In May 2022, the National Oceanic and Atmospheric Administration predicted an active hurricane season for 2022, estimating “14–21 named storms (winds of 39 mph or greater), of which 6–10 could become hurricanes (winds of 74 mph or greater). Of those, 3–6 could become major hurricanes (winds of 111 mph or greater).”
As the unpredictable hurricane season continues, business owners must grapple with potentially costly impacts to their operations. Here are tips for policyholders when faced with business interruption losses and the need to prepare an insurance claim. In particular, policyholders should consider the following:
Establishing a claims team.
Requesting interim payments.
Establishing a claims team
Ideally, a company will go through a business continuity planning process (BCP) to pre-assemble internal teams and secure external resources so that the company is prepared with a detailed plan to keep employees safe, maintain business operations, and efficiently prepare its insurance claim in the event of a hurricane.
However, with or without a BCP plan in place, it is important to assemble a proper claims team immediately after a hurricane loss to reduce stress on company personnel and deliver a well-documented claim that can lead to a better recovery. The team should include professionals who understand the most effective and efficient way to prepare the claim; a “company champion,” such as the risk manager, who can serve as point of contact and liaison between the team and company personnel; forensic accountants; and other consultants/engineers, depending on the circumstances of the loss.
Fortunately, most property insurance policies include a sublimit for “Claim Preparation Costs” or “Professional Fees.” These provisions generally provide coverage for forensic accountants and other consultants to quantify, prepare and thoroughly document the insurance claim, including gathering and analyzing the financial records and documentation for repairs, replacement, and extra expenses incurred.
Finally, if a claim is especially complex, it may be appropriate to hire insurance coverage counsel shortly after the loss. Coverage counsel often will initially work behind the scenes to provide a detailed review of the insurance policy and advise on how it applies to the loss, and how the claim should be presented to comply with the policy terms.
Requesting interim payments
It is difficult to assess the possible impact of a business interruption loss in the immediate aftermath of a hurricane, as policyholders typically do not yet know the magnitude of financial loss, duration of time required to repair damage and restore operations, prospects of successfully mitigating the loss, and potential for coverage issues.
However, it is important to manage the expectations of the adjuster and insurer, who will be anxious to set reserves for the loss. As such, it is generally desirable to prepare a preliminary loss estimate (with appropriate caveats) within 30 days of the event. This estimate should be submitted as “preliminary” and updated periodically as additional information becomes available. We recommend these estimates lean toward the high end, as insurers prefer not to increase the reserves during the claim process.
Typically, policyholders are entitled to receive interim payments from insurers after a loss to help fund repairs or pay continuing expenses. Policyholders should initiate requests for such payments supported by cash-flow analyses and documentation of incurred and committed costs (e.g., invoices and purchase orders).
Insurers generally only pay for costs that have been incurred or are committed to be incurred and are fully documented. Therefore, policyholders should establish proper loss-accounting procedures, maintain appropriate records to justify the work performed and the related cost, and discuss with third-party vendors the appropriate level of detail required on their invoices. These steps, along with proper coordination and communication with the adjuster and the insurer’s consultants, will expedite interim payments.
In light of the uncertainty that can accompany the claim process, the policyholder should manage expectations internally. Often, many stakeholders within the company have an interest in the claim. For example, a plant manager may be interested in repairing the damage as quickly as possible, but also may seek operational improvements once the repairs are completed. The CFO may be more concerned with how much the company could recover and when they will get paid. The risk manager may prioritize how a large loss could impact the company’s premium at renewal. These competing interests can lead to inconsistent expectations and messaging, which can be problematic during a claim process.
The policyholder team should hold periodic internal status and strategy calls regarding the value of the claim and potential issues that may limit recovery. Doing so can, for example, help a risk manager avoid fielding difficult comments from colleagues, such as:
“I thought all our losses would be covered—that’s why we have insurance!”
“What do you mean the repair scope I approved includes betterments that aren’t covered?”
“You agreed to settle for $5 million? I booked a receivable for $10 million!”
The policyholder team also should hold periodic check-in calls with the adjusting team to update status, ask or field questions, and discuss elements of the claim — including loss estimates, progress of repairs, duration of the interruption, decisions regarding replacement or repairs of property damage, potential mitigation strategies and how certain decisions may impact the business interruption. These discussions can help policyholders avoid difficult conversations with the adjusting team, such as:
“Your claim is now $10 million? I only reserved $5 million.”
“You replaced the damaged equipment? We thought it would be repaired for half that cost.”
“You are claiming the payroll for your employees who helped with the cleanup? While we appreciate your resourceful approach, it is not covered, since you would have paid those employees anyway.”
The road to resolving hurricane claims does not have to be rough. By being proactive, using a team approach, and managing expectations through strategic coordination and communication, policyholders will be able to navigate the claim process confidently.
Steve Moseley is a managing director and a leader in BRG’s business insurance claims practice. He may be contacted at [email protected].