Containment Strategies

An adjuster walks onto a site. At first glance, it appears to be a relatively minor and routine loss. But all is not as it appears. In the blink of an eye this small loss has escalated into a large loss. Litigation looms, reserves skyrocket, policyholders are unhappy and crucial evidence has either been lost or spoiled. The root cause is still unknown and nobody involved in the claim is speaking to each other.

The transition of small losses into large losses can happen for a plethora of reasons. The number one way to help prevent these situations is communication — communication between the adjuster, the contractor, the experts, the insurance company and the insured.

Reasons for escalating costs

Lack of communication

Lack of communication or control on a file can have a significant impact on the handling of claims. This is never more obvious than during an emergency situation. Often an adjuster is not immediately involved in the loss and only has access to the scene after much of the emergency work has already been completed. By this point, it’s often too late for the adjuster to assert control over the claim, according to James Giffen, manager of Crawford & Company (Canada) Inc.’s Global Technical Services branch in Toronto.

When adjusters are not present, claims costs can increase during an emergency situation, either because the contractor has done more work than required, or the work has not been done to an adequate level (leading to further expenses in order to complete the work properly).

Adjusters need to get to the emergency scene as soon as possible and keep the lines of communication open. They need to remain actively involved in the claim so as to control the process and the scope of the repairs. “In other words, we need to make sure that the cart is not driving the horse, and that the adjuster is controlling the process and not the contractor,” Giffen says. “It really should be a joint effort, a joint venture between the adjuster and the contractor.”

It is easy to blame the contractor when things go wrong, but that is not always fair, Giffen notes. He observes that contractors sometimes receive very little guidance from adjusters. When left on their own, contractors will work on the “better safe than sorry” premise and do more work than is required rather than risk not doing enough.

An adjuster who does not communicate adequately, lacks experience or understanding of what is required, or who fails to thoroughly review the cost and estimates with the contractors or the insureds can push the cost of the claim higher.

“You can run into a situation quite easily where if you don’t have control, you may think a contractor is in and out of there, clearing for just a few days, and then you return to the file a few weeks later and find out that they are still there,” Giffen warns. “Now your $20,000 job may be a $200,000 job.”

In some instances, the contractor might spend an extraordinary amount of man-hours and dollars to clean and restore items that an adjuster or policyholder intended on discarding. This kind of situation happens when there is a breakdown in communication between the adjuster and the contractor.

“If you don’t give direction and you don’t have control, you can’t be surprised if somewhere down the road, the cost of a claim is far more significant than you thought,” Giffen warns. “The contractor is trying to do the best job he can and the most thorough job that he can. Getting very little direction can be quite scary for all parties.”

A lack of direction or communication can nullify the potential to subrogate a claim if there is evidence spoliation.

The opportunity to recover an underwriter’s subrogated interest can be lost if evidence is not preserved, including the continuity of evidence and the origin and cause of the loss left unidentified, John Hall, Toronto branch manager at Kernaghan Adjusters, notes. Insurers would want to subrogate a claim to the party responsible for a loss, so the costs don’t fall on their shoulders.

“The classic [mistake], I suppose, is when you unwittingly overlook or ruin a subrogation opportunity,” Mark Bailey, senior engineer and director at MEA Forensic Engineers & Scientists Ltd. agrees. “A great example of that would be: Maybe there’s water escape and the ‘smoking gun,’ which is the broken pipe . . . , either gets tossed by mistake or somebody seizes the evidence or doesn’t get enough of it.”

Bailey recalls the instance of a restaurant fire, in which all signs pointed to a problem with a washing machine. The restoration firm put the washer outside; due to a communication error, somebody ended up putting the washer out to the trash. Even though a team tried to recover from the mistake by searching the local dump, the water was not recovered. The opportunity for subrogation was lost. “Fairly innocent thing, though,” Bailey says. “People just trying to do their jobs and evidence gets thrown in the trash.”

Sometimes the miscommunication is between the adjuster and the policyholder. Phil Moore, vice president of national accounts at Disaster Kleenup Canada Ltd., remembers a situation in which a contractor received a call from a property manager of a condominium about water coming into one unit. The contractor told the manager to shut off the water from the standpipes. But by the time the contractor arrived a short time later, water had infiltrated 36 units. The property manager had not been told where to find the shut off valve, thus increasing the loss exponentially.

Hiring the wrong expert

Hiring the wrong expert, or an unqualified expert, can also increase costs or negate the ability to subrogate a claim, Chris Giffin, president of Giffin Koerth, notes.

He recalls a situation in which a fire damaged a house located on the former boundary line between two recently-amalgamated municipalities. A fire department was dispatched, but when they were a minute away from reaching the fire, the dispatcher called in to say the house fell within another fire department’s territory. The truck turned around and another fire department was dispatched. The second fire truck did not arrive until several minutes later. With a view to subrogating the claim against the fire department, the insurance company hired a fire investigator to determine the impact of the fire department’s delay. The investigator determined that the fire started outside the home and propagated into the home.

