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Before Disaster Strikes: A Checklist for Handling Catastrophic Losses
The beginning of 2011 has arguably been one of the worst in years for disasters around the world. Property damage and business interruption insurance claims are still pouring in as companies and their insurers grapple with the aftermath of the Japan earthquake and tsunami, the earthquake in New Zealand, the Chilean volcano and tornados and the Mississippi River floods at home. Additionally, many people have their eyes on the Gulf of Mexico as hurricane season begins.With so much at stake for policyholders and insurers, a checklist of catastrophic loss dos and don’ts might be handy. Linda Kornfeld of Jenner & Block LLP in Los Angeles, Ellen Farrell of Crowell Moring LLP in Washington, D.C. and William Oklesen, Vice President Director of Property Claims for Lockton Companies, Inc. in Chicago share some insight they have gained through years of dealing with large-loss events at home and abroad.Most U.S.-based companies have a master property policy in the United States and local policies where they conduct business. Complications can arise when those policies interact. Well-coordinated communication is the key to avoiding misinformation between policyholder and insurer, the experts say.New Lessons in JapanThe quake and tsunami in Japan presented unique problems in communication, said Oklesen.There are cultural differences to address that may impact how insurance claims are pursued. As a result, Oklesen said that companies often encounter difficulties when they try to run claims from the United States.Views on what insurance covers also can differ. Historically, Japanese companies have not been insured by their Japanese insurers for business interruption claims and as a result many companies do not, on the Japan side, have much experience with such claims. In many cases, the property damage claims are handled in Japan, and the business interruption claims are handled in the home country. Oklesen said that distance is impacting communication and the handling of claims.Whether you are dealing with catastrophic loss claims in Japan or anywhere else, he advises getting to know the people you are working with. Build a level of trust. Time spent face to face with parties overseas can go a long way to avoiding misunderstandings. Adjudicating the scope of damage issues, such as whether to repair or replace, helps avoid surprises, Oklesen said. Insurance carriers can help smooth the process by making clear who is running the claim–local or U.S.-based representatives. Claimants need to know to whom to present their claim, Oklesen said.Once these issues are addressed, the claim can be pursued as a traditional large claim with normal big-claim problems, he said.10 Steps for PolicyholdersOn that front, Kornfeld said companies can take a number of steps immediately to help ensure a successful recovery from their insurer.1. Read your policy.2. Understand the timing issues. How long do you have to notify your insurer?3. Consider how many occurrences might apply. For claims originating from the Japanese quake, the quake, the rolling blackouts and the tsunami might trigger multiple deductibles or policy limits.4. Know your policy exclusions.5. Examine your sublimits.6. When you have multiple policies, consider which one might apply and the differences in policy language.7. Be aware of choice-of-law issues.8. Coordinate communications between home office and loss site.9. Preserve documents and information related to the loss from the beginning. Teams should collect information on what happened, on past company performance and the potential impact on business.10. File your proof of loss in a timely manner (or work with your insurer to obtain extensions of any deadlines). This document often will be referred to throughout the life of the claim. Thus, it is important that the proof of loss is carefully prepared and that the necessary professionals are involved with its preparation.Careful Communication a MustPolicyholders should know that internal communications about their possible loss and communications to their insurer should be made carefully. From the first day, internal discussions (written or oral) involving possibly “sensitive” coverage issues, whether they are about exclusions, sublimits, occurrences or choice of law, should be held, if possible, in the presence of an attorney to protect them as privileged, Kornfeld said. “We have seen companies first internally have communications without inside counsel involved. They talk about the nature of their loss, what happened and how to respond,” Kornfeld said. “Without a lawyer involved, insurers likely will argue that those communications aren’t protected. If the insurer obtains those early claim communications through discovery in coverage litigation, the insurer often will sift through those and look for anything that is not consistent with a positive coverage position.”Likewise, all conversations with your insurer should be guarded. Insurers often have loss adjusters available to their insureds to get them quickly back in business. Policyholders are anxious to recover after a disaster. Kornfeld said that information provided in those initial conversations might later be used by an insurer to seek to deny or limit coverage.“It is important for employees responsible for pursuing claims to understand policy nuances,” Kornfeld said. “They should have a sense going in as to what the issues are and how best to ensure maximum recovery. Policyholders don’t want initial communications to come back to bite them after they have more and better information about their claim.”Consistent communication with your insurer is important, Kornfeld said. Policyholders also should, if possible, keep insurers in the loop when hiring consultants or incurring other costs to respond to a claim. Have your insurer confirm you are taking the right approach, and that the expenses are necessary and appropriate, she said.For Claims Professionals: Clarity is KeyOn the insurer side of the equation, Farrell said one of the best preemptive actions that insurers can take is to make sure the policies they write are clear about what is covered. In disaster preparation for any policy, claims professionals must have their claims procedures in order and must be ready with adequate staff, she said. During the aftermath of a disaster, claims professionals must ensure due diligence is done, Farrell said. It is vital to know what is in the policy and to understand the components of the loss. What are the coverage issues? Are claims excluded? Is there causation? What are the projected losses? Are they verifiable? Each type of catastrophe produces different considerations, she said. In Japan, for example, there are questions about the duration of the event. Is damage by the aftershocks included? Does a tsunami constitute a flood? Losses related to the devastating tornados in the United States pose different coverage questions, she said. Therefore claims professionals need to be alert.And, of course, another disaster with new issues always looms over the horizon.