Natural disasters struck with devastating frequency and severity in 2011, wreaking more than $100 billion in insured losses. It’s natural following such a year to search for the lessons learned from specific incidents. From an insurance claims perspective, one of the most important lessons from 2011’s catastrophes is the importance of the preparation done before disaster strikes.

Pre-Loss Claim Planning

Large-scale catastrophic events such as hurricanes, tornadoes, tsunamis, and earthquakes can stress an organization’s operations, personnel, business model, and balance sheet. And as the 2011 earthquake and tsunami disaster in Japan demonstrated, a company does not have to be in the direct path of a disaster to suffer a significant loss. Whether it’s a physical loss or more of a contingent time element loss, it can be vital to a business’ survival that its resulting insurance claims are handled in a manner that gets the organization proper funding and the loss resolved.

This isn’t always easy, especially if the claim is large and underwriters push back. Pre-loss preparation work will go a long way toward ensuring that there are no coverage surprises following an event and may even simplify and speed up the claims settlement process.

One of the most important things insureds can do from a pre-loss standpoint is to fully understand their insurance coverage, including structure and coverage interpretation. In addition to carefully reviewing each policy with their broker and legal advisor, insureds also should initiate conversations with their underwriters to ensure clear understanding of the coverage between both parties.

Some of the major coverage issues that tend to arise post claim that should be discussed pre loss include:
 

• Policy wording. Understand the definition and differences between named windstorm versus flood; earthquake/tsunami versus flood; and contingent business interruption.
• Property damage valuation. Understand how the policy will respond to physical loss or damage—actual cash value or replacement costs.
• Deductible applications. Understand the various deductible applications. Does the policy contain a percent deductible, a dollar deductible, waiting period, or average daily value? How does the policy define occurrence with respect to earthquake, flood, or named-storm?
• Sub limits. Understand where they apply and determine whether they are adequate, especially for contingent time element exposures.
• Margin clauses. Understand whether the property and business interruption policy contains margin or co-insurance clauses.
• Distance limitations. Understand whether distance limitations are included in service interruption, ingress/egress, or civil authority provisions within the policy.
• Who is covered and where. Understand the scope of coverage in terms of the territory or geography covered and the named insureds.
• Increased cost of construction. Understand whether the policy limits the cost of reconstruction to building codes set as of the date of the loss or if it’s silent on the matter.

Understanding the structure and scope of coverage is an essential element of an overall claims management plan that should be part of every organization’s pre loss work. Such plans also should clearly define roles and responsibilities as well as the structure for reporting and tracking claims

Best-in-class claims management plans should incorporate the following strategies:

• Establish roles, responsibilities, and deliverables of empowered decision makers from your organization and your risk partners.
• Ensure that the plan supports your business continuity and supply chain plans as well as the organization’s overall operational and financial goals.
• Develop and maintain templates for documents to be used in the claim process including the claim reporting form, document request forms, financial tracking forms, and claim timeline forms.
• Designate key personnel who will be responsible for coordinating and communicating with the insurers’ claims representatives and their senior consultants
• Meet with senior insurer claims personnel to establish definitive loss management, communication protocols, and agreed loss management objectives.
• Ensure that the “insurance claims teams” work together as allies. All parties, both internal and external to your organization, must understand and support your financial and operational recovery goals.
• Establish a procedure to track and respond to industry trends that are likely to develop as a result of a catastrophic event—especially those that may have an impact on your claim or how insurers may view or interpret coverage for a specific event.
• Understand your property policies’ time sensitive provisions and how those provisions may be altered by governmental laws or rules following an event.

Tips on Getting Started

When developing a claims management team, consider individuals with expertise in:

• technical risk management;
• finance and accounting;
• engineering and construction;
• human resources;
• legal;
• government relations;
• insurance brokerage claims consulting; and
• forensic accounting.

Effective pre loss preparation may not always ensure an expedited recovery after a catastrophic event, but it will go a long way toward ensuring a smoother and quicker claims settlement process and eliminating many of the coverage “surprises” that arise after a loss is incurred.