A catastrophic event like an explosion, oil spill or gas leak can put an entire organization at risk. When a disaster like this occurs, losses can reach a billion dollars or more, and both internal and external teams must kick into crisis mode. Most organizations have dedicated crisis management teams, but planning for insurance recovery is often not part of the initial response.
An organization’s ability to maximize its insurance assets in the aftermath of a costly disaster can greatly impact its ability to return to normal and minimize the risk of future events. Even when the life of the organization is not at risk, ideal preparation and response will help an organization maximize the amount of insurance recovery and reduce its timeline to return to full operation.
Establishing the Right Team
Disasters are challenging, if not impossible, to predict, resulting in teams growing complacent in their preparation after years of uninterrupted, normal business. However, risk managers who are prepared for a disaster will already have strong relationships with various parties inside and outside of their organization. Developing these relationships in advance of a potential disaster helps drive the insurance recovery process and expedite the return to normal operations.
The risk management team, often at the intersection of the finance and legal departments, should be responsible for identifying the necessary roles when a major insurance recovery effort is needed. The support group will consist of internal and external parties in the finance team, legal team and occasionally other business areas. Each plays a unique role in insurance recovery efforts.
The risk management team brings all parties together and coordinates with external parties such as brokers and claims preparation consultants/accountants. Brokers serve as an intermediary between the organization and its insurers. They also assist in providing notice to the insurers of a potential claim. Claims consultants and accountants can instruct internal accounting on cost tracking, help to strategize the insurance recovery effort, and provide forensic accounting and claim preparation services such as assisting with the categorization of losses/expenses into available coverages.
The legal team will play a critical role in analyzing potential legal exposures and establishing a defense, if necessary. Internal legal counsel will oversee public relations communication and work toward defending the organization in the event of third-party litigation. They often oversee the hiring and supervision of external defense counsel to assist in this process. External coverage counsel will advise on insurance coverage positions and work with claims consultants to negotiate the resolution of larger, more complex claims.
The finance team can provide insight into information tracking, document retention and cost management processes that will need to be in place for a disaster. Accounting departments are instrumental in setting up event-related cost tracking and estimating future expenditures. The procurement team will play a role, especially in more complex disaster response events where contract management becomes crucial. Emergencies can cause companies to sign a multitude of vendor contracts in very quick succession, and procurement will play a vital role in ensuring that contracts are properly vetted before signing.
Key Steps to Maximizing Insurance Recovery
After a disaster occurs, companies will need to act quickly to investigate and assess damages, begin initial remediation work, and procure the necessary contractors to assist in long-term recovery efforts. This is often performed at a breakneck speed while pulling resources from across the organization. By having and established insurance recovery team, streamlined processes, and a well-thought-out approach companies will be more likely to quickly and easily recover funds from insurance. Below are some keys to maximizing those recoveries:
Determining the policies in play. Following a crisis, a variety of insurance policies could be triggered, including but not limited to property, commercial general liability (CGL), pollution legal liability (PLL), owner-controlled insurance program (OCIP), and directors and officers (D&O) policies. The insurance recovery team, and specifically coverage counsel, brokers, claims consultants and risk management teams, need to look at the full breadth of the disaster and identify potential damages and the insurance policies that could be relevant to covering those damages. Once the relevant policies are identified, it is crucial to work with the broker to provide proper notice in accordance with the terms of each policy.
Tracking costs with insurance reimbursement in mind. Once the proper insurance policies are identified, companies will need to identify the relevant coverages that could drive recoveries (or exclusions from recoveries) and establish separate accounting codes to track those costs in their accounting system. When compiling a claim, this categorization will significantly ease the process of identifying the costs in need of reimbursement.
Companies can improve their process further by categorizing costs with more specificity. Examples include categorizing on-site (owned property) cleanup and repair costs separately from off-site (third-party property) cleanup and repair costs. If incurred, costs should be tracked for such items as third-party claims, temporary housing, living expenses for third parties affected by the disaster, administrative needs and legal fees. This practice will help prevent crisis-related costs from blending with the normal operating costs of businesses, and it will help ease the claim process when dealing with multiple insurers.
If costs are not coded to specific, project-related accounting codes when they occur, the claims preparation consultant/accountant may need to work with organization employees and contractors to retroactively identify whether expenses were normal operating expenses or specifically related to an event. They will also need to understand the nature of the expense to properly determine the appropriate insurance policy in play for each expense. Investigating past expenses, sometimes months after they occurred, can be a huge undertaking that complicates the claim process and the timeline of recovering insurance proceeds after the disaster.
Reviewing vendor contracts carefully. When an organization is in a crisis, it will be under significant pressure to begin remediation work immediately. Often, companies will engage vendors that they already use in the normal course of business. By structuring contracts with these vendors prior to a crisis, an organization can avoid the need to spend the time signing a new agreement/addendum, which can be challenging from a pricing or scope of work perspective during a disaster.
To the extent possible, companies should have contracts with outside vendors that will be parties to the response effort or even an extension of the recovery team. A master service agreement (MSA) with major vendors expected to assist in any disaster response can reduce the number of contracts in need of signing and reviewing in the chaos of a catastrophe.
Inevitably, new contracts with new vendors will be required to assist in remediation efforts. The legal and procurement teams should review these contracts with recovery and legal issues in mind to ensure that the terms of the contract are set out to align with the overall strategy for handling the response. Time permitting, approval should be obtained from impacted insurers.
In addition to this, incorporating audit rights into new contracts can provide significant value. In order to keep the work flowing in a crisis response situation, companies may issue payments to vendors without the standard review process to ensure the expenses billed were fair and reasonable. An audit ability allows the organization to request a reimbursement if it disagrees with some portion of the original invoice. Common issues that arise with emergency response and remediation costs include excessive markups (for overheads and profits), duplicate billings, lack of support for charges, and bulk pricing for labor and equipment.
Establishing early and regular communication and data sharing with insurers. When a major loss occurs, companies will likely have many insurers involved, each with its own representatives and legal team. Companies should immediately set up a regular cadence of calls with the insurers’ representatives to keep them apprised as to key decision points. In many cases involving lawsuits, relevant insurers will need to consent before any settlements can be made. In addition to this, insurers may need to sign off on specific reimbursements, such as payments for temporary meal cards or living expenses following an event that affects nearby residents.
Ultimately, companies should not spend significant funds without speaking to the insurance representatives who may be reimbursing them for those expenses. This can significantly delay the insurance recovery process. Instead, early and regular involvement of insurers will ease the claim process.
Preparing a well-documented/supported claim. An organization can significantly enhance its recovery process by utilizing the services of a skilled claims preparation consultant or accountant. By working closely with the consultant/accountant to compile a comprehensive claim package that clearly documents the organization’s response to the event and outlines all associated costs with supporting invoices, contracts and purchase orders, insurers and accountants can review and process the claim efficiently. As a result, the organization will be able to expedite and maximize its recovery efforts, leading to a successful outcome.