The safety and well-being of employees should be business owners’ primary concern during and immediately following a catastrophic event, and all companies should have a detailed emergency plan in place before disaster strikes. The path toward financial and operational recovery is not always straightforward, especially when that recovery involves preparing and submitting insurance claims. Issues surrounding property damage, business interruption and calculation of both losses and remediation costs are complex. Proactively developing a robust recovery plan and engaging experienced forensic advisors to assist with claims and their inherent challenges can be keys to getting business—and profits—back on track.
I. Disaster Preparedness
Disasters, whether naturally occurring or man-made, compel companies to focus on the immediate challenges before them. However, in order to successfully recover costs and return to normal operations post-disaster, it is crucial to consider long-term consequences and anticipate the company’s needs from a variety of angles. Although many companies are prepared for disasters when it comes to safety procedures or recovering and maintaining business operations, few have considered how their accounting and financial procedures could facilitate quantifying and presenting a commercial insurance claim for recovery.
When devising a corporate disaster plan, it is important to include a method for segregating and capturing disaster financial costs in preparation for filing a commercial insurance claim as well as any financial issues that may arise. It is best to understand in advance that some costs may be covered by insurance, some by the government and some not at all. If an organization is prepared in advance of a disaster, it can establish various accounts in its general ledger to track and capture information related to external and internal costs. This will allow the organization to fully identify the costs associated with recovery in the months following.
It is also essential to create clear lines of responsibility and accountability, as the usual decision-making processes often collapse under the strain of disasters. Depending on the scale of the damage, top-level leadership—up to and including the CEO—can be involved in the submission of a commercial insurance claim. Companies operating on a global scale should consider region-specific teams and plans to minimize and manage issues that may be specific to particular localities. Policies and procedures with built-in adaptability will be able to respond more effectively to the burdens and obstacles created by catastrophe.
II. Disaster Recovery
Companies often lack the resources and experience to manage the insurance claim process. This inexperience can lead to inefficiencies, unnecessary complications, and unexpected challenges, which, in turn, can negatively affect or impair the recovery of losses.
The first step in recovering losses should be a proactive one. Conduct a thorough review of the insurance policy to determine the breadth and limits of coverage, the losses that are covered, applicable formulas for recovery, stipulated documentation, and processes that are required. This review is not always easy. Insurance policies often are highly complex and open to incorrect—and sometimes damaging—interpretations. Fully understanding a policy’s provisions can be essential to properly calculating, claiming, and fully recovering losses.
Companies that are considering filing an insurance claim may consider first assembling a dedicated team, which could consist of internal and external personnel, to objectively assess and gather supporting documentation on the claim. This team may include the company’s chief financial officer, chief risk officer, and general counsel. It may also be prudent to retain an outside forensic advisor who is well-versed in preparing, analyzing, and negotiating complex insurance claims across a wide range of industries, and with expertise in pursuing—and securing—recoveries from both the private and public sectors, including agencies such as the Federal Emergency Management Agency (FEMA). Forensic advisors can lead or be integral members of the team and provide guidance throughout the claims process. Many major insurance policies will reimburse companies for the cost of retaining forensic advisors to review and manage the recovery of their claims, and their experience can be invaluable as companies navigate the process.
Review of the insurance policy should be concurrent with the careful and detailed identification of expenses related to the event that caused the claim, and any extra expenses incurred by the company’s response to the event. An experienced forensic advisor can recommend practices to accurately segregate and quantify recoverable costs. Forensic advisors also can objectively assess the initial loss or impact on the business, including any systems or assets that were damaged, and the impact of those losses on the company and its potential earnings. After gaining a thorough understanding of policy protections and limitations, companies should notify the insurer of a claim as soon as possible. Maintaining open lines of communication with the insurance company about the status of the claim allows companies to anticipate and avert challenges in cash flow and take full advantage of built-in support available to them while the claim is being processed.
Once the insurer has been notified of a claim, the team should thoroughly analyze and aggregate all relevant data and documentation to support the claim. The quality and clarity of this documentation is crucial to a claim’s success, as it will be used as the basis for making the claim and for substantiating such issues as property damage, business interruption, and extra loss-related expenses incurred. Knowing this, forensic advisors can help companies extract relevant data sets from a range of disparate systems to create a unified, relational database that enables efficient, productive data compilation, tracking, reporting, and analysis. This database will be essential to more efficient and effective data retrieval and analysis.
Forensic advisors who are experienced in the claims process can be particularly helpful as liaisons with insurers’ adjusters, accountants and attorneys. They can present the claim, manage communications, and address adjustors’ inquiries, working with insurers to negotiate and secure advance payments that are crucial to restoring damaged or delayed operations and maintaining cash flow during difficult times. In tandem with counsel or other company management, forensic advisors can also work with insurers to negotiate the final settlement and payout of the claim. Should resolution of the claim prove elusive, forensic advisors can work with companies’ counsel on arbitration or litigation of the matter, or can manage recovery through other avenues available, such as FEMA or other state or federal agencies.
III. Commercial Insurance Recovery and COVID-19
Now that companies have been dealing with COVID-19 for nearly a year, the key to any recovery from the insurance company is the policy language. Perhaps one of the biggest hurdles companies will face is that many commercial insurance policies, especially those in the US, include language that specifically excludes coverage for viral, bacterial, or communicative diseases.
In addition, most policies require proof of direct, physical damage to facilities that have shut down or whose hours of operation have been reduced from a covered cause of loss. Proving this damage can be challenging. Even if policies do not contain an exclusion for viral, bacterial or communicative disease, insurers can argue that the damaging effects of COVID-19 last only minutes, and that the disease is not directly attributable to any long-term physical damage.
While courts have begun to weigh in on the issue, the final outcome of the ruling is yet to be determined. It may take years to understand how COVID-19 and the issue of pandemics will fully impact the insurance industry. In the interim, policyholders can employ simple best practices to facilitate future claims by thoroughly reading and understanding their policies, assembling, and reviewing any documentation that pertains to claims, and meticulously segregating costs associated with COVID-19 from other routine costs of doing business.
Additionally, companies should conduct a comprehensive review of their disaster plans to ensure that they are as prepared as possible for this and any other disaster that may cause severe business interruptions. As threats mount and disasters become even more prevalent, such preparation will be invaluable.
ABOUT THE AUTHOR:
Douglas Farrow has more than 35 years of experience assisting corporations, attorneys and their clients with a wide spectrum of financial, economic and accounting matters including insurance claims and damage matters. Prior to joining HKA, Doug was a senior partner and practice leader for KPMG Forensic in the Pacific Southwest region.
Doug has had a career-long focus working with risk management, corporate officers, insurance brokers, and outside counsel in insurance claims and damage matters. In addition to his insurance experience, he has provided expert witness testimony pertaining to financial matters both in federal and state courts. He has also served as the sole arbitrator in various post- acquisition disputes. He has a broad range of experience in developing damage theories and case strategy in complex litigation at all levels of dispute. Doug has extensive experience across all phases of the crisis management lifecycle, from planning for, responding to, and remediating critical events. He has prepared, calculated and negotiated complex insurance claims, such as business interruption, extra expense, inventory and/or property loss, and theft (Employee Dishonesty Coverage) claims on behalf of large corporations.
