The wildfires that ravaged Southern California last fall highlight the need for businesses not only to purchase adequate insurance, but to move swiftly in the wake of disaster to maximize the coverage they have purchased.
Preoccupied as they may be with the physical tasks of recovery in the wake of disaster, business owners must also focus early on insurance recovery -- giving prompt notice to all their insurance carriers, documenting all losses, and preparing to fight for coverage if necessary.
First party insurance disputes are typically not about whether coverage exists but rather how much coverage exists. How much was a business premises and the equipment it housed worth and how much will it cost to rebuild? How much income was a company knocked out of business by the fire going to earn over the next few months?
Policyholders and insurance companies always come to different conclusions on these issues, and the magnitude of the differences becomes much greater when insurance companies face many similar claims. Businesses must be prepared to fully document all losses and fight for every dollar of the coverage for which they have paid. Here are ten things for policyholders to consider in pressing insurance claims:
1. Find your policies: Destruction of offices, records and files can make this basic task harder than it sounds. Your broker can help if your records are disrupted. If your records are destroyed, send your insurers written requests for your policies. Find primary, excess, local and global property insurance policies as well as inland marine, multi-peril, fire and business owners' policies. If one policy excludes a cause of damage -- e.g., flood, mudslides, or mold -- another may well provide coverage.
2. Give prompt notice and remember all policies: Give notice as soon as possible. Do it even if you're short on details at present -- you can always provide more information later. Failure to do so can nullify coverage -- 'late notice' is one of insurance companies' favorite coverage defenses. Usually, your broker should give notice under all relevant policies, but monitor this. Have the broker send you a copy of the notice letter.
The effects of disaster can be far-reaching, and someone may hold your business responsible for something. If faced with third party claims, consider what notice should be given under liability (e.g., general liability and errors and omissions) policies.
3. Read the policy: Property insurance policies typically are bulky, and their wordings and coverages are complex, but property insurance is not high-energy physics. A close reading of your policy, with the help of your agent or broker, will probably reveal most of the provisions under which coverage may exist, and form a basis for intelligent discussion with your insurance company.
A close reading will also enable you to deal strategically with policy exclusions. For example, while commercial property policies universally cover fire damage, most exclude mold damage. Mold frequently occurs in fire-damaged buildings that were soaked during firefighting or that remain partly exposed to the elements when the fire subsides. Policyholders whose property suffers damage from multiple causes must be prepared to make the strongest case possible that damage stems from covered causes – for example, that walls infested with mold were first destroyed irreparably by fire.
4. Remember "business income" and "extra expense" coverage: In addition to coverage for physical loss or damage, most business policies provide business income coverage, which pays the business's loss of profit and continuing expenses (e.g., insurance premiums, management salaries, payroll) during the loss period. Many policies also include contingent business income coverage, which pays for loss caused by damage to key customers, suppliers or partners. Extra expense coverage pays costs incurred to minimize or avoid business income loss. "Order of civil authority" coverage kicks in -- often with little or no deductible -- when civil authorities impede access to a disaster zone.
5. Secure tolling agreements: Property and business interruption losses often take months and sometimes years to resolve. Provisions limiting the time for you to provide 'proof of loss' or to repair or replace damaged property can often be extended by written agreement. Most policies also assert a deadline before which any any suit against the insurance company must be filed. If negotiations are running up against that limit, get a written extension of your time to file suit.
6. Be a Squeaky Wheel: Insurance companies "ration by hassle" they deny or minimize claims and do all they can to discourage policyholders, finally paying only the persistent policyholders who do not take "no" for an answer. Do everything in your power to demonstrate to the insurance company that you will not simply go away. If your claim is moving slowly or if the insurance company is offering inadequate payment, write letters demanding that they explain their coverage positions. If unanswered, write further letters incorporating all previous requests for information and demanding immediate responses. Make them commit their positions to writing, since they often shift rationales in the course of a long negotiation. Finally, confirm all conversations in writing immediately and respond immediately in writing to all requests for information, lest the insurance company later complain that your own lack of alacrity was the cause of your Business Income losses. Written, contemporaneous correspondence is a must if the claim goes to litigation.
7. Keep a diary and document all loss items: Insurance companies often question, contest and reject loss items. Keeping complete and accurate records provides policyholders with vital ammunition when resolving these disputes. Video and photographs to document losses, and insurance company inspections of losses, are also helpful.
8. Consider Outside Help: If your claim is big enough, consider hiring a Public Loss Adjuster and/or an accounting firm that specializes in Business Income accounting. The insurance company will almost certainly hire an "independent" adjuster, and one or more accounting firms that specialize in representing insurance companies; it will also probably hire, and conceal the hiring of, a law firm. If the insurance company presents an adjuster or accounting firm as "your" or an "independent" adjuster or accountant, do little research on that firm. A quick internet search will likely reveal that the company works solely or primarily for insurance companies. Your insurance company's engagement of such a firm may give you an early indication of how it is treating your claim.
In the wake of a large-scale disaster you will likely also find that your adjuster has been flown in from out of state. (As is common practice after disasters, the California Department of Insurance has authorized insurance companies to use out-of-state adjusters.) These imported "storm troopers" generally lack knowledge of local conditions and local costs . In particular, adjustors paid by the insurance company almost never account for the spike in construction costs that always follows a disaster.
9. Renew or replace coverage: If catastrophe destroys some or all of your records, take steps to avoid letting policies lapse, creating unintended gaps in coverage. Also be alert to gaps in your coverage that the catastrophe may have exposed. For example, businesses in Southern California, whether or not they were affected by the recent fires, should check now whether they are also covered for mudslides, which often follow wildfires in Southern California. Some policies exclude mudslide coverage, some provide it, and some make it available as an endorsement. Those that do not have it should get it -- fast.
10. Persist: If your insurance company appears to be betting on a retreat rather than riding to the rescue, remember the first principle of insurance recovery: do not take 'No' for an answer.
About the authors:
John N. Ellison ([email protected]) is managing shareholder of Anderson Kill & Olick's Philadelphia office, and Richard P. Lewis ([email protected]) is a shareholder in the firm's New York office. Messrs. Ellison and Lewis regularly represent policyholders in insurance coverage disputes. Their clients range from Fortune 50 companies to small closely held businesses.