Canadian Underwriter
Feature

Calm During Crisis


August 1, 2007   by Kieran Hallinan & Glenn Tautrims


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This article was prepared with the kind assistance of Jeff Peters, risk manager at Talisman Energy Inc.

You are a risk manager enjoying a well-earned rest on a Sunday afternoon when the phone rings. A branch plant has suffered a catastrophic loss. Do you know your role and the role of your expert accountant?

THE RISK MANAGER

After reading and re-reading your policy, determine whether your insurance might cover the event, and whether your insurance was in force at the time of the event. In general, your company must own the property and the property must have been subjected to a peril covered under your policy.

Next, in consultation with onsite management, develop a high-level estimate of the cost of the damage, as well as the expected duration of the downtime for repair. Consider whether any potential claim will exceed the policy deductibles and/or business interruption waiting periods, if any, associated with the coverage applicable to the incident. If there is limited information, err on the side of caution, and notify your insurance company of the incident.

Notification procedures are normally detailed in the insurance policy. Under most insurance policies, you should notify your insurance company in writing as soon as practical after an incident has occurred. The insurance company will normally want to be onsite so its representatives can review the damage as soon as possible. In addition, you may want to notify your broker, who will be able to assist with policy wording issues and negotiations with the insurer.

THE LOSS MANAGEMENT TEAM

Okay, so you think you have a claim. Who will be on your team? Generally, the composition of the team will include both internal and external expertise and will depend on the type of company. For example, a manufacturing company may require:

* an internal finance contact to assist the expert accountant in the collection of the financial information required to complete the claim;

* an internal operations contact to estimate the effect of the event on production;

* an internal engineer to coordinate the rebuild of the plant and to ensure all of the costs of the rebuild are separately identified;

* an external engineer to identify the cause of failure; and

* an external expert accountant to prepare the property and business interruption claim (this role is discussed in more detail below).

An onsite team leader must also be chosen. The choice will depend on the issues involved in the claim. For example, in a claim involving complicated production problems, the operations contact may be chosen as the onsite team leader.

The choice of the adjuster is also important. If the policy does not detail who the adjuster should be, then the risk manager and insurer will have to agree on their choice. Canvass your contemporaries in similar industries for their recommendations.

INITIAL MEETING

The initial meeting between the adjuster and your loss management team should take place as soon as possible after the incident and should focus on building trust. When the insurance company and the insured act as one team, it will minimize the disruption caused by the event. Often the agenda of a typical initial meeting might include the following:

* touring the damaged area;

* establishing communication protocols between the adjuster and your company (see below);

* preparing an initial list of the information required by the adjuster;

* establishing a timetable for deliverables, once they are identified, in order to keep the entire team working towards the same goal of resolving the claim;

* reviewing the plan for the repair and recovery; and,

* discussing how your company is mitigating their losses during the business interruption period.

To achieve a consistent message, and to avoid release of information before issues are resolved, you, as the risk manager, must be the conduit for all communication between the adjuster and your company’s management. This communication should be two-way: you will update the adjuster as to what your company is doing, and the adjuster will inform you of what the insurer is doing.

You should also coordinate regular meetings with the claim team to discuss the claim progress and to discuss and resolve concerns and unanticipated problems.

FILING A CLAIM & SETTLEMENT NEGOTIATION

In a claim involving a repair lasting more than three months, an interim claim may be submitted. As evidence of the claim, you are required to file a formal written proof of loss.

In a perfect world, a final claim should only be submitted when all the information is available. However, if 95% of the information is available, then a review of the time required to obtain the remaining 5% — as well as whether the claim can be closed within the time limits specified in the initial meeting — should be considered. Normally, final proof of loss forms provided by the insurer may be submitted for final payments.

The property claim and business interruption claim should be negotiated in person. Your company’s negotiation team should at a minimum include your onsite team leader, your expert accountant and you as risk manager. In the event of a disagreement, the matter may be determined by appraisal.

The loss is normally payable within 60 days after completion of the proof of loss unless the policy provides for a shorter time period. You should ensure a timely collection of payment from your insurers.

A risk manager normally uses an expert accountant to develop and prepare the claim for the following reasons:

* the time constraints of internal company staff;

* the expertise of the accountant in claim development and preparation;

* the claim preparation costs are often covered in the policy; and

* the adjuster will normally use an expert accountant to review the claim.

The expert accountant should be experienced in claim preparation, have a recognized accounting qualification, knowledge of the industry and preferably be chosen before an incident occurs.

The expert accountant should work very closely with your internal experts to develop the property and business interruption claims and manage the internal information.

The property claim will involve developing procedures to collect the replacement costs. Some of the more important costs to track are: the company’s own labour used in the rebuild; third-party contract labour used in the rebuild; machinery and equipment rental; scrap; supplies; and freight costs.

The business interruption claim will involve identifying an accurate yardstick to measure the lost profits. Depending on the policy wording, the lost profits may be based on lost production or lost sales. Some of the more important costs to track are: additional purchases; saved costs (e.g. electricity, gas, royalties); and extra costs (e.g. freight).

The expert accountant will be able to identify and discuss with you potential claim problems at an early stage of the claim development.

Next, the expert accountant will assemble the property and business interruption claims to be submitted to the adjuster within the policy wording. The schedules and the report wording will be discussed with you and the onsite team leader before finalizing.

SETTLEMENT

During the settlement phase, your expert accountant will work with the opposing accountant to reduce the number of issues that have to be discussed at the final settlement meeting. The expert accountant will assist in negotiating the remaining items during the settlement meeting.

Hopefully this article will allow you to stay calm in a crisis and lead to
an accelerated insurance claim process if an event occurs.


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