When does the Insured need the help of an expert?

We have explained on more than one occasion how, in the Insurance world, the occurrence of a loss event is the moment of truth.

Policies are contracted in order to cover the assets and the liabilities of individuals and companies in the event of an accident occurring that brings about Material Damage and/or Consequential Losses.

In most cases, the covers under the Policy are clear, it is easy to ascertain the cause of the loss and also to agree the amounts of the indemnities that are payable on the basis of the Policy.  The Insurance Broker assists the Insured to recover the amount of the loss and damage sustained that is covered by the Policy.

However, there are loss events which given their size and complexity require both the Insured as well as their Insurance Broker to seek the support of a Loss Assessor to help them in that emergency situation that gave rise to the occurrence of a major claim.

On these occasions, particularly in the case of companies, it is in our opinion very useful if the Insured can count upon having some professionals by their side to help them:

  1. To minimise the Consequential Losses and take the correct measures to normalise the production of the risk.
  2. To prepare, document and defend the claim to be presented to their Insurance Company.

The intervention in these claims of a Loss Assessor acting on the part of the Insured who defends their interests and helps them recover the amount of the loss and damage sustained is of fundamental importance.

Likewise he can help them to obtain “payments on account” from the Insurance Company to cover the disbursements required in order to pay for the repair of the damage caused by the loss event.

It has been proven that the correct and professional intervention of a Loss Assessor speeds up the finalisation of the claims with the advantages that this can bring for both the Insured as well as the Insurer.

It has also been demonstrated that the presentation of a well-documented and verifiable claim facilitates the work of the Loss Adjuster acting for the Insurer and the reaching of an amicable agreement to close the claim.

This is the philosophy of Vantevo, independent consultants at the service of Insureds and their Brokers:  to assist the Insurer’s adjusters to close claims as soon as possible in a professional and amicable manner, in order to there by demonstrate the importance of Insurance for the company and that Policies do indeed perform their purpose, namely to protect the assets of the Insured, especially in the event of major claims that might jeopardise the continuity of the affected business.

Moreover, today with the “Preparation claims fees clause”, this consultancy service can be provided at no additional cost for the Insured, since it is the Insurance Companies who pay for this service.

 

What happens when a loss event occurs in the middle of another claim?

The above does not occur often, but it does sometimes.  Indeed, we have been involved in claims in which whilst the damaged machine was being transported to a workshop to be repaired, the lorry carrying it had an accident and overturned, thereby an increase of the loss being brought about in such cases.

On other occasions, due to an error on the part of a subcontractor who had been engaged in the repair of the damage, when it came to testing the machine, it failed and the repair and recommissioning of the same was delayed by several weeks.

In cases like these we have come across some Insurers who regard these incidents as being part of the same claim, since they understand that they occurred during the process of repairing the damage caused by the first loss event.  Whilst respecting this interpretation, the indemnity is paid by the Insurers and it is they who decide how the loss is to be adjusted.  It is the opinion of VANTEVO CLAIMS ADVISORS, that in both cases these are different loss events, since they occur at different times, on account of different causes and brought about by different persons.

In the case of the accident during the transportation, there will be somebody responsible for the same whose Insurer must be liable for the damage caused to the lorry’s cargo.  Therefore it is essential whenever a machine is to be transported so as to be repaired at an external workshop, that insurance is contracted that covers this carriage, since normally the covers of the carriers is inadequate.

In the other case, we have here an error on the part of an external subcontractor who must have a Professional Liability Policy, which should be liable for the loss and damage caused by the poor performance of the company subcontracted for the repair of the damaged machine or installation.

Unfortunately,  cases such as the above are not usually considered in the General Conditions and Schedules of the Policies, when it stands to reason that the Policies ought to specify whether they should be regarded as being new claims, as we at  VANTEVO CLAIMS ADVISORS believe, or as incidents of one and the same loss event.

Common sense tells us that the experts ought to consult the Insurers as to the what approach to take in these types of cases, since what tends to happen is that all the loss and damage is covered under the Policy whilst at the same time they try to recover the increased loss and damage from the third parties that were responsible for the same.

Vagueness must be avoided when drafting Policies

For the experts, the Insurance Policy is crucial in order to be able to adjust a loss event.  Therefore, when the Policy is “made to measure”, that is to say, when it is tailored to the risk it is intended to cover, the process of the loss adjustment is usually straight forward.

The problems arise when this is not the situation, especially in covers for SMEs, when often the Policy fails to cover the Insured’s basic risks or even the Sums Insured are not updated and results in underinsurance.

However in many cases, both in Policies that are tailored to the risk they were intended to cover as well as those that are not, added complications arise such as vagueness and poorly drafted wordings, not to say ambiguities in many of the Policy clauses, particularly in those to do with the exclusions.

