8 Claims Practices That Risk Managers Should Absolutely Stop Doing Now
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.
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.
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.