Coverage Lessons Learned

Katrina Revisited

Brokers urge policyholders to understand their policies and avoid the harsh surprises insureds faced in the aftermath of Hurricane Katrina.
By: | July 1, 2015 • 4 min read
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Suffering losses from 2005’s Hurricane Katrina was bad enough for many businesses and individuals, but to make matters worse for many, certain losses were not covered by their insurance policies.

So said several Marsh experts during a June 17 webinar entitled, “Lessons from Hurricane Katrina, Looking Back, Planning Ahead,” which outlined ways in which Hurricane Katrina, which devastated New Orleans almost 10 year ago, impacted insurance underwriting, business interruption and claims handling.

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The first lesson learned: businesses should thoroughly read their commercial property policies before they purchase them, said Duncan Ellis, leader of Marsh’s U.S. property practice. However, far too many find out the hard way what’s in their policies — or not in them —  after sustaining major losses from catastrophes and other events.

“That’s the wrong time to find out that you are not covered for something, or that certain conditions do not apply,” Ellis said.

“After Katrina, many of our clients were sorely surprised to learn that despite having windstorm coverage, they weren’t covered for storm surge. Understanding what you are buying really can pay off.”

Ellis and Paul McVey, leader of Marsh Risk Consulting’s property claims consulting practice, outlined a number of “tripwires” in property policies that occurred after Katrina, for business owners to now be mindful of in case of future events.

The goal when dealing with major catastrophes is for insurers and policyholders to work as allies, McVey said. As part of a policyholder’s loss management plan, they should meet with their carrier and agree upon communication protocols and upon each party’s roles and responsibilities after an event. They should determine the appropriate carrier representative with the authority to make decisions on claims.

“After Katrina, many of our clients were sorely surprised to learn that despite having windstorm coverage, they weren’t covered for storm surge. Understanding what you are buying really can pay off.” — Duncan Ellis, U.S. property practice leader, Marsh

“What we see after Katrina, when decisions had to be made as to reinstatement, replacement, mitigation, there weren’t a lot of people involved at [carriers’] mid-management level to make those decisions,” he said. “That put the process on hold to a degree, and some of the things became confrontational. Insureds should make the effort to establish a relationship with an empowered senior claims representative.”

Other policy tripwires that caught businesses by surprise in Katrina that all businesses should now be aware of include:

  • Determining the exact definition of special high-hazard flood zones, such as a 100-year flood plain, and how damage within those zones can impact sublimits. Typically within policy sublimits are further internal sublimits for these special zones. For example, if a business has a $200 million sublimit for flood, it is probable that there is a further internal sublimit of $50 million for high-hazard flood.
  • Understanding policy definitions that determine whether an event was a named windstorm or a flood, which can impact whether the policy excludes surges from wind-driven water.
  • Determining how coverage is typically triggered by civil or military authority and ingress/egress. There have been disputes about whether Katrina claims regarding ingress/egress issues should be paid after politicians told people to stay away from New Orleans, as carriers have argued that those politicians were actually not acting with civil or military authority.
  • Determining how “wide area impact” or “idle period” impacts claims.
  • Determining whether contingent business interruption coverage extends not only to suppliers or customers, but also to suppliers of suppliers and customers of customers.
  • Determining the scope, time limits and corresponding disappearing deductibles within contingent business interruption coverage due to local utility companies’ service interruptions.
  • Determining whether deductibles apply by occurrence and/or by location, and whether there are separate deductibles for property damage and “time element.”
  • Determining whether costs, such as overtime for contractors rebuilding properties, fall under sublimits or “expediting expenses.”
  • Determining what is — and is not — covered under business interruption, and how claim costs may be calculated.
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“The property damage piece is very easy to figure out, but business interruption is probably the most misunderstood coverage and probably the most difficult in settling claims,” Ellis said.

“It’s not replacing revenues — it’s replacing profits lost and continuing expenses that the property generates when it’s not operational. For example, a continuing expense could be taxes and non-continuous expenses could be heat, light and power.”

