With this topic clearly being a controversial one, and of great interest to many of our readers, we felt that there is value to be gained in publishing the remainder of the letter. If you missed the first part, you can access it by following this link: The role of the public loss adjuster
The public loss adjuster’s primary value is to understand the differences between the insured’s and insurer’s expectations at the time of a large loss, and to manage these very significant perceptions to assist the insured in achieving the long-term survival of his business.
One problem which arises within hours of the catastrophe is that insurers, and particularly, reinsurers, urgently require a reasonably accurate estimate of the value of the loss. This aspect is uppermost in the mind of the loss adjuster from the time he receives instructions in the matter; and, within hours of the catastrophe, the insured is expected to be able to provide the loss adjuster with an estimate of the value of the loss of his assets and probable gross profit loss going months into the future. Insurers expect this estimate to be categorised into various categories such as Plant, Stock, Buildings and Profits. There is no doubt that these estimates are important for the proper operation of the business of the insurers and reinsurers but the insured’s interpretation of what is important after the catastrophe is totally different.
Firstly, no matter how bad the damage to the business may be, the insured is always optimistic about how quickly the physical assets can be replaced and is even more optimistic about how quickly he can return to normal pre-fire business. This phenomenon is worldwide and seems to be a consequence of shock coupled with the natural optimism of a risk-taker. Uppermost in the insured’s mind is how he is going to satisfy his customers’ orders, which were either in production or due to go into production at the time of the catastrophe. The biggest danger that the insured believes he faces at this time, is the loss of his customers’ goodwill because, in his mind, the business is built on the basis of this goodwill over a long period of time. The insured also knows that if he is unable to deliver a promised order, the customer will look to his competitor for satisfaction and the customer may be permanently lost. Essentially, the insured does not regard the physical assets as being the heart of the business. Insurers, on the other hand, are primarily interested in the physical assets and want the insured to go back into business as quickly as possible to minimise the consequential loss which may arise during the insured indemnity period. Most often, this requirement is detrimental to the long-term survival of the insured business.
The public loss adjuster should understand this very significant difference in expectations and, firstly, prevent the insured from making decisions that will not ensure the long-term survival of the business. Quite often, this advice to an insured seems at odds with the insurer’s requirement that the insured make every effort to minimise the loss. We often have to point out to insurers that the insured is not required only to minimise the loss, not only for the insurer’s benefit, but primarily for the benefit of the insured business.
In order to determine a proper course of action for the insured business following a catastrophe, it is our practice firstly to examine the consequences that the catastrophe will have on the insured’s customer base and determine the cash-flow requirements to rehabilitate the business. Once these aspects have been determined, we are then able to advise the insured how to formulate the claim and to what extent he should go about the replacement of physical assets. Unfortunately, it takes time to arrive at a properly considered decision, and this apparent inactivity on the part of the insured is often construed by insurers to be in conflict with the policy terms and conditions. It is the public loss adjuster’s role to manage this process with the loss adjuster so that insurers are not unduly prejudiced.
Similarly, there is a substantial difference between the insurer’s expectation of how the consequential loss claim should be managed, as opposed to the insured’s primary concern about ‘cash flow’. Insurers are concerned with the value of the difference between standard turnover and actual turnover (turnover reduction) during the insured indemnity period whereas the insured’s only concern is whether he will have sufficient ‘cash flow’ to pay creditors which pre-existed the catastrophe and creditors which will have to be paid post-catastrophe, notwithstanding that production/sales may have ceased or have been severely curtailed. Again, it is the public loss adjuster who must understand the difference between an insured’s ‘cash flow’ requirement and an insurer’s liability to reimburse ‘gross profit’ following a turnover reduction. This aspect is critically important when the insured business has factored its turnover. An insured business that has factored its invoicing will have zero cash flow from the date of the catastrophe and will be absolutely reliant on insurers to finance its existing creditors and standing charges. Probably, the most critical aspect facing the public loss adjuster is the management of cash-flow requirements against insurers’ interim payments which are normally only paid after the gross profit loss has arisen.
