Risk managers set for busy time as they tackle claims from recent hurricanes

The recent hurricanes to hit the US and Caribbean will have risk managers poring over policy wordings as they seek to maximise their insurance recovery, according to a webinar hosted by US risk management body RIMS. With the insurance industry facing a $100bn-plus bill for Hurricanes Harvey, Irma and Maria, claims will be a key focus in coming months for readers of CRE. Much like previous catastrophes, interpretations of policy wordings will have big implications for insurance recoveries, especially in areas like business interruption, contingent business interruption and flood vs wind damage. When faced with a claim from a catastrophe like Harvey or Irma, it is critical that risk managers carefully read through their insurance policy in full, according to webinar participants Robert Reeves, Dallas-based partner at Ernst & Young, and Edward Joyce, an attorney at Jones Day in New York. “Get a copy of your policy, read through it and make sure that you are aware of the terms and conditions, as well as the deadlines,” advised Mr Joyce. He noted that policies may require policyholders to take certain actions within prescribed deadlines, such as giving notice to an insurer of a potential loss, or providing proof of loss. Some insurers may be prepared to extend deadlines in exceptional circumstances, but policyholders should get any such agreement in writing, he said. Douglas Backes, vice-president and manager of staff claims at FM Global in Rhode Island, also highlighted the need to fully understand protection afforded by coverage, preferably in advance of a loss. “It is critical that you read carefully and understand the insurance contract. When you read the contract and the insurer reads the contract, it is important that you both come away with the same understanding. Pre-loss planning will help work through this,” he said. Having a pre-loss plan in place can be key to a successful claim from large loss events such as the recent hurricanes, Mr Backes said. “With the claims I have been associated with, the most successful are the ones where the policyholder and insurer have sat down and set out mutual goals and hold each other to account to them throughout the loss,” he said. Some properties would have suffered damage to property from both wind and flood during Harvey, Irma and Maria, making for complex claims. In the past, storms like Hurricane Katrina and Storm Sandy resulted in disputes between policyholders and insurers about whether damage was caused by flood, storm surge or wind, and therefore what cover applied under their insurance contract. Given the likely provisions contained in a property insurance contract for flood damage, as well as the relevant deductibles and sub-limits, large claims can be a “mess”, according to Mr Joyce. Settlement can be made even more complicated by the inclusion of anti-concurrent causation clauses, which exclude a loss that results from multiple contributed causes when any of the concurrent or contributing causes of loss are excluded by the policy. As a result, risk managers will need to also look at the policy declaration page and sub-limit sections, advised Mr Joyce. According to Mr Backes, insurers have done a lot of work to define damage caused by flood and wind in insurance policies during the past ten to 15 years. “Definitions are more explicit these days. Policy terms and conditions have evolved so that an insurance policy can delineate between flood and wind damage,” he said. “The answer [to whether damage is covered] is down to the specific policy. It is a risk management exercise to test the insurer on a pre-loss basis to ensure that they come away with the same answer and when there is a loss there will not be surprises,” said Mr Backes. Similar issues are likely for business interruption claims where the insured has not suffered direct damage, such as contingent business interruption. Cover may be available in some form, albeit sub-limited, but insureds will need to read past the main policy wording to find it, according to Mr Joyce. Companies can also suffer sizeable loss from the loss of suppliers or customers affected by storms like Harvey and Irma. Policy wordings for contingent business interruption have broadened, but it is not always clear how they will respond, for example to losses affecting “indirect” suppliers and customers. Another possible issue with contingent business interruption losses arises around notification. It may take some time before a company knows it has suffered a loss related to damage at a supplier’s or customer’s premises. Policyholders may also face issues with limits on periods of indemnity for business interruption, contingent business interruption and additional expenses losses. Some losses, like loss of revenues, may not be apparent until many months after an event hits. In such circumstances, risk managers should err on the side of caution and notify insurers as soon as possible, rather than wait until they are able to quantify a loss and risk missing notification deadlines. Mr Reeves urges good communication between the parties, for example talking to insurers early about possible mitigation opportunities. “Working in a vacuum and dumping questions and information on people will only cause problems. There needs to be a collaborative approach between policyholders and insurers,” he said. A common mistake made by companies is not communicating openly with insurers during a large claim, according to Mr Backes. “An insurance contract is a promise to pay. But you have to be willing to develop a sense of trust through a longstanding relationship with the insurer or a history of loss,” said Mr Joyce. “Companies need to communicate and not hold back for the perfect answer. You need to understand what the insurer is asking for and why they are asking. It will help frame the response and get the right person in touch with the adjuster,” he said. Mr Reeves said risk managers need to be pragmatic and focus on areas of agreement with insurers. Disputed parts of a claim need not hold up settlement in other areas. “As the policyholder, you can set the agenda and talk about the parts of a claim that you want to and not get hung up on areas of dispute, which can hold up the rest of the claim,” he said.

Risk managers set for busy time as they tackle claims from recent hurricanes

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