Also often misunderstood is the indemnity period for contingent business interruption claims, McVey said. The timeframe is typically defined as the time to replace, reinstate or repair the property, but businesses should be aware that many variables could impact payment of claims. That’s why it’s so important to discuss these issues ahead of time with their broker or claims representative — particularly before renewal.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]
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Emerging Risk: Drones

The Paradox of Drones

Capacity is lining up to cover drones, but a lack of historical data and useful regulation hamper the industry.
By: | July 1, 2015 • 3 min read
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A paradox is emerging in the area of drone or unmanned aerial systems (UAS) coverage.

On the one hand, capacity for UAS–related risks is fairly abundant, according to a report from Marsh. Yet at the same time, underwriting expertise and historical data are in short supply.

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As the insurance industry waits for enough data to more comfortably underwrite the risk, carriers are working off of forms developed for traditional aviation risks. The lack of precise language to address the risks of drones is limiting coverage, and by extension the expansion of the commercial use of drones.

According to a recent report from Marsh, entitled “Dawning of the Drones: The Evolving Risk of Unmanned Aerial Systems,” insurance is currently available to cover drone-related property and liability risks such as:

  • Physical Loss to the UAS itself (airframe, propulsion units, operating system, and flight controls).
  • The payload—such as camera equipment and sensors, and the ground station/control unit, as well as spare parts, and coverage for transit.

On the liability side, coverage is available for bodily injury and property damage as well as product liability for re-sellers and manufacturers.

Underwriting Criteria

The report includes a checklist of risk factors influencing UAS underwriting decisions.

For instance, in determining whether or not to take on UAS liability risks, underwriters are looking at:

  • Whether operators are certified by a governing body.
  • The hours flown since the craft was manufactured.
  • Engine type and redundancy as well as aircraft range.

In deciding about UAS property risks, all of the above concerns are taken into consideration as well as additional factors such as endurance, launch and recovery, navigation, operating environment (urban or non-urban) as well as maintenance, storage, countries and safety of the load while in transit.

Considering that much of the coverage that exists today evolved from the aviation market—and considering the shortage of UAS-related claims history, according to Marsh, some carriers are hesitant to underwrite the UAS sector, despite a general glut of capacity.

“It is difficult with the FAA just starting to open the commercial air space, to know what all of the risks are,” an executive with Marsh said.

“There just hasn’t been the claims history or litigation to tell where problems may lie.”

Exceptions to the rule do exist, however: One coverage that’s available which has some uniqueness to drones is insurance to cover the risks to the ground control equipment  — whether hand-held or via a full cockpit layout (often contained in a van).

“Such coverage varies depending upon the size and type of control station and functionality,” according to the Marsh report.

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Still, risk specialists wanting a UAS insurance program addressing only what is needed for unmanned aircraft may want to consider markets who’ve been hard at work crafting specialized coverage for drones.

Another factor limiting the expansion of commercial drone use is a lack of regulation from the FAA. As an opinion piece in the Houston Chronicle recently pointed out, Congress asked the FAA to issue regulations by September of 2015.

The FAA recently announced it could miss that deadline by as much as two years.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at [email protected]
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Sponsored Content by AIG

Preparing for and Navigating the Claims Process

Be clear on what your organization's policy does and does not cover before you need it.
By: | July 1, 2015 • 5 min read
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All of a sudden – it happens.  The huge explosion in the plant.  The executive scandal that leads the evening news.  The discovery that one of your company’s leading products has led to multiple consumer deaths due to a previously undiscovered fault in its design.  Your business and its reputation, along with your own, are on the line.  You had hoped this day would never come, but it’s time to file a major claim.

Is your company ready?  Do you know – for certain – how you would proceed, both internally with your own employees, and externally, with your insurance provider?  What data will you need to provide, and how quickly can you pull it together?  Do you know – and understand – the exacting wording of your policy?  Are you sure you are covered for this type of incident?  And even if you are a multinational with a global policy, how old is it, and is your coverage in concert with any recent changes in the laws of the country and local jurisdiction in which the incident occurred?

