Contents and Inventory
The starting point of pre-event planning is to take a physical inventory of all the assets of the firm. Do not rely on your asset listing but rather do a physical validation of the entire list and correct it as needed. The inventory listing should be used with an updated assessment of each item's fair market value without regard to the depreciation recorded with respect to such assets. Equipment with a significant fair market value should be appraised every two to four years by an independent appraiser. A videotape documentary will suffice for items of lesser value.
Following a loss, the replacement cost of damaged assets, not the depreciated value of the assets, will be relevant in settling your claim.
Real Property and Improvements
Real property and improvements claims are generally the most apparent to the insured and often represent a substantial exposure. The inability to properly substantiate the value of these assets often leads to inadequate insurance recoveries. To properly document a property claim the following information should be secured:
- original contract documents
- as built plans and a list of any improvements or betterments to the property
- a copy of local building codes
- a list of all leased equipment
- list of all items that are excluded from insurance coverage
- copies of any appraisals of the property and facilities
Business interruption documentation is another overlooked area that's detrimental to the policyholder. You should be prepared to produce the last three years of financial statements from all profit centers. Also, make available copies of the following documentation to support potential claims.
- insurance policies
- receipts listing
- accounts receivable listing
- tax returns
- third party contracts that may be affected by a loss
- cash flow projections
Establishment of accounting procedures to assure capture of all loss related expenses should be put in place and all records should be maintained in duplicate and stored in separate locations.
The importance of establishing a relationship with a service contractor to respond in the event of a loss cannot be overstated. Securing these relationships with a signed contractual agreement is warranted and advisable. This step will shorten response times and control costs during remediation.
The immediate response to a catastrophic event must be an attitude of control. The owner or designated leader must take control of the entire process from the very beginning. It's important to understand that the insurance policy on the impaired property may now be your most valuable asset and should be managed as such. It will be critical that your policy be used to address the critical business needs as defined by you.
It's the insured's responsibility to protect property from further damage. The service contractor secured during pre-event planning generally handles these duties, which includes boarding windows, tarping roofs and vacuuming water. In accordance with typical insurance policy provisions, it's necessary to notify the carrier of the loss and allow its representatives immediate access to the damaged property.
Limiting access and maintaining control of the area is also advisable and will reduce outside intrusions and disruptions. It is important to separate damaged from undamaged contents. Do not throw away damaged items but only agree to store undamaged or cleanable items. Use common sense and agree to have cleaning and restoration only on items that seem reasonable and set the rest aside. Cleaning and restoration is often attempted on uncleanable and unrestorable damage, which wastes claim dollars. Don't secure major repairs or make agreements with contractors or your insurance carriers at this time. At the conclusion of these action steps the situation should be stabilized and the process of evaluating and addressing your critical needs can begin.
An understanding that the policy does provide protection but it requires that you act in accord with policy requirements to activate and expedite the process. The first step that must be taken is to identify your immediate needs and as a general rule it is an immediate cash advance. Thus, at this point a partial claim should be submitted along with supporting documentation to ensure that the insurance company is financing the loss. The monitoring and execution of the process to provide funds in advance of critical needs is not the responsibility of the carrier. In the Houston plant, the funds available to operate the company were substantial and more than adequate for normal operations but when billings stopped and expenses continued, the crisis began to develop.
A Critical Look at Your
Often at this time the speed of the process is increasing in addition to the insured realizing that he does not possess a complete understanding of the policy and how it applies to the loss. Instead of reacting, the policyholder should stop and evaluate the problem objectively to ensure he does not loose control of the process and potentially his business. Adjusters are trained to take control of the process and as an agent of the carrier their interests inherently conflict with yours. In addition contractors are often relied upon to manage the interests of the insured but generally work for the carrier and are not familiar with how the policy provisions apply to the loss. In short it is your responsibility to represent your interest at this critical time.
Your evaluation of how to proceed may include the following:
- How should I approach the claim to expedite the rebuilding of my plant?
- What is the proper way to value the loss based on the policy provisions in place?
- How do I ensure that cash for operations and construction will be available when needed to avoid financing the loss from my funds?
- How do I maximize all the coverages that I have purchased on my facility?
- What options do I have under the policy regarding recovery?
- Are there any penalty provisions that need to be managed in the policy that is in force?
- Do I have any technological obsolescence issues to address?
These issues and many more site-specific examples should be evaluated to ensure that your end result is of a satisfactory nature.
The common misconception among insured is that it is the carriers adjusters' job to determine the value of the loss. By default on the part of the insured, this often does happen but it is actually the contractual obligation of the insured to provide a complete and full "Proof of Loss" to the carrier and the carriers job to review and evaluate. You're obligated to formally inform the carrier of the full scope of the loss, the value of the damage, which includes both the real property, inventory and business interruption losses. A complete understanding of the loss and how it applies to your policy is critical for a proper submission. Your responsibility is to represent your interests to ensure there is no self-insured aspect of the loss.
A "Proof of Loss" will include the following:
- time and cause of the loss
- names of those with financial interests or encumbrances with respect to the property
- insurance contracts
- replacement cost of each item in a content claim with appropriate backup
- replacement cost of entire scope of construction based on unit costs
- business interruption claim with supporting documentation
Your insurance contract will determine the exact coverages and how they apply but all aspects of the claim, property, contents and business interruption, work together to properly indemnify the insured.
