Show me the evidence - substantiating a claim

One of the most common reasons companies do not recover what they are entitled to from their insurers is because they underestimate what is required when substantiating a claim. So, how should claimants respond? When it comes to disaster recovery, many businesses in the UK are well prepared and have good plans in place. However, the sheer number of potential risks - from bad weather to man-made disasters such as terrorism - can result in potentially huge insurance claims, particularly business interruption (BI). Lack of preparedness rather than the scale of loss can put companies at risk.

It would be easy to rationalise that business recovery after a major loss is simply a matter of good risk management and an effective business continuity plan that swings into action, allowing a business to continue trading with minimal impact on the customer. Yet many insureds do not recover what they are entitled to from their insurance claims and one common reason is that they underestimate what is required of them when it comes to substantiating their loss. So, how do claimant companies respond to the insurers' drive for greater detail? Put simply: "Forewarned is forearmed," says Candy Holland, Managing Director of
Echelon Claims Consultants, which specialises in managing large, complex or problematical claims.

"You have to understand how the claims process works and prepare for it," insists Holland. "In a major claims situation, insureds must maintain credibility with the insurance market. They have a contractual obligation to provide information as a condition of the policy. They need to be ready with the right processes in place immediately after a loss."

Forensic detail
Unsurprisingly, given the scale of the industry's losses following a catalogue of natural and man-made disasters in the last decade, when it comes to large claims, insurers and their loss adjusters are now paying far greater forensic attention to the loss evaluation process than ever before. Neither do they hesitate to bring on the heavy guns - in addition to loss adjusters, they routinely appoint expert forensic accountants and lawyers from the outset.

According to the terms of most insurance policies, the onus is on the policy-holder to substantiate their claim, typically providing "such books of account and other business books, vouchers, invoices, balance sheets and other documents, proofs, information, explanations and other evidence that the insurer may reasonably require for the purpose of investigating or verifying the claim, together with, if required, a statutory declaration of the truth of the claim and any matters connected with it."

In short, that means insurers will want to substantiate every element of the claim, drilling down into the detailed documentary evidence of timesheets, day rates and purchase orders. Given the difficulty in locating the relevant department let alone the people who hold this information in a large company, the scale of the problem becomes clear. But insureds unable to provide this level of detail could find the omission a costly one. AIRMIC (the Association of Insurance and Risk Managers) may believe a claims performance index would help restore the industry's reputation for handling claims fairly, but presented with insufficient documentary evidence on a large case, most insurers will apply a heavy discount.

Tensions rise
According to Leo Dixon, a consultant at Echelon, making a large claim is a time when there can be tensions between two important priorities for a company as it struggles to recover: "Collating and preparing information for the insurance market after a major loss can consume a significant amount of time and resources," he says. "That's when risk managers and business units need the support of the board, because if they are going to optimise recovery of their losses, they have to produce as much evidence as possible. It's a different perspective to the business operations manager, whose sole purpose is to get the business up and running again. Insurance is not usually on their radar."

Equally important is the need for someone to review each piece of information, making sure any commercial, claim-sensitive or unnecessary information is not passed to the loss adjusters. Wise claimants will question whether what they are being asked for is part of a reasonable ‘shopping list' of documents required to prove the loss, or something altogether less pertinent to the claim.

But, while many insureds are ill-prepared for the onerous process of pursuing a BI claim, beacon companies such as BT have seized the initiative. The telecoms giant has developed a ground-breaking protocol that defines the information that will be supplied for each area of its business in advance of a claim - streamlining the whole process of claims handling.

Be prepared
For a business of BT's size, working with a large number of insurers on claims could have made the claims process a cumbersome one. Instead, the company called upon the resources of its broker Jardine Lloyd Thompson and Echelon Claims Consultants to devise a loss management protocol which would minimise the complexities and length of the claim process.

One loss adjuster and one external forensic accountant were appointed to represent all the insurers and these two professionals have worked with BT to agree the methodology and data to be used for each element of the business should a claim arise. It is the methodology which is agreed, not the value, and insurers have given assent for this to be agreed on behalf of the whole market. Called the Claims Quantification Methodology (CQM), BT intends to apply the methodology to every revenue stream in the business.

For Chris Maurice, BT's risk finance manager, the rationale for developing this protocol was a simple one. "It's about good corporate governance. We need to protect our balance sheet on behalf of our shareholders. That means having a robust process around a claim which may not be catastrophic for our business because of its size, but is a large claim for the insurance industry. It's important to be able to demonstrate that we have a reasonable expectation of recovering those funds."

Maurice also believes it is hard to understand the pressure this process puts upon a company until you've experienced it for yourself. "The single most important part of the policy," he says, "is the claims preparation clause. Never under-estimate how much time it takes to gather the information. You have to think about how you will capture the data before the loss. Few companies have a physical paper trail now, and if you don't code information to allow you to extract it from the system and present it to the loss adjuster, you're toast."

"Big organisations can be fragmented, so don't be afraid to buy in external resources," Maurice advises. "Do t early, agree a rate in advance, and get the loss adjuster's agreement for them to assist. It makes the loss adjuster's role easier if they are dealing with professionals."

Presentation is key
How data is presented to insurers and their advisors is key to optimising the recovery of insured losses. Claims consultants such as Echelon combine specialist insurance claims, industry and accountancy expertise. They can provide companies with a useful resource to prepare and settle large losses as well as smooth the claims process.

Ultimately, if you want to pursue a successful claim, the onus will be on you. Be prepared.