As should be clear from these few questions, if you organization is hit with a major event and you need to make a claim, just knowing that you are current with your premium payments is not enough.  Preparation before the event ever occurs, strong relationships with your insurance team, and a thorough understanding of what needs to happen throughout the claims process are all essential to reaching a satisfactory claim settlement quickly, so that a long business disruption and further damage are avoided.

Get Ready before Disaster Strikes

SponsoredContent_AIGThe Boy Scout motto, “Be prepared,” applies equally well to organizations that may suddenly be faced with the need to navigate the complexities of the claim process – especially for large claims following a major crisis.  Crises are by nature emotional events.  Taking the following steps ahead of time, before disaster strikes, will help avoid the sense of paralysis and tunnel vision that often follows in their wake.

Open up a dialogue with your insurer – today.

For risk managers and others who will be called upon to interface with your insurer in the event of a crisis, establishing open and honest lines of communication now will save trouble and time in the claims process.  Regular communication with your insurance team and keeping them up to date on recent developments in your organization, business and manufacturing processes, etc., will provide them with a better understanding of your risk profile and make it easier to explain what has happened, and why, in the event you ever have to file.  It will also help in the process of updating and refining the wording in existing policies to reflect important changes that may impact a future claim.

Conduct pre-loss workshops to stress-test your readiness to handle a major loss.

Firefighters conduct frequent drills to ensure their teams know what to do when confronted with different types of emergencies.  Commercial airline pilots do the same.  Your organization should be no different.  Thinking through potential loss scenarios and conducting workshops around them will help you identify where the gaps are – in personnel, reporting structures, contact lists, data maintenance, etc., before a real crisis occurs.  If at all possible, you should include your insurance team and broker (if you have one) in these workshops.  This will not only help cement important relationships, but it will also serve to further educate them about your organization and on what you will need from them in a crisis; and vice versa.  The value to your organization can be significant, because your risk management team will not be starting from zero when you have to make a claim.  Knowing what to do first, whom to call at your insurer, what data they will need to begin the claims process, etc. – all of this will save time and help get you on the road to a settlement much more quickly.

Know what your policy covers, before you need it.

SponsoredContent_AIGThis advice may sound obvious, but experience has shown that all too often, companies are not aware, in detail, of what their policies cover and don’t cover.  As Noona Barlow, AIG head of financial lines claims Europe has noted, particularly in the case of small to mid-size organizations, “it is amazing how often directors and risk managers don’t actually know what their policy covers them for.”   This can have dire consequences.  In the case of D & O insurance, for example, even a “global” policy many not cover all situations, because in some countries, companies are not allowed to indemnify their directors.  Obviously, these kinds of facts are important to know before rather than after an incident occurs.  So it is important to have an insurer with both a broad and deep understanding of local laws and regulations wherever you have exposure, in addition to an understanding of the technical details of working through the claims process.

Make sure your data management policies are in order.

Successful risk management depends on having consistent, high-quality data on all of your risk-sensitive operations (manufacturing, procurement, shipping, etc.), so that you can quantify where the greatest risks sit in the organization and take steps to reduce them.  Good data, complemented by strong analytics, will also help you to identify potential problems before they occur.  It will also help you to maximize the effectiveness of your insurance purchasing decisions.  Frequent, detailed conversations with your insurer will help you to identify any areas where additional data might be needed in the event of a crisis.

No one ever wants to find themselves in the midst of a crisis.  But if and when such an event does strike, if you have taken the steps above you will be much better positioned to work through the claims process – and reach an effective resolution – as quickly and as smoothly as possible.

For more information, please visit the AIG Knowledge and Insights Center.

This article was produced by AIG and not the Risk & Insurance® editorial team.



AIG is a leading international insurance organization serving customers in more than 100 countries.
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