Why do insurers continue to resist the recoverability of claims preparation costs when such assistance can be beneficial, asks Neil Greaves
Faced with an unforeseen catastrophic loss, many businesses will seek help from trusted advisers to assist in managing and preparing the resulting claim. Yet, many delegates at Post's recent Claims Club conference voted that claims preparation costs should not, in any circumstances, be recoverable as part of the claim. Is this a reasonable point of view or should insureds expect these costs to be indemnified as a matter of course?
A company that has suffered a sudden major catastrophic loss may have to undergo a significant period of reinstatement. Such an incident can also give rise to challenging discussions with key customers, which can result in a material and long term loss of market share.
Few financial controllers have experience of losses of this magnitude. Furthermore, in this difficult economic environment, many businesses are operating on a cost disciplined basis with no available administrative or financial resource.
The financial controller must decide whether to take a 'wait and see' approach to the claim or to seek support and assistance from a trusted adviser with whom they may have an established working relationship, such as the broker or auditor. The board will want to know what action is being taken to stabilise the situation and protect the company's interests.
Many financial controllers and risk managers will choose the proactive approach. They engage an adviser to provide expert advice, additional resource and to assist with the management and preparation of the claim. Shareholders and customers are likely to draw encouragement from any measure which supports senior management and leaves key employees able to focus on their clients and prompt recovery of the business.
This seems an entirely reasonable and rational approach. Prompt recovery of the business, and customer/client focus, benefits both the policyholder and insurer. So why is there this apparent consensus against allowing the insured to recover claims preparation costs? Surely the intention of an insurance contract is to indemnify the insured? This should be against all costs associated with this unforeseen incident. Providing these costs are necessarily incurred and are directly in relation to claim preparation and presentation, they should be recoverable. After all, other consultancy costs, such as surveyors' fees, are covered on a reasonably and necessarily incurred basis.
Many commercial policyholders regularly purchase consultancy support on all manner of issues. Whether it is a merger or acquisition, commercial restructuring, dispute resolution or risk management, it is accepted practice and good corporate governance to seek appropriate consulting expertise to support any process that may have a material impact on the financial performance of the company. A substantial insurance claim may well fall into this category. This is why many policyholders will engage an adviser and assume they will be indemnified against such costs.
Hard to pin down
The inconsistency in opinion at the Claims Club is perhaps not surprising. It reflects the insurance market approach to the claims preparation clauses that covers these costs. The inclusion of clauses tends to reflect the attitude and appetite of individual insurers, rather than a trend towards certain industry sectors or risks. There are also significant geographical variances with some regions being more supportive than others even where the same insurer is involved.
Most property/business interruption policies place the insured under an obligation to prepare and present a claim but costs thereof are generally only covered by the inclusion of a specific claims preparation clause. The value of this clause to the policyholder lies in the indemnity against a cost they deem necessary to incur to prepare and present the claim. Is there any benefit to the insurer, or is it perceived that the inclusion of claim preparation clauses increases the cost of the claim and offers no value in return?
There are clear benefits to an insurer. A properly prepared claim can reduce the life cycle of a claim and reduce all associated costs. If a company is given good advice, and is confident in that advice, then there may be opportunities to shorten the period of interruption and the expectations of a policyholder can be managed leading to reduced BI exposure. Policyholders without the resource to manage or prepare their claim in a time-efficient manner can be pre-occupied with recovering their key business areas to focus on the insurance issues and this can lead to a drawn out and frustrating process. A full and professional claim preparation can lead to a more inclusive and constructive process. It is also entirely consistent with the 'treating customers fairly' ethos that has been laid down by the Financial Services Authority.
Claim preparation clauses can, therefore, benefit both the policyholder and insurer in cases of major and complex loss. It should be acknowledged that the value of claim preparation is significantly diminished on smaller and routine claims where there is precious little benefit in appointing an expert claims preparer to attend a couple of meetings and obtain an estimate on the policyholder's behalf. A desire to avoid unnecessary claims preparation costs on smaller claims, where there is no value, should not however lead to a failure to include claim preparation clauses altogether. To do so denies the policyholder a true indemnity on a major and complex loss. Indeed, some insurers are now endeavouring to draft claim preparation clauses that apply solely to large losses, as many commercial policyholders will accept a minimum threshold for the use of claims preparation in acknowledgement that losses below a certain level are not financially material and will not necessitate expert assistance.
It is important to recognise that a claim, particularly following a major and complex loss, is the true test for the insured as to whether the product they have purchased responds in the manner in which they had anticipated. Customers buy insurance as protection in the event of loss and the response they receive when they have cause to claim is, of course, a true measure of its worth.
For brokers and insurers alike, a key priority should be to ensure that insureds receive a positive experience through the claims process. Facilitating recovery of reasonable and proportionate costs incurred in preparing and presenting the claim is a key element that should be allowed if we are serious about granting a full indemnity and treating customers fairly.
- Neil Greaves is the UK leader of the forensic accounting and claims services practice at Marsh.
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