It may exclude corrosion and erosion, but neglects to indicate that this refers to that corrosion and erosion that originates in a slow and gradual manner but not to that which arises accidentally and unexpectedly.

The same thing happens when the loss event is caused by a defective item.  The Policy fails to clarify that the rest of the damage brought about to other parts of the machine or installation by this defective item could be afforded cover thereunder.

Again the same occurs with the Consequential Loss covers.  Normally, regarding the time Deductibles, they do not specify just how the days indicated therein must be considered:  Are they working days? Calendar days? The initial days after the occurrence?  Are they to be allocated pro rata?  This lack of definition causes, at least in Spain, many problems when it comes to adjusting a claim.

Neither do these LoP Policies normally specify what percentage of Gross Margin must be taken into account when calculating the indemnity:  Is it that of the year the loss event occurred? That of the previous year? And if the loss event affects two accounting years, which one should be applied?

Likewise the Policies do not define who must be responsible for the extra expenses, since they do not indicate that these should be assumed pro rata to the benefits that may accrue to each party from the same.

Lastly, nor do they usually specify how the costs of recommissioning the damaged piece of equipment or installation must be treated once it has been repaired.  Should this be done under the Material Damage cover or under the Consequential Loss cover?

In the opinion of VANTEVO CLAIMS ADVISORS, the drafting of the wording of the Policies is unsatisfactory and Insurers ought to improve the clarity and accuracy of the same, avoiding any vagueness and possible disputes that in many cases harm them.

What are the differences between the claim and the settlement proposal in a Material Damage loss event?

There are usually differences between the claim presented by the Insured and their expert and the loss adjustment proposed by the experts acting for the Insurers.

Based upon our own experience, at VANTEVO CLAIMS ADVISORS we know that these differences are due to the following five factors:

  • Differences in measurements.
  • Differences in unit prices.
  • Betterment or concepts not attributable to the actual loss event are included
  • Maintenance tasks are included.
  • Salvage and recoveries are not taken into account.

Once the above differences have been clarified and corrected and an agreement reached regarding the appraisal of the loss, then you must refer to the Policy in order to agree the indemnity payable.

  • Is the cover on an actual value or new replacement value basis?

If it is at actual value, then depreciation for wear and tear, age, obsolescence etc. will have to be applied to the replaced items.

  • Is the Sum Insured adequate or inadequate?

In the case of the latter, unless the Average Clause is waived or the Policy is on a first loss basis, the Average Clause must be applied.

  • Does the Policy have any Deductible?

If yes, then it must be applied.

 

To summarise, the differences between a claim and the agreed settlement must be clearly defined and analysed by the experts, since they have to stem from the five factors indicated above and from the conditions of the Policy.

Obviously if a timely and equitable agreement on the payable indemnity is to be reached, it will help a lot if the claim is correctly detailed, structured and documented.  This is precisely the job that VANTEVO CLAIMS ADVISORS undertake in those loss events where we are contracted to act as the Insured’s expert advisors.  This facilitates a swift, fair and professional agreement between the parties.

How should an Expert Report be structured?

It is very important and desirable that the information provided by the expert to the Insurance Company and/or the Insured, depending upon who they were contracted by, is well organised and above all, that the Report is clear, concise and verifiable and accompanied by the most relevant documentation used by the expert.

The structure normally used by the different firms is:

  • The Insured.
  • Description of the Risk.
  • Circumstances and discovery.
  • Spread and extinguishing (in the case of a fire).
  • Cause
  • Nature of the Material Damage.
  • Extent of the Consequential Losses.
  • Measures adopted following the loss event.
  • Cover under the Policy
  • Liability on the part of Third Parties (if applicable).
  • Other Insurance (if applicable).
  • Reserve (in the Preliminary and Interim Reports).
  • Appraisal of the Loss and Damage (in the Final Report).
  • Indemnity (in the Final Report).

We have highlighted in bold those sections of the Expert Report that we consider to be the most important.

In general terms, the Preliminary Report should be concise and issued as soon as possible, since it is important that the Insurers should know promptly the amount of the Reserve.

On the other hand, the Final Report should be as complete and fully documented as is possible, in such a way that it is verifiable by whoever has to read and approve it.

At VANTEVO CLAIMS ADVISORS, besides striving to reach agreement on a figure that is acceptable to both the Insured and the Insurers, something that we manage to achieve in the vast majority of the claims, we also suggest measures for improving the safety conditions of the risk and so as to prevent any similar losses in the future.

We also try to obtain a “payment on account” early on for the Insureds so that they might defray the costs of the repairs and the measures undertaken to minimise the Consequential Losses.

