The settlement phase of a business interruption (BI) claim presents policyholders with myriad organizational, intellectual and professional challenges. Even in ideal circumstances it can be a dauntingly complex tangle of analysis, strategy and negotiation.
Although property damage and BI claims can be negotiated and paid quickly, insurance companies and policyholders sometimes need to turn to the court system to decide on factual issues and policy interpretation. The ultimate resolution of these claims can take years to play out and the controversies that erupt can alter and even destroy long-term business friendships.
Components of the BI Claim Negotiation
Preparing BI claims is an internal process that includes gathering data, conceptualizing and calculating loss, preparing reports and communicating with the adjuster about the nature of the loss and its consequences. In contrast, the loss settlement process involves outside parties who will ultimately be asked to acknowledge coverage and pay the agreed loss amount.
The power of the checkbook carries with it great responsibility. Insurers’ claims managers owe it to their company and its shareholders to beware of—and refuse to pay—improper or fraudulent claims; they must be reasonably certain that the insurer is liable under the policy and must agree that the BI loss has been computed accurately.
In the vast majority of cases, the policyholder has no direct contact with, and therefore little influence on, the insurer’s internal deliberations. The information insurers receive comes from appointed adjusters, accountants, technical experts and lawyers whom they have retained to evaluate the claim. If the policyholder is to be successful, he or she must carefully address the needs of these professionals and craft a strategy that will promote an accelerated recovery of the maximum amount allowed by the policy.
The Claim Audit
Virtually every BI claim is audited by forensic accountants retained by the adjuster. The purpose of these audits—which can last anywhere from a few days on a simple claim to many months on a major one—is to verify the claim for conceptual and measurement accuracy. The importance of cooperating with the auditor cannot be overstated.
Auditors are selected by the adjuster or an insurance company claims representative from a short list of national firms specializing in the field or from the ranks of many local practitioners. There are, however, no recognized professional standards for conducting a BI claim audit: there is no requirement that the auditor be a CPA or have any insurance training; unlike audits of financial statements, there are no set standards for planning or conducting fieldwork, for gathering sufficient evidentiary materials or for reporting findings.
As with adjusters, the quality and approach of auditors varies widely. Some are excellent and very professional. Others are not. (See “Handling Adversarial or Unreasonable Auditors and Adjusters,” p. 58.)
But auditors do not operate in a vacuum. They rely on the policyholder to provide the necessary information and documentation to verify the claim. If the claim has been prepared properly, most necessary data will have been provided already. However, auditors being auditors, more information is almost certain to be requested.
Some policyholders, under pressure from management to avoid disrupting internal resources, are tempted to refuse to cooperate with auditor requests for information. This practical concern is understandable to a point, but it can also prove counterproductive. From an auditor’s perspective, any effort to limit the information it receives can be misinterpreted as concealment. Never mind that particular documents are irrelevant in the eyes of management, or that many hours will be required to gather and produce them. Auditors are naturally curious about the information a policyholder wishes to withhold, so with the exception of attorney work or other privileged communications, the requested information should be provided promptly. Otherwise, time will be wasted debating the merits of particular requests and the loss adjustment will drag on, undermining the credibility of the negotiation that is soon to follow.
As the audit progresses, the policy holder must establish a professional dialogue with the participants in order to identify any factual or judgment conflicts that may arise. This is a delicate yet extremely important moment in the adjustment process, as it is probably the first opportunity for the policyholder to learn what is on the auditor’s mind. A good faith effort to resolve these conflicts before the auditor issues its report is critical to a successful settlement.
When Factual and Judgment Conflicts Arise
The audit process involves give-and-take between two groups: the insured and its claims professionals on one side and the adjuster and the insurer’s accountants on another. Even most reasonable people will disagree on the interpretation of facts and laws. With BI claims, this seems the rule rather than the exception, as controversies typically flare up over the following issues:
• The number of days in the period of interruption
• Pre-loss trends of production or sales
• The actual variable cost per unit
• Historical selling prices
• The amount of expenses incurred to reduce loss
In each instance, the policyholder must organize a comprehensive response to the insurer’s arguments to set the record straight. This could entail producing additional documentation, making senior executives available for interviews or simply challenging the accuracy of the auditor’s work product.