A second expert was retained to model the fire and determine how the fire spread. The insurer intended to use this evidence to prove that the damage might have been reduced had the fire department arrived at the original time. The second expert should have comprehensively reviewed the first expert’s conclusions. Instead, the second expert simply took the conclusions of the first expert at face value. Also, the second expert misapplied fire modeling software that was not meant to be used for outdoor fires (it is designed for contained spaces such as inside a building). The second expert concluded, therefore, that it did not matter when the fire department responded to the fire, because the house would have been destroyed regardless. Due to the lost opportunity for a subrogation, the original loss, which was comparatively small, suddenly blew up into a total loss.

Ultimately, however, the insurer was able to subrogate the loss against the fire department. It hired a third expert who determined that a) the fire started inside the building and b) the delay of the fire department’s arrival had a significant impact on the damages to the house.

Delays in hiring the right expert

Sometimes it’s not about who an insurer hires, but rather who they don’t hire that matters.

Giffen recalls a claim a number of years ago where a homeowner, who was a doctor, came home and accidentally dropped her medical bag onto the floor. Her thermometer broke and 10mg of mercury spilled onto the hardwood floor in her older home. The insurance comp
any hired an adjuster who went to survey the damage. At first, this was thought to be a small loss; a small amount of mercury had seeped into the floor, and all that would be required was to lift off some of the flooring, clean up the mercury and re-lay that particular piece. As time went on, this seemingly minor loss escalated into a total loss. It took two years and the hiring of the appropriate experts to determine that mercury travels into the air, into soft furniture and into the wood. They eventually determined that the entire house would have to be torn down and all the contents replaced. What was originally thought to be a $5,000 loss turned into a $450,000 loss. In this instance, it took a fair amount of time to realize the necessity of hiring an expert who had some knowledge of how mercury travels. By then, it was too late.

Preventive measures

All is not lost, literally, when various strategies are used to contain property damage claims costs. A quick response and on-site inspection by a qualified adjuster can help to limit exposure, Hall notes. “In my opinion, nothing substitutes for an independent assessment allowing for identification of potential pitfalls.”

Open communication

It is critical to keep the lines of communication open between adjusters, insurance companies, contractors, experts and the insured. Each of these parties has a substantial impact on the claim and can help contain costs if they are kept in the loop.

“The human [element] and managing the human component of a claim [is] more important than the actual rebuilding process, because everybody has to have an understanding of what that process is going to be so that they can feel satisfied at the end of the day,” Winmar president John White says.

The adjuster must be the first point of communication. It is up to the adjuster to make sure everybody is aware of what is being done and what needs to be done. The adjuster needs to spend an appropriate amount of time on-site developing a clear understanding of the work that is being done, why it is being done and the costs associated with the claim. Conveying this information to others involved from the outset can held to curb bigger issues further down the road.

“Lack of communication is something that costs us all throughout any kind of process, and that is something . . . a lot of insurers recognized,” Irene Bianchi, vice president of claims at RSA, notes. “We have some fairly strict protocols in place, in terms of how communication happens, when it happens and through whom it happens.”

It is really about being clear and trusting that both parties are going to do the right thing and ensuring that questions are asked if things are not clear, she says. “I think that oftentimes when miscommunication occurs, it’s because people have assumed things that are not necessarily correct. It’s all about asking questions and being open and honest with each other. That way, we can work through any issues and resolve things.”

Immediate instruction to the insured or contractor to preserve evidence or suspected cause of loss is critical, Hall cautions. Continuity of evidence must be preserved in writing. “The door to recovery can be quickly closed when crucial evidence disappears,” Hall says.

Giffen adds it’s all about developing a plan. “Know where you’re going and how you’re going to get there, and work with the partners on how to accomplish that,” he cautions. “You’re going to be far better off and serve everyone more efficiently than if you run at something with blinders on.”

Joe Turcotte, claims manager at FM Global, says adjusters need to do their homework, which is essential to being prepared and having a plan. “Have a plan, identify the dispute potentials and then sit down and methodically work through it, but at the same time always be that active listener.”

Communication and active listening confirm that you understand what has been said and conveyed, Turcotte says. “The best adjusters are the ones that can come in and change what they do and adapt and see that the client wants something different,” he notes. “The insured needs something different, [and so] I [need] to change what I do.”

Keeping track of costs

An adjuster needs to keep the file on track. This involves reviewing costing and estimates with the contractor and the insured upfront and continuously throughout the process. It always involves firming up the logistics of the case early in the process.

For example, try to ensure straightaway that the claims costs — both the hourly labour rates and the cost of equipment rental — are reasonable and that the required equipment is obtained to do the job. An adjuster needs to make sure the rate paid for an equipment rental over the course of a job does not exceed the outright purchase price of the equipment, Giffen notes.

