In case of fire, break glass?

When your company suffers an insured loss, knowing what to do can speed up the claim process

When an insured loss such as fire or explosion occurs, a company’s controller or finance department often have a difficult time dealing with both the day-to-day financial matters and managing the insurance claim. The priority of every company is to make decisions going forward based on the best interests of the company. The insurance claim is simply a means to recover some of the losses attributable to the incident. Most companies will have insurance policies that cover property damage and business interruption losses. Property losses relate to the costs incurred in replacing and repairing the machinery and equipment damaged or destroyed by the event. The business interruption losses relate to the difference between the income the company would have earned if the incident had not occurred and the actual earnings. For most finance departments, a large insurance claim will be a once in a lifetime event. And in such an event there are some steps a company should consider as it attempts to achieve a successful resolution of the insurance claim and a timely reimbursement of the damages.

Review insurance policy Most standard insurance policies come in one of three forms: gross earnings form, profits form and business income form. Policies may also include endorsements covering extra expenses or reimbursement of costs for experts to prepare the claim (see “Covering the extras,” right). In addition, there are specialized policies for certain industries such as the oil and gas and the motor vehicle industries. After reading the policy, determine whether your insurance covers the event and if the insurance was in force at the date of the event. In general, the property must be owned by the company and have been subjected to a peril covered under the policy. For example, standard policies will usually cover damage due to a fire, lightning or explosion but will not cover damage due to war. Next, consider if a potential claim will exceed the policy deductibles, if any, described in the business interruption policy and the property insurance policy. In addition, the business interruption policy may have a waiting period before any claim can be made. The company must consider whether the business interruption loss period will exceed the waiting period. If it’s uncertain if the deductibles will be exceeded, notify the insurance firm of the incident. Notification procedures are normally detailed in the insurance policy. Under most insurance policies the company should notify its insurance company in writing as soon as practical after an incident has occurred. The insurance company will normally want to be on site so its representatives can review the damage as soon as possible. In addition, companies may want to notify their broker, who may be able to assist in the claim process.

Create a loss management team So you have a claim. Who will be on your team? The composition of the team will depend on the type of company. For example, a manufacturing firm may require:

• a finance contact to manage the collection of the financial information required to complete the claim;
• an operations contact to estimate the effect of the event on the production;
• an engineer to coordinate the rebuilding of the plant and to ensure all the costs of the rebuilding are separately identified;
• a risk management contact, if available, to negotiate the adjusting matters on the claim with the insurance company; and,
• an expert accountant to prepare the claim on behalf of the company

A team leader must also be chosen. That 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 team leader. In most large companies the claim would be managed by the risk management department.

Meet with insurer In most insurance policies after any loss or damage to insured property, the insurer has an immediate right of access and entry by accredited agents to survey and examine the property and to make an estimate of the loss or damage. It is important to arrange a meeting with the insurance company as soon as possible after the loss. The insurance company will usually hire an adjuster to assess the claim on their behalf. The adjuster may include additional experts on his or her team such as a claims accountant to assist in the measurement of the damages, an operations engineer to assist in reviewing the production matters and a mechanical engineer to assist in reviewing the property claim. The initial meeting between the adjuster and the company 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:

• a tour of the damaged area;
• the establishment of communication protocols between the adjuster and the company. In most cases, the adjusting team should make contact with the company through the team leader;
• an initial list of required information;
• a schedule for the presentation of the claim — interim submission of claim (approximately three months after the incident); submission of final property claim (approximately three months after the property damage has been repaired); submission of the final business interruption claim (approximately three months after the business interruption has ended); and final payment (about three months after the claim has been submitted).

Manage information After developing a good working relationship with the insurance company, the next task is to manage the information re- quired to complete the claim. Fortunately, most companies’ accounting systems will be able to track the information if it is coded properly. Some of the more important costs to track include:

• Property damage claim: clean-up labour; security; 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.
• Business interruption claim, which includes lost production, both expected production and actual production; lost sales (expected sales — budget/forecast for the 12 month period following the event — and actual sales); additional purchases; saved costs (e.g. electricity, gas, royalties); extra costs (e.g. freight).

Mitigate your losses Under the terms of most insurance policies and for the long-term health of the business, companies should attempt to mitigate their losses during any business interruption. For example, companies may attempt to source their products from third parties or rent machinery to replace damaged machinery. Companies may expedite the delivery of replacement equipment to reduce the downtime. Most insurance policies insure these expenses to the extent that the aggregate of such expenses does not exceed the amount by which the loss is reduced.

Another example of mitigation may be to perform maintenance of undamaged machinery that was scheduled for a future shutdown. In this way, the future shutdown may be avoided, hence reducing the losses suffered by the company.

If repairs are not carried out with due diligence and dispatch, the indemnity period of the business interruption losses may be reduced by the insurer.

Submission of interim claim In a claim involving a repair lasting more than three months, an interim claim may be submitted. As evidence of the claim, the company is required to file a formal written proof of loss. These forms are provided by the insurance company when it has been notified of the loss.

Submission of final claim In an ideal world, a final claim should only be submitted when all the information is available. However, if 95% of the information is available, a review of the time required to obtain the remaining 5% and closing the claim within the time limits set at the initial meeting should be considered. Normally, final proof of loss forms provided by the insurer may be submitted for final payments.

Settlement negotiation The property claim and business interruption claim are normally settled by negotiation. The company’s negotiation team should at a minimum include the team leader, the expert accountant and the risk manager. In the event of 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. Hopefully, these steps will assist in the event of having to deal with a catastrophic event and will help lead to an accelerated insurance claim process if such an event occurs.

Covering the extras The extra expense endorsement is often purchased if the additional costs incurred after an event are expected to be greater than the reduction in loss. For example, the cost incurred by an accountant to relocate after an event may be greater than the reduction in lost income. The endorsement to cover the cost of experts to prepare the claim extends the policy’s coverage to include any reasonable fees incurred by the insured for an expert accountant’s services to prepare the claim on behalf of the insured.

Technical editor: Ron Salole, vice-president, Standards