The key is to avoid opinion and conjecture by resolving factual conflicts as objectively as possible. If the insured has made an honest mistake in presenting the claim, it should be agreed and noted as an adjustment item. Mistakes by the auditor should be dealt with in the same professional manner.
Even in the most ideal circumstances, adjusters may be called upon to assist in the discussion of factual disputes. Adjusters are often loath to participate in what is perceived to be mundane number crunching, but when big money is involved, they will inevitably pay attention.
Conflicts of judgment may remain unresolved until the final settlement negotiation. They usually include questions about the following:
• If loss period level of production or sales were effected
• If selling prices and gross margins were applicable to lost production
• If there was reasonable and necessary expense during the period of interruption
• If the policyholder acted with due diligence and dispatch
• If costs incurred reduced the BI loss
Finalizing the Claim
The vast majority of property damage and business interruption claims settle quickly and amicably. But disputes sometimes arise, especially when disasters occur that may require insurers to pay billions of dollars in claims, such as Hurricane Hugo, the 1994 Northridge earthquake or September 11, 2001. If a dispute with the insurer is possible, the policyholder should develop a negotiation and settlement strategy very early in the adjustment process.
First, the policyholder should determine the nature of the dispute. If the disputes are factual, the policyholder should assemble a team of experts and witnesses who can present the policyholder’s position in a professional and persuasive manner. If there are legal disputes concerning the meaning of the insurance policy or the scope of coverage, the policyholder should retain a competent and experienced insurance coverage attorney. Of course, if the insurer has retained coverage counsel, the policyholder should do the same. (See “The Question of Legal Counsel,” p. 60.)
Second, the policyholder should ascertain whether or not the dispute can be resolved through simple negotiation. If the insurer is arguing that the loss period is ninety days and the loss is $5 million, while the policyholder contends that the loss period is 110 days and the loss is $6 million, the claim will almost certainly settle, whether through informal negotiation between the policyholder and the adjuster or through a more formal mediation. To take a more extreme example, if the insurer contends that the covered loss is close to zero and the policyholder has submitted a claim for $500 million, negotiation is unlikely to be fruitful.
Third, the policyholder should consider ways of closing any gaps between itself and the insurer. If the only difference between the parties is one of accounting, the policyholder may wish to invoke its right under almost all BI policies to an appraisal (a relatively informal binding arbitration). If the parties are separated by a legal dispute over the meaning of a particular insurance policy provision, it may be a good idea to submit it to a judge for resolution. But if the dispute arises out of an unresolved legal issue concerning the meaning of a common insurance policy provision that affects thousands of policyholders, the insurer may be willing to compromise the claim to avoid an unfavorable ruling.
Fourth, regardless of how the claim may be finally resolved, the policyholder should seek payment for the undisputed portions of the claim. Some states and many insurance policy forms require insurers to make such payments.
Fifth, the policyholder should consider the big picture. Is there a long-term relationship with the insurer? Can a claim payment be traded off against a higher premium on renewal or a prepaid extension of existing coverage?
Finally, if the adjustment process is too difficult, the policyholder should ascertain the risks and rewards of using litigation or arbitration as a tool for resolving the dispute. Does the insurance policy require binding arbitration under unfavorable terms? Is there an advantage to suing in a particular jurisdiction or before a particular judge? Would the insurer gain an advantage by filing a preemptive lawsuit in an unfavorable forum?
All of these factors are likely to have an influence on the parties’ respective settlement positions. Bear in mind that even after litigation or arbitration begins, the vast majority of claims are likely to be resolved informally before final judgment.