The importance in fire claims of involving companies for the recovery and decontamination of machinery and plant

In fire claims, some assets are destroyed and, inevitably, must be replaced.  Others, on the other hand, only sustain partial damage and can be recovered.  Indeed, what tends to happen in serious incidents is that the fire directly affects some areas of the risk whilst other parts of the plant only undergo damage due to smoke, heat, the water sprayed by the Fire Brigade or by the risk’s own automatic extinguishing systems, or the corrosive gases that are formed such as HCI (Hydrochloric Acid), etc.

In these cases where the damage is only partial, it is both expedient and cost-effective to involve companies specialising in cleaning, drying, decontamination and recovery of the equipment, whether mechanical, electrical or electronic.  These companies, some of which fortunately we have in Spain, for example BMS Technologies, Debeer- Belfor, Recover, etc., must intervene as soon as possible since the corrosion and oxidation processes worsen day by day. Therefore, the chances of success are far higher with an early intervention in the loss event.

Apart from minimising the Material Damage in the case of partial damage, the Consequential Losses can also often be reduced by the intervention of these firms.  In fact on some occasions damaged machinery can be temporarily repaired and can then continue to operate for a few months until new replacements are obtained, thereby minimising the Loss of Profits.

In most cases both the Insurance Company as well as the Insured are very satisfied with the involvement of these companies since they can resolve what could have posed a major problem for them, such as being unable to produce over several months until the replacement machinery arrives, which in the case of complex machinery could take some 12 or 18 months.

Moreover, at VANTEVO CLAIMS ADVISORS, besides using these companies in certain loss events, we also involve companies that are specialists in salvaging partially damaged stocks, since they perform a task based upon the classifying and cleaning of the partly affected stocks that can be highly cost-effective for Insurers.

Why it is important to learn the cause of a loss event

Learning the source or root cause of a loss event is, along with the appraisal of the loss and damage, the most important task of a loss adjuster in the event of a claim.

There are 3 reasons why it is essential to learn the exact origin of the loss event:

  1. So as to ascertain the cover for the same. For example, in the case of a Machinery Breakdown brought about by slow and gradual corrosion, the claim would not be covered.
  2. So as to recover the indemnity from a third party, if we can demonstrate their liability in the cause of the same.
  3. Because if we know exactly what has occurred, we can take steps so as to prevent the same thing from happening again and bringing about a similar loss event in the future.

In complicated claims, such as a major fire, it is advisable to involve investigators and experts in the examination of its root cause. Fortunately, there are an ever increasing number of firms and teams specialising in this work for ascertaining the exact source of a fire.  It is important to confirm that it has had an accidental origin and that we are not dealing with a loss event that was caused deliberately.

Likewise in the case of Machinery Breakdown, it is vital to involve metallurgical laboratories so that, based on the analysis of the part that initially broke, it can be determined whether it was a sudden and accidental breakage or was the consequence of a slow and gradual process.  As we have stated earlier, in this second case the claim would not be covered.

Although, ideally, official laboratories or ones belonging to Schools of Engineering should be used, these bodies have the problem that they tend to take several months to provide the results of the analyses and often this is not acceptable, since the Insured and the Insurers want to know as soon as possible whether or not the claim is covered by the policy.  That is why we at VANTEVO CLAIMS ADVISORS usually use private laboratories and investigators of recognised professional competence since they are able to be more agile in furnishing the outcome of their investigations.

 

“Industrial Loss and Damage Claims” book by Roberto Revenga

In his Book “Industrial Loss and Damage Claims, published by AGERS, the author Roberto Revenga analyses real claims and the main covers that industrial firms require.  He stresses the need for the policies to be “made to measure”, that is to say, that they should be tailored to the risk that they want to cover.  Also, that they should be drawn up with major loss events in mind, which is when they will have to function properly, in order for which it is essential that the Sums Insured are updated.

 

Likewise, the book highlights that with the “lessons learned” that arise out of each claim, the safety conditions of the risk and the policy covers can be improved upon, in such a way that after a lengthy process of years of analysis of the causes and constant improvements, the risk situation and the policy covers might be optimised.

 

As regards the cover for Consequential Losses, emphasis is placed on the need to examine the Sum Insured, the Maximum Indemnity Period and the appropriate Deductible, stressing that this will only work in those claims where there is an impact upon the financial results, which does not usually happen in loss events with a short duration.

 

This book will be particularly of interest for those persons embarking upon the complex world of insurance, and can be acquired from AGERS (Libro físico – Siniestros de daños y pérdidas en la industria – AGERS) who publish it in Spain.

 

When must a faulty machine be replaced?

