there is no question!
The 14th century proverb “The proof of the pudding is in the eating” - and its meaning - will be well known to many readers of this Review; for many insurance policy holders this has historically been one of the criteria by which insurers’ and brokers’ performance following a claim made under an insurance policy has always been judged. But is it really the case that an insurance buyer needs to suffer an actual loss to establish the proof of their pudding? And why would a buyer feel comfortable living by this standard, when there are numerous examples of policies that when put to the test have not served up the delights promised? This old adage may still have some truth to it in terms of the ultimate test only coming following a loss. However, we are seeing ever greater value in a more proactive approach that demands steps be taken to ensure that all stakeholder parties work together from the outset to more comprehensively challenge the intent and requirements of the written contract. The objective is not only to understand the cover provided but to also to understand each party’s respective obligations in terms of the potential million-dollar question: “What happens if…?” This question is also becoming increasingly relevant in a hard market, where the value of insurer relationships should rise and where the impact of disputes with a key risk partner can have greater implications for the longer-term health of an Insured’s programme. We firmly believe that good claims management doesn’t happen by accident. The secret to success starts with a well-structured pro-active approach that focusses on the key claims stakeholders and a well-defined process, three key elements of which are:
Ultimately, the objective of policy holders and lenders when purchasing an insurance policy is to secure comfort and cover for when an unfortunate situation arises. So logically, it makes sense to want to understand the product being purchased and how it is likely to perform to maximise confidence in the transaction. In our experience, the most effective way of achieving this is through Claims Workshops.
As a result, we are finding more and more insurance buyers open to the idea of participating in Claims Workshops designed to stress-test the insurance policy with hypothetical claims scenarios designed to gain a better understanding of what is and what is not covered under their policy. By engaging in these discussions at the pre-placement and placement stages – hopefully well before any losses - many lessons can be learnt in terms of peculiarities of the business, as well as how the policy is constructed and the scope of cover to be provided; through this, we are able to check that our collective ‘intent’ is fully reflected in the proposed policy wording. Moreover, it can also assist in highlighting, where possible, limitations to cover such as sub-limits and how restrictive clauses may impact any ultimate recovery under the policy. We have found that this helps to effectively manage and set expectations in the event of a claim. Not just for risk and insurance managers! To maximise effectiveness and stake-holder ‘buy-in’, our preference is for the scenarios proposed to come not only from our expert Power claims and engineering specialists but also the key stakeholders who would rely on the policy to reinstate their position following a loss. This could include key members of the buyer’s insurance, financial, commercial and technical teams, who will be more familiar with any financial, contractual or technical specifics of their business. Expectation management We have also found that including representatives from this wider group in these discussions provides greater clarity over the expectations and responsibilities of each party in the event of a loss, enabling a full assessment of the What if? Why? and How? in the knowledge that preparation for a possible eventuality allows a more reasoned and coordinated response to a loss if it happens. Of course, it is not always possible to replicate an exact loss scenario but utilizing lessons learnt from similar claims can help to gain a better understanding of what can be expected in terms of policy response. The exercise also raises the profile of onerous conditions, the failure of which to observe can result in insurers feeling compromised and claims settlements being impacted. In a more challenging environment, where flexibility can be eroded, this becomes ever more important.
A clear Claims Protocol document is essential to keeping this knowledge freely available to the insurance team and other key stake-holders; this should always be distributed and to be at-hand should it be needed. Proactively engaging in the claims process at an early stage is not just advantageous to policyholders. It is important at the inception of a policy to work with an insured and insurers to compile a practical and working Claims Procedure Document or Claims Protocol which sets out a number of key points and processes so that when a loss does occur, all parties have a clear picture of the necessary steps to take and by whom.
The type of incident, circumstance, loss or damage which is considered material to the insurance cover and that requires notification will be noted in the policy wording as well as how to make the notification. It is important that this is correctly communicated in the Claims Protocol to ensure the responsible party for notifications does not invalidate a potential recovery. There are wide and varying obligations for claims notification; some will be time bound from the date of the incident, others will require notification as soon as reasonably practicable after such information shall come to the knowledge of the Principal Insured. It is important too to ensure that ‘knowledge’ in this context is limited to parties who have a detailed understanding of the cover in place and are identified as having notification responsibilities. If possible, the Claims Protocol should also include pre-agreed loss adjusters and experts that insurers stipulate are likely to be involved in the process, together with details of key contacts at the relevant stakeholders. Importance of the right loss adjuster This is particularly pertinent in the power sector, where losses can be high in both complexity and severity and where a quick response is essential to enable early decisions to be taken swiftly by the Insured. For power projects that benefit from project finance, it is imperative that claims are quickly addressed to maintain revenue streams in support of debt servicing. Expedition is also heightened when losses occur during periods of peak market demand when spot prices and possibly capacity payments (depending on profiling) will also be at their highest. We continue to see further investment and consolidation of more specialised loss adjusters, experienced in handling these types of claims. This being the case, it is important to make sure that your loss adjuster understands not only your sector but by working with them, your business, how it is managed and its revenue streams. Where possible, time spent pre-loss with individuals who have been allocated to your programme to familiarise them with this is also valuable. Helping manage pressures In our experience, when a loss occurs there are many different internal and external pressures placed upon the Insured, including customers, contractors, lenders, shareholders and internal management, each with its own demands and expectations placed upon them in terms of what happens next and in what order. The advantage of pre-agreeing the steps to be taken by all parties following a loss allows the necessary resources to be allocated to getting back to business as normal as quickly as possible. For example, inclusion of standard loss reporting forms, how to record the loss and how to monitor costs can all assist in streamlining the information flow in the initial hours and days following a loss. In particular, we have also found that claims protocols have proved extremely valuable for clients who have global portfolios of assets spread over various locations and time zones. Being able to provide a standard loss template to be completed in event of a loss can greatly simplify the process and ensure that the correct information is gathered as soon as possible.
Claims Preparation Clauses are provisions within policy wordings that positively provide cover for the costs of additional clerical or professional services required to correctly evaluate and present a valid claim. These clauses are regularly omitted from insurers’ own wordings; however, they are not uncommon in a softer market, as part of bespoke broker and client wordings.
As the market continues to harden, the clauses and their extent of application continue to come under scrutiny and pressure. Power claims, especially for consequential loss, can be time consuming and costly to prepare. They also greatly benefit from the attention of professionals who are experienced in preparing and presenting loss data in the format required by insurers. It is probably one of most nominal of clauses, but one with the greatest impact, particularly where losses include the unravelling of complex revenue streams on Power losses that involve indemnity periods that are impacted by a number of variables. A separate policy provision such as this that provide for the associated costs is therefore essential.
Of course, a proactive response to claims continues throughout the entire claim duration. Putting the right pieces of the jigsaw together at the early stage puts in place the scope for interim claim submissions and ultimately to work towards obtaining the right result in terms of final claim settlement amounts. This can often involve a significant amount of time with the various stakeholders to understand, verify and challenge differing approaches to coverage and quantification. We believe strongly that the insurance process is as much a partnership between the parties as it is a financial transaction and development of working guidelines and relationships with the key stakeholders is key to a more efficient claims process.
Chris Ling is Claims Director specialising in Renewable Energy, Willis Towers Watson Ipswich. Chris.Ling@WillisTowersWatson.com