Also, in discussions with the contractor, an adjuster must immediately determine:

• whether the costs are reasonable;

• what are the posted rates for labour, equipment and material;

• what is required to do the job, what the contractor can supply and an estimate of what all of this will cost;

• whether the costs are in line with general industry practices;

• items excluded from claims payments, such as standard equipment for the contractor (i. e. ladders, extension cords, etc.).

• drilled-down costs whenever possible;

• the sub trades owned by the contractor (how will these groups charge for expenses?); and

• whether the contractor is prepared for an audit and full disclosure.

“Make sure that when you are talking to contractors about auditability that they understand what it is,” Giffen notes. An insurer’s audit is not just about signing off on time sheets and a list of consumable items: it means reviewing source documents indicating the true costs associated with the job.

Adequate documentation is also essential in an emergency situation, when there is no time for contractors to bid on a job. An emergency situation typically involves the available contractor working on a job based on time required and materials used. Often the cost is not known up-front, leading to imprecise ballpark estimates. An adjuster should ensure that a contractor knows what documentation will be required to quantify the bill. This could mean the contractor will be audited by an accounting firm to document payroll and materials used. An adjuster needs to confirm this point from the get-go, Giffen says, because some contractors are not prepared for that type of scrutiny.

One way to reduce costs submitted by a contractor is to hire a clerk or a consultant to sit at the job site and monitor how many people were on site, for how long the crew worked, how much they accomplished and what equipment they used. This helps to avoid a scenario in which a contractor claims that 20 people worked on site for eight hours a day, when in fact four people worked at the site for six hours a day. Hiring a clerk can also ensure someone is supervising the daily progress of the crew, Giffen notes.

The right people for the right job

Adjusters need to make sure qualified experts are brought on board as soon as possible. This includes hiring a contractor with the appropriate qualifications, licensing and insurance to complete a job. Adjusters should ask the contractor questions to confirm they are the right company to use for a particular job. When working with the contractor, implement a standard procedure for documentation and enforce this with the contractors hired, Moore notes. The documentation should have standard wording designed to avoid litigation. It should also improve the decision-making process at a period when time is of the essence.

Experts are helpful — sometimes crucial — in determining the root cause and origin of the damage. Some typical root causes of damage include the following:

• poor design;

• poor manufacturing;

• poor materials;

•
poor maintenance; and

• operator error.

Giffin says adjusters need to ask themselves if one or more of the root causes listed above are responsible.

Appointing qualified forensic consultants to determine the feasibility of restoration versus replacement can also help to control costs, Roy Atkinson, assistant branch manager in Toronto at Kernaghan Adjusters, says.

If an adjuster doesn’t know the type of expert required for a particular case, Bailey recommends they call the expert to ask a few questions. Doing this is cost-free, and might save costs in the long run. An expert can let an adjuster know what to look for, whether something should be saved for evidence or whether an expert needs to come out to the site straightaway.

If an expert is required, make sure the right expert is appointed for the job. Every expert has a specialty, and although one expert might be best to cover one aspect of the file, a different expert may be more qualified for another part of the job. Ask questions to ensure the right expert is appointed.

Using the right equipment

A plethora of new technologies is available that can help contain costs. Soft and hard contents are often tossed and replaced, for example, even though the right equipment can disinfect the contents so that they can be returned to the policyholder. The use of such equipment is not only more cost-effective, but it reduces the downstream environmental effect, Moore notes. Over the past year, new technologies for cleaning soft goods has saved the industry nearly $6 million. As a result of these technologies, nearly 56 dump trucks’ worth of soft goods, retrieved in more than 1,200 claims, did not end up in a landfill.

When working on a water damage claim, consider dry heat as an alternative option, Moore notes. Dry heat works faster and costs less money than other methods of drying out water damage. Not to mention, the contents can usually remain in the room, which means there is no cost to remove them all from the premise. Consider infrared cameras to see where water might be, saving the time and cost associated with cutting out drywall in various places in the home.

In addition, biotechnology might provide a cheaper and faster way to remove spills such as home heating oil and sewage. They include engineered bugs created to eat sewage, oil or whatever other substance requires cleaning — and then each other.

“There are a whole bunch of new technologies out there that will directly impact your bottom line,” Moore notes. “Claims will be closed faster and much more cost effectively than they have in the past if you embrace them.”

Moore recommends that adjuster learn about new technologies and options available to them, but at the same time, he is looking to increase trust between adjusters and contractors.

“I don’t want the adjuster to be as knowledgeable as the contractor, that’s not real,” Moore says. “They’ve got a big enough job to do as it is. I want to end up where you trust me, because I’m the one who is supposed to know all this stuff. I’m the one who’s supposed to understand it.”