A problem often faced by the public loss adjuster is the issue of interim payments which are made for Plant, Machinery, or other physical assets and then used by the insured to settle creditors that pre-existed the fire. Insurers often demand that payment for physical assets must be used to replace those assets in the belief that this will enable the insured business to commence production and thereby reduce the value of the consequential loss. Fortunately, most senior loss adjusters understand that the insured is obliged to use the claim proceeds in the most appropriate manner, and depending on the time it has taken to admit liability, it is often essential that creditors be paid to prevent liquidation of the business. The public loss adjuster should be sufficiently skilled to negotiate this issue, without prejudice accruing to either the insured or insurer.
It has become common practice for insurers to take at least 30 days, but more often, 90 days and more, to complete their investigations into the circumstances of a large loss and admit liability for the claim. By this stage, the insured business may already be on its knees financially. This delay is the most damaging and perhaps unfair business practice that has arisen in the field of insurance claims in recent years. There is absolutely no legal remedy available to an insured to force insurers to admit liability for a claim within a reasonable period of time. Similarly, there is no legal recourse for an insured to recover any damages which may lie outside the policy cover, and this is particularly onerous when one considers that an insured business may be driven to liquidation by this delay. In some cases, insurers deliberately create this delay, but, in most instances, it simply arises from the time it takes for all the different specialists engaged by insurers to investigate the circumstances of a large loss. In some instances, forensic chemists can take up to four months to submit their reports to insurers. Similarly, forensic accountants can take a similar length of time to determine whether an insured had a financial motive to create the loss himself.
It is hoped that the proposed consumer protection legislation will assist in redressing the current situation. From a public loss adjuster’s perspective, it is imperative that information required by the insurers be assimilated and presented to the insurers as quickly and comprehensively as possible to minimise the investigation period. Whilst it may seem a simple task to assimilate documentation to support the value of a claim, it is an enormous task under normal circumstances and even more so when there has been either total or partial destruction of records and computers. Very often accounting records have to be reconciled with suppliers and customers records and this alone can take more than 90 days. Assets registers are invariably out-of-date and, in any event, reflect values that are not appropriate to Policy definitions. The more sophisticated public loss adjusting companies employ their own chartered accountants for such tasks and are also in a position to facilitate bridging finance to the insured during this investigation period. This has gone some way to alleviating this very serious problem, but is not the solution because the very high cost of bridging finance is being claimed as Increased Cost of Working and the delay is thus increasing the cost of the claim to insurers.
Large fire claims are always problematic for insurers because of the suspicion of arson. Until fairly recently, most insurers relied on the findings of forensic chemists to determine whether the cause of the fire was deliberate and, if so, the insured was suspected of being complicit. This delayed the progress of the claim and required detailed accounting investigation to prove an insured’s innocence. It has always been our company’s contention that arson is almost always only committed by an insured that is financially desperate and arson is the last resort to resolve the financial predicament. Certain underwriters have, in recent years, subscribed to our view and first investigate a claimant’s pre-fire financial position to determine the probability of arson by the insured. Unfortunately, this forensics accounting investigation has also become ever more sophisticated and now reaches into the realms of whether an insured business was technically solvent at the time of the fire, and, if not, some underwriters regard this as a non-disclosure of a material fact, rendering the policy voidable. Without going into the merits of the legitimacy of this interpretation, it seems that this financial investigation could be substantially speeded up by completing the following:
- Check with the insured’s bankers whether their bank account has been operated in a satisfactory manner over the past 12 months.
- Check with the insured’s three major creditors whether these accounts have been operated in a satisfactory manner over the past 12 months.
- Check whether VAT has been paid according to the liability dictated by turnover during the past 12 months.
