to ask for information — a lot of information. In general, these requests are broad and may even be used to fish for something that can be used against the claim. Don’t let this happen. Ask that requests be specific. If they are not specific, send the request back. Ideally, claims are presented with supporting documentation, and that should be the focus of requests. I often filter this information down to what is really specific to what is being claimed. Extraneous information can create confusion and can lead to more requests. Your loss accountant, if she is experienced, will help interpret requests and focus on what is relevant to the claim.
  4. Recruit Experts   Adjusters and their team work on claims every day. It’s their full-time job. For you, it is an infrequent part of your job. If you want a smoother process and a positive outcome, you need experts working on your behalf. In addition to your internal team, your broker’s claim experts (as well as independent forensic accountants, engineers and outside counsel) are critically important. Ensure that those on your team are working on your behalf and match up well against the insurance company representatives. In my claim example above, we were not engaged from the onset; it is vital to have your independent team vetted and agreements in place ahead of a loss. Remember, as in my example, many claims are hindered by mistakes made in the initial weeks after a loss. Immediately after a loss is no time for shopping.
  5. Don’t Play Games — In other words, focus on the claim, not the games. Prepare an accurate claim from your perspective; be up-front with relevant information; and be reasonable in final negotiations. Just because insurers may play games doesn’t mean you need to do the same. You are much better off being prepared, professional and confidently in control of the process.

See also: The Future of Insurance [Infographic]

If you follow this advice, you will stand a much better chance succeeding with claim recovery. As WOPR realized in the movie, with claims war games there are no winners.  Avoid this ambush by being prepared and informed.

get along

Why Can’t We All Get Along?

More often than not, a large property and business interruption insurance claim turns into an “us vs. them” scenario, creating a rough process for all involved. Not unlike a football game, someone is always trying to win and is willing to do so at any cost. As a forensic accountant for more than 20 years specializing in quantifying business interruption losses and documenting property claims for policyholders, I’ve seen the good, the bad and the ugly. The problem is that the process is designed to focus on disagreements.

We’ve heard the concerns from our clients and the insurers, and we can understand both perspectives. Policyholders accuse the adjuster of being unreasonable, trying to stick it to the policyholder at every turn. Insurers accuse policyholders of trying to take advantage of the claim in an attempt to get more than they deserve. The battles can become very heated, even on a personal level. Once, during a claim meeting on a large loss, the discussion between the parties intensified until an executive from the insured side of the disagreement ordered the adjustment team to “get out of my building!”

Disagreement in the course of a property insurance claim is an anticipated part of the process, but there are ways to keep it civilized and productive. It is possible to come to a fair representation of the loss without all the aggravation. The fix is really quite simple, but it will require the insured and insurer to take responsibility for their contribution to both the problem and the solution.

Here are some ways insurers can improve the claim process:

Take time to understand the insured’s business 

Too often the adjuster wants to appear to know it all. It is better to listen first and try to understand the insured’s position. Understanding your customer is common business sense.

Adjusters should have superlative people skills

A big part of an adjuster’s role is to coordinate with experts needed for a given situation. These are management and organizational skills. In other words, the adjuster does not need to know all the technical aspects of every loss and would be better served knowing more about how to manage people and deal with customers. Whether it’s from retiring baby boomers or cost cutting, there is a lack of well-trained and experienced adjusters.

Give the adjuster more control 

Even the best adjusters are impaired by the current claim process; Adjusters seem to have limited authority to make decisions. Policyholders find it pointless to explain their issues in great detail when the real decision maker is somewhere in the background. When pressed to make a decision, policyholders just throw their hands up. It’s difficult to make any progress when the adjuster has to get every little decision approved by superiors. To the insured, it just seems like a delay tactic to put off payment and only adds to feeding mistrust.

Here are some ways policyholders can improve the claims process:

Give the process a chance 

While there are many times you will experience some of the problems mentioned above, the process can work with the right people involved. Communicate with the adjuster and his or her team. Be responsive to all requests that are reasonable and appropriate and ask for clarification and address your concerns right away.

Maintain good relations with realistic expectations

Set realistic expectations for what you want, such as advance payments and resolution of differences. Though insurers are not obligated to finance a rebuild project, they should be willing to advance money to stay ahead of the cash expenditure. By maintaining good relations with the adjuster, insurers will be more open to working with – rather than against  you.

The best defense is a good offense 

On your end, be prepared and organized so you can require the same of the insurance company. You cannot withhold information until the last minute and then demand resolution and payment. The faster you answer questions and requests, the faster the insurance company can review them. Often times, it takes them longer to review the support you provide because they review the information in a vacuum. Don’t assume they understand what to ask for or what has been presented. Promote frequent meetings and discussion to make sure misunderstandings are not made part of their reports to underwriters. Once it is on the record, it is harder to change.

Escalate when needed

If issues start to arise that cannot be resolved, rather than letting it fester, escalate it to the markets involved. It is no different than speaking to a manager at a restaurant. It’s better to deal with decision-makers when action is needed. However, this should only be used as a last resort to avoid litigation.

The insurance claim process has its flaws. I don’t think it’s intentional but rather a result of how it has evolved. The best approach to improving the process is by recognizing the challenges with an “us vs. them” mentality and finding a way to work cooperatively through the claim. Both sides need to help to fix it so that more claims get resolved as they should.