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.
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.
“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.
Location is Everything
Location isn’t only important in real estate. It is also critical to supply chain resilience. To be resilient, companies must understand where their suppliers are located. They must also understand the susceptibility of those locations to disruption.
Businesses often engage suppliers in regions with lower labor costs. That can backfire if not enough attention is paid to the location of these suppliers or to the adequacy of contingency plans in the case of business disruption. Large global companies with deep supply chains are often at greater risk given the potential for impact to on-time deliveries, supplier responsiveness and sustainability.
Your Suppliers’ Suppliers
Ask yourself: Do I know the locations of all the companies within the supply tiers that feed my final production and assembly? Some of your suppliers’ suppliers may be located in areas prone to power outages, landslides, political upheaval or labor unrest, which could shut down a critical facility for a significant period of time.
The devastating fire that killed more than 250 people at a garment factory in Pakistan stands as a stark reminder. Building codes were not enforced in that case.
While many companies have established standards to identify all suppliers in all tiers, these standards require ongoing analyses of each supplier’s financial stability and their regions’ economic and political stability. When it comes to suppliers’ suppliers, incorrect assumptions may be made about the resiliency of second- and third-tier suppliers.
Supplier location is important for another reason — the efficacy of building codes and other construction standards in a region. But those codes do no good without enforcement. The devastating fire that killed more than 250 people at a garment factory in Pakistan stands as a stark reminder. Building codes were not enforced in that case.
From a risk management standpoint, companies should insist their suppliers maintain the same quality and integrity in their facilities that they conform to themselves. For larger global entities, it is prudent to require tier one suppliers to conduct business only with suppliers that maintain high building construction standards. Absent this assurance, the onus is on companies to map out their supplier’s location, peruse local building codes and investigate compliance.
Relying on too many suppliers in the same region also can be problematic. Geographic clusters of Tier 1, Tier 2 and even Tier 3 suppliers are increasingly common, according to a recent report by Deloitte. And while capitalizing on groups of experienced workers in proximate facilities can streamline supply chains and pare costs, it only makes sense if the risk is gauged in relation to the opportunities.
More Than Meets the Eye
Where a company is located is a crucial determinant of supply chain risk. Certain countries are simply more resilient to supply chain disruption than others. Our research with Oxford Metrica bears this out, indicating that Norway, Switzerland and Ireland are highly resilient regions, whereas Venezuela, the Philippines, India and Bangladesh are much less so, subject to country-inherent risk stemming from such things as corruption, political instability or natural hazards.
Today, risk is no longer scrutinized in a vacuum. The sum of the whole is what makes a supply chain resilient.
Preparing for and Navigating the Claims Process
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
The 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.
This 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.