Business interruption claims success

Shocking headlines recounting catastrophic devastation caused by natural or man-made disasters, such as the Scottish plastics factory explosion, tsunami, hurricanes or terrorist attack, are becoming all too frequent. Such disasters result in tragic human loss and huge economic impact, with business interruption forming a major component of the insurance claims. Whilst claims satisfaction is the absolute test of the insurance promise, organisations often find themselves immersed in a complex and difficult process that ultimately reduces the total value of their claim.

An examination of this process helps to identify pre and post loss measures that an organisation can take to improve their situation.

The major loss settlement process has changed in the last few years, particularly in the wake of World Trade Centre claims. Insurers now employ a raft of advisers, which typically include loss adjusters, technical experts, lawyers and forensic accountants. This has been driven by Insurers increasing focus on claims cost containment, along with reinsurers more active involvement in the claims process. Insurers have rigorous processes in place to collect evidence of coverage and quantum on any claim before accepting liability and agreeing settlement.

Organisations are finding this process increasingly demanding and time-consuming and are re assessing their position in order to protect their interests. Many are seeking out claims specialists who understand the processes, have market knowledge and contacts and technical and financial expertise.

These skills augment the Insured's own internal capability and are perceived as crucial to expediting and recovering the true claim value. Fees for the claims specialist are usually negotiated separately according to the circumstances of the loss and will range from a fixed amount to an hourly rate or linked to the success of the claim. However, where a policy includes a Claims Preparation Clause all or part of their fees may be included as part of the claim depending upon the policy wording.

According to Mike Wellsted, Managing Director of Echelon in Hong Kong "there is a growing tendency for organisations to turn away from loss adjusters as independent assessors of claims. Insurers employ loss adjusters and policyholders prefer instead to control their own destiny by employing professionals skilled in both technical assessment and negotiation techniques. Claims expert is increasingly talking to claims expert."

At the outset of a claim
Insurers' requirement for financial and other information can be onerous for the Insured, particularly at the outset of a claim when their attention is focussed on loss mitigation and business recovery. Organisations suffering a large loss are typically put under pressure to supply a raft of detailed information quickly to enable reserves to be established and the extent of policy coverage assessed.

The accurate assessment of the initial reserve is vital because if this is set too low it can adversely affect the insurer's attitude to the subsequent claim offer.

Effort versus reward
Substantial effort is needed to gather information and this may be required in different formats for the various experts. Tom Battell, a Director with Forensic Accountants LLP, suggests that when dealing with business interruption claims "accountants acting for the insurer request extensive information to support the claim, perhaps beyond the level retained by the insured. If the support is found wanting the accountant advises that part of the claim is unsupported. Insurers generally take this to mean that those elements can be struck out or considerably reduced" (Claims Professional, Spring 2005, page 31). Insurer appointed advisers inevitably look to interpret financial data to the Insurers' advantage.

Preventing misinterpretation
Whilst the Business Interruption policy provides a formula for claim quantification, it does not prescribe what documentation is required. Organisations need to take great care in providing accurate and relevant information, particularly during the early stages of the claim.

They must ensure it is accompanied by appropriate explanation, interpretation and caveats to prevent misinterpretation or incorrect assumption by the insurers and their accountants. It is always difficult to change the insurer or their adviser's view once this has been formed, no matter how persuasive your argument or inaccurate their opinion may be.

Format important
When it comes to preparing and presenting the claim, this needs to be done in a format the insurers will understand and accept. This protects the ultimate value of the claim and prevents time and cost spent in rework or provision of unnecessary information. It is worth bearing in mind that as a last resort this information may need to stand up in court, should arbitration be necessary.

Frequent communication
Frequent and effective communication with insurers and their experts is vital. Most large claims require input from several departments within an organisation - operations, IT, finance, property, legal etc. Coordinating the information flow within organisations can be time consuming and may result in disjointed communication to the Insurer. Consistent provision of information helps manage expectations and maintain insurer's confidence in the organisations loss mitigation and claim management ability.

These suggestions will undoubtedly help but they cannot overcome cover inadequacies. Across all business sectors process changes, such as insourcing, outsourcing, offshoring and technology, are affecting exposures and liabilities.

The fast pace of these changes can result in insurance and other risk financing arrangements struggling to keep pace with the business needs.

Unfortunately, for many organisations this only becomes apparent in the event of a major loss, as this is generally the first time the programme is truly tested. Common issues include:

• Inadequate sums insured - possibly due in part to the ostrich syndrome ("it's never going to happen to me") combined with the desire for premium savings and a lack of understanding of insurable business interruption exposures.
• Inappropriate indemnity periods - we have seen policies with indemnity periods of 12 months where time taken for demolition and decisions on how and where to reinstate property, alone, has ranged from four to 12 months.
• Policy wordings that do not reflect the business exposures and where complex issues around causation affect the final payout - for example non-owned and operated property not included within the policy definition despite substantial revenue being generated from these premises.
• Inner sums insured that are woefully inadequate - denial of access or loss of attraction are good examples that were highlighted by the recent tsunami catastrophe. Many businesses did not suffer physical property damage but still had business interruption losses.

This is why we encourage organisations to stress test their Business Interruption insurance programme. This requires assessment of insurable exposures, key vulnerabilities and operational interdependencies and an understanding of how losses arise, the resultant business impact and the ensuing costs that can occur. The objective is to provide confidence in the insurance product and the best chance of recovering financial losses if the policy is tested by a major claim.