In the course of doing business, a company may be affected by an insurable loss, such as a fire, flood, equipment failure or explosion. These incidents, if not handled properly, can result in significant damage to the company’s profit, financial stability and possibly its reputation. It cannot rely solely on its insurance policy to avoid the economic loss that can result from an incident.
The important steps to mitigate the risks of a loss include:
- Having a formal risk mitigation plan in place.
- Accounting for the claim with a proper reporting structure.
- Properly quantifying the claim and being actively involved in managing the relationship with the insurance company.
Risk mitigation plan
At first, be prepared: Have a risk mitigation plan in place that can be put into action immediately upon the occurrence of the incident.
As part of the plan, identify people who will take charge and manage the claim process. Each member of the team would have preset tasks in the event of an incident. The plan should also specify alternative production facilities, suppliers and warehouse space, with the goal being to keep the company operational and minimize losses.
As a next step, carefully review insurance policies and identify all potential issues regarding coverage, valuations, exclusions and endorsements. If the policy is unclear, it should be reviewed with the insurance broker to make sure there is adequate coverage. Once an incident occurs, it will be too late to find out about coverage limitations that jeopardize the company’s ability to recover.
External advisers should be identified in advance to assist during the incident. They may include accountants, lawyers, risk managers, engineers and others. Using external advisers who can help with the claims process will allow the company to focus on its day-to-day operations. They will also allow the company to level the playing field with the insurance company and its representatives who deal with claims on a daily basis.
Also, most insurance policies will cover the costs of professional services needed to assist with the claims process, through the professional fee endorsement portion of the policy. External advisers are knowledgeable with how claims work and can accelerate the process, increase the recovery amount from the insurance company and relieve pressure on the company’s staff.
Accounting for a claim
It is vital to capture all loss-related costs. The company should set up an insurance receivable account on its balance sheet, with sub-accounts to capture all the costs in the correct “buckets” in accordance with the insurance policy. These may include cleanup and debris removal, property repairs, etc.
It is important to have the costs categorized correctly to facilitate the payment of the insurance claim. If the costs incurred from the incident are not allocated to the correct categories, the insurer may not pay for them. For example, costs related to the business interruption portion of the claim, such as loss of sales resulting from downtime, must be accounted for separately from property damage costs. Supporting documents should be included to provide backup for the costs, such as invoices, time sheets, cancelled cheques and correspondence.
Managing the relationship
In quantifying the claim, the company’s methodology should be consistent with its insurance policy. One of the most widely used methods is known as the “three-column approach,” which uses a modified income statement and presents the calculation in three columns. Column one itemizes results the company expected to achieve if not for the incident. Column two is the actual results achieved following the incident. The third column is the difference between the two, or the loss incurred. The company uses this method for its sales, cost of sales and extra expenses.
The company lead representative in charge of the claim should work closely and openly with the insurance company. This is not an adversarial relationship and should not be treated as such. The insurance broker should also be used as a resource to help co-ordinate the loss recovery. It is important to keep the insurer and adjusters advised of any changes that may affect the claim.
If after submitting its claim the company is not happy with the insurer’s settlement offer, it should take steps to explain its position carefully. External experts experienced in dealing with the insurer can be of assistance during this process. Make sure that all the components of the claim have been set out clearly and accurately with adequate supporting documentation.
As mentioned previously, the insurer requires documentation and will not just take your word for it. The company should present its claim in person to the insurer and may request that its broker be in attendance. Do not change the rationale or methodology of the claim once it has been submitted as this will damage the credibility of the claim.
By following the steps detailed in this article, a company can be better prepared to mitigate the losses from a loss incident.
The following article appears in the March 8, 2013 edition of Lawyers Weekly and can be viewed in it’s original form here.
Steven Polisuk is a Chartered Business Valuator, Certified Fraud Examiner and recognized as an expert witness in the Ontario Superior Court of Justice for the quantification of economic damages. For the past twelve years, Steven’s practice has focused exclusively in the areas of valuation, litigation support, personal injury claims and forensic accounting. Steven has published several articles and is well respected in his field as an expert in damage quantification for commercial litigation, insurance claims (including business interruption) and for personal injury matters.