What does a Risk Manager have to do when faced with a major loss event?

The fundamental objective of a Risk Manager is to protect the safety of the workers, the assets and the Profit and Loss Account of their company and therefore, one of the things they must do, is to contract a suitable Policy to cover all of the company’s risks.

Risk Managers should be supported by a Broker who will help and advise them in the complicated task of designing the very best Policy for their company and who are the best Insurers and Reinsurers for their purposes.

In addition the Risk Manger must be involved in drawing up and updating the company’s emergency and contingency plans.  These latter, also called “business continuity plans” are essential to minimise the Consequential Losses in the case of the occurrence of a loss event.

What should Risk Managers do in the case of a major loss event?  In our opinion, with the help of their Broker, they should appoint a Loss Assessor who can help, on the one hand, to minimise the Consequential Losses and normalise the production of the company after the loss event and, on the other, to help them prepare and defend the claim that must be presented to the Insurers and their Loss Adjusters following the same.

Most claims are satisfactorily resolved with the help of the Brokers, but there are others that, given their size and complexity, require the support of Loss Assessors. They are experts in claims and have experience of dealing with emergency situations such as those that arise after a major loss event, especially when their cost can be assumed – either partially or entirely – by the Insurance Company under the “Fees of the Insured’s expert” clause that is ever more frequently being found in Policies, especially in those that cover large risks.

It is even more important to have the support of a Loss Assessor in the case of the loss event occurring in a facility far from the company’s headquarters, and moreover if it occurs in a plant situated overseas.

Am expert Loss Assessor will not only help the Insured to try to avoid any loss of sales, which might bring about the loss of clients, but also to get the Insurer to agree to “payments on account” to pay the costs of repairing the damage.

 

It has been demonstrated that presenting a well-documented and verifiable claim assists in the speedy and amicable closing of a claim and that is why the Loss Assessor appointed by the Risk Manager to act for the Insured has such an important role to play.

Vantevo, which is an international and independent consultancy, with professional engineers and economists who are experts in major claims, can help Risk Managers to “resolve” the claim in a fast and professional manner, after which they will find their   position in the company to be strengthened, since they will have demonstrated the value of their work at a critical moment for the business, as would be the case if it were to be affected by a major loss event.

A claim that is well handled and swiftly resolved works to the benefit of all parties involved in the same:  the Policyholders, the Insurers, the Brokers, the Experts as well as the Risk Managers.

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.

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.

“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.

 

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.

When a loss event occurs, the moment of truth

The fact is, insurance policies are contracted by companies in view of the chance that a loss event might occur causing them substantial loss and damage.

If there were never any claims, then no policies would ever be contracted, and so it is clearly evident that Insurance plays a very relevant and necessary social function, mutualising the losses in the sense that many of us pay for the damage caused to a few.

That is why it is vitally important that the policy should be well designed and operate correctly so that, following a loss event, the Insured recovers the major part of their loss and damage.  It is when a loss occurs, that everything is put to the test:  whether the policy is adjusted to the risk that it was intended to cover, whether Insurers attend to their client with due diligence and professionalism, whether the Brokers advise them adequately and finally, whether the Loss Adjusters appointed by the Insurance Company are expert and independent professionals.

Preparing and proving a claim after a major loss event is very specialised work, and can be extremely demanding, especially during the first few weeks following the incident.  Being able to rely upon a company such as VANTEVO CLAIMS ADVISORS, composed of expert and independent Loss Assessors who can assist the Policyholder to compile their claim and undertake measures with a view to mitigating their Consequential Losses, can be extremely expedient and result in a substantial economic impact to the benefit of the Insured.

Indeed, a good Loss Assessor can not only suggest valid measures for minimising the Consequential Losses, but can also get the Insurers to make “payments on account” in order to defray any costs that such measures might bring for the Insured.

It is in Europe and North America where this service of assistance for the Policyholder has been most developed, and it has been proven that it expedites the settlement of the claims, since it is easier that an understanding and agreement can be reached between professionals and thus the claim can be “resolved” speedily, professionally and ethically.

The major Insurance Brokers, who have their own loss adjusting teams, include in the policies, particularly those covering All Risks of Material Damage, cover for “fees of the Insured’s expert”, so that the Policyholder will not have to pay any additional cost for this service. VANTEVO CLAIMS ADVISORS, through our international structure and with a solid experience in the adjustment of claims, allows medium sized Brokers, who also have important clients who require comprehensive advice, to offer this type of service on the same terms as the major Brokers, given that VANTEVO CLAIMS ADVISORS is a firm independent of any other interest in the Insurance sector.  In order to be competitive with the major Brokers, we strongly urge that the “fees of the Insured’s expert” clause should be contracted so that these services can be covered by the policy itself.

It would be very useful for those medium sized Brokers that have industrial clients to contract this type of service for complex losses, since a large part of the claims can be resolved without any outside help.  VANTEVO CLAIMS ADVISORS have an international and independent team of expert specialists, some with more than 20 years of experience, for the compiling of claims and the assessing of losses defending the interests of the Policyholder.

Why should Insureds contract a risk survey?

As the saying goes “better safe than sorry”, yet all too frequently we have encountered, on the occasion of visits motivated by claims, companies whose layouts and risk prevention and safety measures left much to be desired.

In a tough insurance market such as the current one, it is important to invest in prevention and safety so as to facilitate the acceptance of the risks by the Insurance Companies.  Many of the measures that can be undertaken, such as improving cleanliness, sealing of electric cable ducts, thermal imaging of the electric switchboards, charging forklift batteries in an adequate place (either open air or well ventilated) … are cheap to do and require little investment.

In addition, it has been proven that most of the loss events that occur in industrial risks are caused by human factors, i.e., due to the negligence of their own workers or workmen from external companies engaged in maintenance or repair work.  Therefore, it is vital to ensure that the operations and maintenance manuals are complied with and likewise the protocols for the “hot work permits”, and that both your own as well as the subcontractor staff know and follow the prevention and safety manuals established for each risk.

There is no point whatsoever in having excellent prevention and safety rules, if then their rigorous compliance is not enforced or controlled.  Being strict on this point would substantially reduce the claims record of companies, and is a matter in which their boards of directors and works committees ought to be seriously involved.

The fact that some experts inspect the risks and issue reports recommending improvements in prevention and safety issues and point out any deficiencies and gaps found, we believe would reduce the accident rate of companies and facilitate the cover of their risks by Insurers.

At VANTEVO CLAIMS ADVISORS, we have experts in risk surveys and are in a position to assist Policyholders and Brokers to reduce their claims record and lower the cost of their insurance policies.