This basic test should take no more than 14 days to conclude and, if the results are all positive, will effectively rule out financially motivated arson by the insured. Any financial investigation that goes beyond the above basic checks could indicate that insurers have prejudged the insured and are pursuing a repudiation rather than an objective assessment of the merits of the claim. The task of the public loss adjuster in these instances is to try and convince the reluctant insurer to reappraise their position and not to criminalise the insured. Very often, the public loss adjuster is only engaged once this criminalisation process has been established and the investigators may no longer be in a position to change their view. In recent years, some insurers have established their own ‘Special Investigation Departments’, mainly staffed by ex-members of the old style South Africa Police Services. As with any ‘investigative’ department, the danger is that they have a tendency to criminalise the process and start creating suspicions that an objective evaluation of a given situation would not support. Whilst there may be a place for this type of detailed investigation of certain claims, this should not be a regular feature of the investigation of every large fire claim because issues of profiling and abuse of human rights could become an issue. It is our experience that these departments are going beyond what an insured should be expected to face when placing business with a reputable insurance company. Unfortunately, there is no specific forum available to the public loss adjuster to debate these issues with insurers.
There are many other examples of the practical and technical service offered by the public loss adjuster, but it should be apparent that the compiling and negotiating the successful settlement of a large and complex loss requires a substantial amount of expertise and time. It is simply not possible for an insured to professionally attend to this aspect, and, simultaneously, the successful rehabilitation of the business following a catastrophic event. The loss adjuster represents the insurer’s interests in the claim, and the few examples I’ve quoted clearly demonstrate that the insured’s and insurer’s interests in a claim can be very different and extremely prejudicial to each other if not professionally managed. The public loss adjuster’s role is to represent the insured to manage the claim process professionally to the extent that the insurance policy response in full to the insured’s loss.
There are two questions frequently asked by the insurance industry:
1. Shouldn’t the insurance broker perform the function of the public loss adjuster?
The short answer is that the insurance broker has neither the claim expertise nor the time available to formulate and negotiate complex claim settlement on the insured’s behalf. When we started this business some 20 years ago, brokers believed that their function was to “hold the insured’s hand” during the claim process and the insurance company’s loss adjuster would independently manage the claim for them. Times have changed and the whole claims process has become very professional, and an unskilled broker could very easily create a serious professional negligence resulting in a P I claim against his company. As I have already mentioned, Marsh and Alex Forbes have created internal specialist divisions to formulate and manage complex insurance claims, not only for their own clients, but also competitors’ clients. The cost of managing a complex claim is very substantial and certainly not covered by the usual broker’s fee/commission.
2. Why do public loss adjusters charge fees as a percentage of the settlement and do they artificially increase the claim to cover the fee?
I suppose the reason we charge a contingency fee is because the insured prefers this type of arrangement. It is also less administration for us and the insured gets some sort of comfort by virtue of the fact that our fee is tied to the success of the claim.
It is simply not possible to increase a claim artificially when it is being audited by a professional loss adjuster. It is often pointed out to us that there is a substantial increase in the estimate once we become involved compared to the initial estimate submitted by the loss adjuster. I have already tried to explain this in the body of this document, but an initial estimate is nothing more than a guess, with the danger being that an under-estimated claim faces the risk that the loss adjuster may try to fit the claim into the estimate rather than face the insurer’s displeasure when he advises them of a substantial increase. Once we become involved in the claim, we spend a lot of time establishing what the maximum possible value of the claim will be and we request the loss adjuster to revise the estimate accordingly. This allows the insurers to register an appropriate estimate, and we expect that the loss will be agreed at a lesser number that’s making the whole process more accurate. It is our experience that increasing an estimate midway through the claim seems to indicate to insurers that either fraud is taking place or the loss adjuster isn’t performing his duties adequately. Neither of these suspicions is correct and a simple matter is that it is not possible accurately to estimate the value of a complex claim without doing a substantial amount of data collation and investigation. This takes time and the value of the claim can change dramatically depending on circumstances that arise during the process of negotiation.
Stuart Woodhead, who, after some 40 years as a loss adjuster, handling many major claims in South Africa and around the world, joined Mike Gaines and Ken Cox as a Public Adjuster, in 2010. Woodhead has been astounded at the attitude of certain insurers, and mainly underwriting managers, towards claims which is he feels is an attempt to wriggle out of accepting liability for legitimate claims by using whatever excuses they can find. In addition, it is apparent that most claims people have little understanding of the serious impact a large fire has on a business and, owing to delays in effecting interim payments, results in many businesses not being able to recover thereby being placed into liquidation.