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 test whether the proof of the particular pudding really is in the eating – or not?
This old adage may still have some truth to it in terms of putting a value on the insurance product purchased, and we are firmly of the opinion that the way in which the policy may or may not respond in terms of an indemnity payment is driven by the cover available. However, increasing emphasis and value are now being placed on the steps taken at the outset of the policy to ensure that all parties are aware of their respective obligations in terms of the potential million-dollar question: “What happens if…?”
Ultimately, the requirements for policy holders and lenders when purchasing an insurance policy are to provide comfort and cover when an unfortunate situation does arise. So logically, it makes sense to know what product is being purchased and how it is likely to perform.
In our experience, more and more insurance buyers appear 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. Indeed, we have found that including representatives from a buyer’s technical as well as insurance team in these discussions provides greater clarity over the actions and responsibilities of each party in the event of a loss.
By engaging in these discussions at the pre-placement and placement stages - and therefore pre-loss - many lessons can be learnt in terms of how the policy is constructed and the scope of cover available. 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. In our experience, we have found that this helps to manage and set expectations should a claim arise.
These discussions should not only be focussed on the relevant risk managers or in-house insurance specialists but also on project managers, financial controllers and other key employees of the insured such as co-insured contractor parties and wider project teams.
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. It also provides the opportunity before a loss occurs to ask the questions: 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.
The claims process is where the intangible policy benefit becomes tangible; it is an integral part of the whole insurance proposition and therefore should be a key part of the overall servicing proposition during RFP submissions and presentations, continuing throughout the placement stage. Furthermore, engagement on claims with buyers during the procurement process completes the jigsaw in terms of being able to see and understand the entire risk management picture.
Proactively engaging in the claims process at an early stage is not just advantageous to policyholders. It has become more commonplace 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 requiring notification will be noted in the policy wording. 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 as soon as reasonably practicable after such information shall come to the knowledge of the Principal Insured.
This can 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. This is becoming more pertinent in the renewable sector, where losses are increasing in terms of frequency and severity. We continue to see further investment and development of more specialised renewable energy adjusters, experienced in handling these types of claims. Whilst many renewable energy projects benefit from project finance, it is imperative that claims are quickly addressed to maintain revenue streams to support debt servicing. Expedition is also heightened when losses occur during or just before cyclical high wind or resource periods, generation is not constant and requires a different mindset to base load generation for established utilities. This can only be positive in terms not only of understanding the renewable industry sector but also in terms of the insurance product and response.
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 expectation 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 many locations and time zones. Being able to provide asset managers with a standard loss template to complete in event of a loss can take away any preconceived myths associated with insurance that may exist.
We have a positive experience of integrating some of our clients protocol needs and expectations within the policy wordings we execute. These would include a mandated position for insurers to make a claims payment within 14 days of its final agreement. This would appear obvious; however, the market is well known for challenging administration and some contractual planning will ensure market settlements are correctly prioritised.
Claims preparation clauses are regularly omitted from insurers’ own wordings; however, they regularly feature in soft market-driven, bespoke broker and client wordings. As the market continues to harden, these clauses and their extent of application continue to come under scrutiny and pressure. In our experience, a separate policy response to pay for the additional clerical or professional services to correctly evaluate and present a valid claim is essential. Should an insured or insurer wish to engage the services of a third-party forensic accountant to support assertions of claims quantum, this can become an important feature of policy cover for all parties. It is probably one of most nominal of clauses, but one with the greatest impact as it can be called upon in the event of any indemnifiable claim under the policy.
Of course, a proactive response to claims continues throughout the entire claim duration and 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 as 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, GB, Willis Towers Watson.