As early in the claim process as possible an understanding of the scope of the physical damages should be established between the insured and the adjuster. This will allow for remediation and reconstruction to begin and provide a foundation from which to work to settle the claim. While the concept is simple it can be very confusing depending on the type of damage, training and motivations of the evaluators. The impact of decisions regarding repairs verses replacement with regards to the long-term serviceability and resale value of the property should always be a consideration. In short, the insurance company's responsibility is to restore the building to its pre-loss condition in accordance with the policy provisions. It's your responsibility to ensure that the loss is handled in a manner consistent with the policy provisions and your best interests.
After the proper scope has been established and repair decisions have been made, the task of determining the proper value of the loss commences. Often insureds are pressured to use contractors for determination of claim value and for negotiation assistance. In specialized instances this is warranted but in most cases it is advantageous to the insured to settle the claim based on established values of the construction in their region of the country. This method protects the insured in the following ways: allows for evaluation of the claim value on objective data instead of contractors trying to secure a project, allows for future recovery of any missed aspects of the loss and gives any benefits of competitive bidding or project modifications to the insured where it belongs. During the valuation phase all policy provisions regarding upgrades or additional coverages must be addressed, and evaluation of penalty provisions in the policy should also be reviewed. This ensures that the claim represents the full value of covered property and that you, the insured, control any benefits or modifications and that the claim is expedited based on your needs and objectives. The property claim will then be ready for presentation to the insurance company, with complete unit pricing and accompanying detail. At this point, it's the adjuster's job to review the submission and to propose any modifications.
Depreciation becomes critical after the value of construction has been determined by all parties. Depreciation is critical because it determines the actual cash value of the loss if you choose to exercise certain options that may be available under the policy. While recoverable, depreciation can be challenging to collect depending on the policy provisions and the options that you choose to exercise. The objective is minimizing the depreciation holdback, thus increasing the actual cash value at the beginning of the claim and to position it to completely recover the minimized depreciation.
A contents claim is similar to property claims. You're required to prepare the claim and submit it for review. It must be in the format outlined in the applicable insurance policy, and it must include a complete listing of all items damaged, including fair market values, with supporting documentation. The more detail and preparation committed to this critical task will be rewarded by a substantial positive impact on your recovery. For each insured item, the objective is to determine the value of a replacement item at today's costs. After the claim is submitted the carrier will review and evaluate the submission. You should be prepared to back up submitted values with facts. After establishing a value, depreciation must again be addressed. Each item should be negotiated separately to minimize any depreciation holdback. You'll be responsible for minimizing the impact of depreciation on the claim. The insurance company will sell the property as salvage after the claim is settled to minimize the claim's impact to their company. Purchasing property at its salvage value is generally available to you if requested and this can be quite advantageous if handled properly.
Generally, property and contents claims are addressed first. You can maintain control of these claims if pre-event planning and loss documentation has been properly addressed. If you haven't spent the time to represent your interests, don't expect the insurance carrier to do it for you.
The Business Interruption Claim
The last phase of the claim is business interruption submission. The concept of indemnifying the insured from any loss of earnings seems simple. However, settling this type of claim is the most complex of adjustments. The preparation of the business interruption claim is not an accounting function, rather the accounting information, with respect to historical earnings, cash flow, budgets and projections, must be used with other information prepared to conform to applicable policy provisions. The information must be presented and substantiated in accordance with your carrier's format, which varies with each insurance carrier. An awareness of how decisions made during the property claim process impact the business interruption claim is also necessary to ensure a complete submission. As with the real property and contents claim, the business interruption claim must be fully documented to include all aspects of the loss. Once again, it is not the carriers job to ensure every aspect of your business interruption claim is addressed you must ensure that the submission is all-inclusive based on your policy provisions. A timely submission is also critical to ensure that loss revenues are recovered so the company does not run out of working capital before normal operations resume.
What options are available to you to minimize the impact of a catastrophic event and to meet your objectives? You have three options available in preparing a claim:
- Allow the hired adjuster to represent the insurance company's interest to adjust the loss.
- Negotiate on your own behalf, interpret policy provisions and apply them to the loss and prepare the property, contents and business interruption claims.
- Hire a loss consultant to represent only your interests, evaluate policy provisions, document the claim, advise of business options, package and settle the claim with the carrier.
In Texas the company was never able to reopen for business, the cash in the bank was quickly used to pay management, begin reconstruction and try to retain market share. When the claim and the resulting payments were not forthcoming in a timely manner the company was forced into bankruptcy. Months later, professionals were retained and able to recover the dollars due under the policies but the real value of the business to the community in terms of jobs and future earnings will never be recovered. All this could have been avoided with minimal preplanning and proper management of the event.
All claims are complex matters and must be properly managed. With professional assistance, the recovery can be complete, expeditious and confusion-free. Hiring consultants to handle your loss allows everyone to do what they do best. You and your staff can continue with your job responsibilities, while the consultant manages the loss. Everyone involved can focus on their own strengths, giving you long-term benefits. The National Association of Public Insurance Adjusters and state trade organizations such as the Texas Association of Public Insurance Adjusters can be contacted for information regarding the qualifications of the various professionals in this field.
If your firm will spend the time to prepare and be ready to manage a catastrophic event, you can "Change the Odds "if a catastrophic event happens on your watch.
John Elder is the Regional Director of Jansen and Company. He is responsible for the education of risk managers throughout the country regarding how to properly prepare for the prospect of a first party property loss.
This article Printed in Volume 13, Issue 1