8 Claims Practices That Risk Managers Should Absolutely Stop Doing Now

By: Allen Melton and Jeffrey Phillips | May 20, 2019

Allen Melton is a partner and the Americas Leader for EY’s Insurance & Federal Claims Services practice. Over the past 20+ years, Allen has assisted clients in the attainment and resolution of over $10 billion in insured claims and federal disaster grants resulting from various loss events around the globe. He can be reached at [email protected]. Jeffrey M. Phillips is a Managing Director in EY’s Insurance & Federal Claims Services practice. He is a licensed professional engineer experienced in underwriting, loss prevention, and property and business interruption claims. He assists clients achieve financial recovery from disasters through insurance claims, FEMA’s Public Assistance program and other grants. Jeff can be reached at [email protected].

If you are a lucky risk manager, you may never have to manage a property damage or business interruption claim. But we buy insurance for protection from that unknown loss.

The following article gives you an opportunity to learn from some common mistakes. The overall theme is to stop presuming you will never have a loss and instead assume it will happen and prepare appropriately.

Here are eight pitfalls to avoid when managing your property insurance program:

1) Circumventing the preparation of accurate values.

Property and business interruption values need to be reported every year at renewal, but many companies put little effort into developing accurate values.

If a large loss hits, inaccurate values can create many problems. Understanding values helps to determine policy sub-limits and deductibles. Inaccurate values make negotiating and settling claims difficult, particularly business interruption losses, if the claim is for a significantly larger amount than reported in the value worksheets.

2) Guessing how coverage might apply.

Read your policy now, in detail, and understand it. Run through some tabletop exercises to see how the policy responds to some hypothetical events, preferably with your trusted advisors.

We list a few areas below for example, but this is certainly not a complete list of everything that should be considered.

Limits — are the policy sub-limits appropriate? Are you comfortable with how they are applied? Are there limits that apply per location instead of per occurrence, and do you understand the difference? Do you understand the difference between extra expense and business interruption, and are the limits appropriate for your type of business and potential loss situation?
Deductibles — deductibles can be one of the biggest surprises when a loss occurs. One policy can have many different deductibles depending on the type of loss. There may be one standard policy deductible that applies for a fire but different deductibles for flood, wind or earthquake. These deductibles may apply per occurrence or per location. The deductibles may be a fixed amount or a percentage. Are you confident you know what value the percentage is applied against? A flood deductible may vary depending on the level of flood hazard for the area your buildings are located.
Service interruption — what does this mean for your locations? What services are included? Data and telecommunications? What about transmission and distribution lines? How far away can the damage occur?

3) Procrastinating in building out your loss recovery team.

When a loss happens, it may be too late to develop relationships with all the different organizations you may need to help your business recover.

Business interruption and property damage losses are significant financial transactions that require expert advice and assistance. In addition, a large loss requires significant time and a level of documentation for which most companies don’t have the resources or the in-house expertise.

Having a trusted advisor you are comfortable working with and who is committed to helping immediately will pay dividends in the claim process. This goes for both claim consultants and law firms.

Developing these relationships pre-loss allows you to spend time interviewing different firms and selecting one that fits best with your organization. These firms can also help you with preparing accurate values (see #1 above) and help you run through potential loss scenarios.

4) Following the path of least resistance when it comes to building your loss recovery team.

In tandem with suggestion #3 above, there may be companies that you have good day-to-day working relationships with but that may not be appropriate or have other conflicts of interest when working on a loss recovery.

Whether you are having pre-loss discussions or are in a post-loss situation, you need to consider the potential conflicts of interest.

Consider the capacity, resources and interest of the organization that you may put on your recovery team.

A contractor that previously did excellent work for you building a warehouse may not have the skills and resources to repair a fire damaged manufacturing facility. Just because your insurance broker did a great job on your renewal does not mean they are the best firm to assist you with a loss. A regional restoration company may not have the ability to respond nationally or internationally.

5) Disregarding the need to provide a timely preliminary estimate of your claim after a loss event.

Adjusters and insurers need information to appropriately set reserves as well as evaluate and measure a loss.

Jeffrey Phillips, managing director, EY’s Insurance & Federal Claims Services

Due to lack of resources or other reasons, many companies delay or hold back information which leads to misunderstandings of the loss and delays responses from insurers. This can also lead to delays on advance payments and loss settlement.

6) Relying solely on the adjuster in a claims scenario.

Many large claims are handled by an independent insurance adjuster who is hired by the insurance company or market if there is more than one insurance company.

There is a benefit to having meetings directly with the insurance market to make sure information is being communicated to them clearly. Letting all communication be filtered through the adjuster can lead to misunderstandings.

7) Missing opportunities.

While a large loss is difficult for any company to deal with, it can also create opportunities.

Rebuilding after a loss is seldom done exactly like it was before. Many times, changes and improvements can be made at no additional cost, or the additional cost may be offset by a reduction in business interruption.

Spending additional money to save your market share or increasing efficiency of a manufacturing operation are opportunities that need consideration.

8) Over-promising and underachieving.

Insurance claims are large financial transactions that can impact companies in many ways. There are many stakeholders in addition to the insurance company, including executives with the organization, investors, banks, customers, suppliers and employees.

All are interested to know what is happening and how it is impacting the company. Be sure all communication is accurate and consider how discussions with one organization might impact another; you don’t want to promise the CEO a $20 million claim settlement if insurers only agree to $10 million.

Preparation Matters

Risk managers spend their careers identifying risk and looking for means to mitigate those hazards.

Experiencing a large and complex property damage and business interruption loss is both a stressful and challenging time for a risk manager and their organization. It’s certainly not the time to find out you are unprepared to handle every aspect of the loss and claim submission.

The items mentioned are important steps to take now, in advance of a loss situation, to confirm that you have taken the appropriate measures so the process is handled in the most efficient and effective manner possible for your company. &

The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization.

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.

8 Claims Practices That Risk Managers Should Absolutely Stop Doing Now