Occasionally, it happens: a company suffers a catastrophic loss. It could be a hurricane, an explosion, a mudslide, a wildfire, a pipeline break, a train derailment, a chemical release or a cyberattack. The company immediately begins its response-cleaning up, assisting victims, starting repair and replacement activities, dealing with third-party claims and litigation, and responding to government investigations. It promptly notifies insurers and, in anticipation of preparing insurance claims, instructs the accounting team to keep track of costs. With these two tasks handled, the company thinks it has done everything it needs to from an insurance perspective and turns back to the response effort.
Alas, it is never that simple. For most companies, a major catastrophic loss is hopefully an uncommon event. As a result, company personnel may be unfamiliar with some of the speed bumps and oversights that can occur in these situations that may negatively affect insurance recovery down the road. But with the right approach, you can manage or avoid these missteps, otherwise known as the “Seven Deadly Sins” of insurance recovery.
DEADLY SIN #1
THOU SHALT NOT FLY BY THE SEAT OF YOUR PANTS
Have a plan and a process, and use them. If your company has an emergency response plan-and it likely does-then filing an insurance claim needs to be included in that plan. It should address providing notice to insurers; implementing pre-defined accounting mechanisms for tracking and documenting costs to be included in a claim; starting a pre-defined claims preparation process; and ensuring that personnel and vendors are cognizant of the company’s insurance recovery efforts. Even if you do not have an emergency plan, go ahead and develop procedures for handling claims. Unlike buying insurance, which many do regularly, filing claims may be much less frequent. Having procedures already spelled out will prevent the proverbial “running around like a headless chicken” during a crisis.
DEADLY SIN #2
THOU SHALT NOT TREAT PATIENCE LIKE A VIRTUE
Patience is not a virtue when preparing an insurance claim. Your emergency response team will swiftly respond to a loss, and your insurance team should too. They need to work closely with operational, accounting and legal teams to identify and document response activities and set up appropriate accounting mechanisms to capture and document associated costs. The insurance team must also communicate with your insurers to make sure that they have the opportunity to visit affected locations, see the company’s response, and hear from company personnel about next steps. In one case, an event occurred in the evening, and the company’s director of insurance was summoned within a few hours with a 3 a.m. call. An insurance team was in place almost immediately. Not surprisingly, this policyholder did not miss any opportunities to recover early costs.
DEADLY SIN #3
THOU SHALT NOT PRETEND THE DEVIL IS NOT IN THE DETAILS
Be ready to prove your claim. To minimize any opportunities for your insurer to reduce a claim in the adjustment process, your best bet is to start with a full and complete trail of electronic or paper documentation for every dollar spent. Insurers will want to see the authorizing documentation (contracts and purchase orders); a complete copy of the vendor’s invoice with any regularly-provided vendor support like timesheets and expense reports; and proof-of-payment (such as wire transfer confirmations, cancelled checks or ACH documentation). If this sounds complicated, that is because it is. The most cost-effective step you can take is to routinely collect and retain these documents as soon as costs are incurred, not months or years later.
By far, proof-of-payment is the most challenging aspect of this for many policyholders, especially for claims prepared after the fact that include older costs. Proof-of-payment is hard to collect, often involving multiple accounting and payment systems within a company, as well as external banking systems and documentation. Insurers typically request it for every claimed payment. Attempting to locate this documentation two years down the road when your insurer or its auditor needs it will be more challenging and, thus, more expensive, with a direct correlation between time elapsed and degree of difficulty. Wait too long, and the company’s document retention procedures will kick in, which often means that proof-of-payment documentation may vanish altogether after seven years.
DEADLY SIN #4
THOU SHALT NOT TAKE THE KITCHEN SINK APPROACH
The more credible the claim, the more quickly it is resolved, with fewer questions and challenges from the insurer. Costs associated with response to a covered event tend to fall into three categories: clearly or probably covered, “on the bubble” (equally likely whether or not it is covered), and probably or clearly not covered.
Policyholders pursue different strategies when deciding what to do with this last category, and the credibility of the claim hinges on how they proceed. The best approach is to consider carefully whether each item actually belongs in your claim. If it is clearly not covered, do not include it. At the same time, be sure you are not missing anything-review the policy and be sure you have included all covered categories of costs in your claim. For example, while you may be focused on property damage and personal injury, do not forget to evaluate possible claims for other potentially covered categories such as extra expense, business interruption or loss of business income.
DEADLY SIN #5
THOU SHALT NOT BURY YOUR HEAD IN THE SAND
Expect your claim to be challenged. Although credibility and perfect documentation help, neither is a silver bullet. Insurers have an obligation to review, test and vet the claim to a reasonable level-and some may get carried away. Assuming your claim is well-documented, you can still expect challenges on how reasonable the costs are, particularly with legal expenses incurred by policyholders to defend third-party claims or lawsuits, and the resulting settlement values. Insurers may engage in some “Monday morning quarterbacking,” and a policyholder needs to be prepared to explain why the expenditures were reasonable.
Defending response costs tends to be a situation-specific endeavor, but there are many things a policyholder can do along the way to be successful. For example, when a vendor is selected via a competitive process, retaining documentation from the selection process can help a policyholder show that the least costly qualified vendor was chosen. Instructing vendors to provide sufficiently detailed invoices to document the goods or services provided also helps justify costs.
When evaluating potential settlement values, counsel’s analyses of comparables or mock trial outcomes can be used to support how reasonable any particular settlement was. Outside counsel costs seem to be a particularly sensitive subject for insurers, so policyholders should consider the guidelines under which outside counsel provide and bill for legal services, and understand how those guidelines might affect the recoverability of legal expenses.
DEADLY SIN #6
THOU SHALT NOT BE SILENT
Plenty of communication with your insurer is a good thing. Claims seem to be resolved more quickly and with a higher level of satisfaction when the policyholder is proactive in communicating information to insurers. Particularly for catastrophic events in which the response involves a lengthy timeframe, a regular exchange of information can lead to a more harmonious relationship. This translates into less bickering over claim values and greater and earlier recovery. Information exchange can include monthly or quarterly updates of a company’s expenditures; reports on a company’s response progress that allow an insurer to pair claimed costs with activities performed; and opportunities for insurers to ask questions and request additional information.
DEADLY SIN #7
THOU SHALT NOT DIVIDE AND CONQUER
Internal communication is equally important. Response to a loss event tends to involve many departments, including operations, legal, accounting and insurance. These parts must coordinate well for the whole to succeed. Setting up regular meetings with key players not only helps ensure communication, but gives everybody a sense of the big picture, which may motivate those who are being asked to do things beyond of the scope of their regular duties.
At the end of the day, obtaining a fair value on your insurance claim is not an easy task. Many risk managers may face these instances only rarely in their careers, making it hard to know exactly how to proceed. Do not hesitate to evaluate your internal resources realistically from the perspective of both your expertise and your workload. Does your in-house counsel have a background in insurance claims, or should you hire outside counsel that specializes in this area? Do you have internal resources to compile everything needed for your claim, or should you hire experienced outside help that has already learned the hard lessons? Management will expect you to maximize your insurance recovery, and it is critical to have the right team in place to do so.