Often we have had cases where apparently a machine has been left so damaged following a Fire or Machinery Breakdown event that it has to be replaced.  However, before taking that decision, the situation must be thoroughly examined since, although the Insured may be interested in having the damaged machine replaced with a new one, as you are well aware, if the repair is both technically and financially feasible, then the insurance policies will settle the cost of the repair not that of the replacement.

The Insured can easily get a report from the machinery manufacturer explaining that the repair is not feasible and that the damaged machine must be replaced. Obviously, the manufacturer is interested in selling machines and therefore normally has no problem with issuing this type of report, which generally is pretty brief and not very technical.   But if the machine is replaced, then we will be faced with a total loss, and the cost of the damage will be more than the actual value of the machine.  In such a case, most policies prescribe that the actual or real value of the machine ought to be indemnified, that is to say, taking into account depreciation for age, use and obsolescence.

On the other hand, if we are facing a partial loss, or in other words, the cost of the damage is less than the actual value of the machine, then in this case the policy will indemnify the cost of the repair without applying any depreciation whereby the Insured will not have to make any disbursement whatsoever.

Another scenario that might happen in this type of loss affecting machinery is that it can be repaired temporarily, with no guarantee, so that it might withstand a few months whilst awaiting the arrival of the new machine, which often has delivery times of several months.  This is expedient when the shutdown of the damaged machine will give rise to some significant Consequential Losses.

What can also be useful is to ask for a second opinion or a second report regarding the chances that the machine may be repaired when the manufacturer and the Insured propose its replacement. Likewise, companies specialising in the recovery of facilities and machinery should be contracted, as they can minimise the damage and get the machine working again, even if only temporarily until the new machine can be supplied.

This solution is highly valued by Insureds and Insurers alike, since it allows the Consequential Losses to be minimised by reducing the potential losses of sales and clients.

To summarise all the above, with Machinery Breakdown not only is it important to learn the cause of the loss event, in order for which a metallurgical analysis is often required, but also it is essential to ascertain the exact extent of the damage and confirm whether the machine can be repaired or if it needs to be replaced.

At VANTEVO CLAIMS ADVISORS we work with reputable laboratories and reliable workshops, which allows us to resolve these two questions:  the origin and cause of the breakdown and the extent of the damage, clearly and precisely, thus enabling us to reach agreement with all the parties involved in the claim.

Conditions in order for the Business Interruption or Consequential Loss cover to be triggered

In our opinion, there are three conditions and moreover, it is necessary that all three are met for there to be any indemnity payable under this cover.

The first condition is that the Material Damage that gave rise to the Consequential Loss being claimed, is covered by an Insurance Policy.  This has its logic and rationale since otherwise, if the Insured does not have the resources to repair the damage, the maximum indemnity period prescribed in the Consequential Loss Policy would always be exhausted.

The second is that production activities are resumed after the loss event.  This condition is likewise well founded because otherwise, it could be the case of a businessman whose company is not doing well, who burns it down so as to collect the indemnity for both the Material Damage as well as the Consequential Loss.  If fraud cannot be proven, at least with this second condition you avoid the Consequential Loss having to be indemnified under the Policy.

Lastly, the most important condition and something that is not usually explained to the Insured when contracting the Policy, is that the loss event must affect the company’s financial results.  Thus it is necessary that the loss event has an impact upon the company’s income, or in other words, that there is a loss of sales or that there is an affect upon the costs, i.e. that it causes extra costs.  Both are things that usually occur with major claims.

In many claims where the Company’s inventory or stocks of finished goods is enough for several weeks and their sales capacity is less than their production capacity, which tends to happen in times of crisis, it is pretty unlikely that a loss event with a short duration, of less than a week, will have an impact upon the financial results of the Company.  Therefore, it is absurd to impose Deductibles of just a few days for businesses with high levels of stocks and whose production capacity is greater than their sales capacity.

To avoid the Insureds from subsequently feeling cheated, this third condition must be clearly explained at the time of negotiating the Policy and make them see how important it is that it should be designed for major claims since the smaller ones will hardly affect their financial results.  Furthermore, imposing higher Deductibles in these cases, extending to weeks rather than days, significantly reduces the cost of the Policy.  Unfortunately, this is not normally done and mistakenly they attempt to lower the cost of the Policy by reducing the Maximum Indemnity Period, instead of raising the Deductibles.

At VANTEVO CLAIMS ADVISORS, given our extensive experience with this type of claim, we can help the Insureds and Brokers to set a correct Sum Insured, an adequate Maximum Indemnity Period, and a Deductible that lowers the cost of the Policy but without reducing the cover for the Insured.  To sum up, Business Interruption or Consequential Loss Policies must be drafted with large claims in mind, not the smaller ones.