Commercial property insurance policies are about as murky as the swamped streets of New Orleans. For storm-stricken entrepreneurs, simply owning coverage only counts for so much when the entity writing the checks is a sophisticated financial institution looking to levitate its profits by curbing payouts. In the meantime, the clock is running: Most property policies stipulate that claims be submitted within 60 to 90 days of the disaster.
That's why devastated policy holders would be wise to bone up on strategies for making the big boys pay. And there are plenty of strategies. "The way you put the claim together could mean the difference between a significant recovery and a nominal one," says Ernest Martin, partner at law firm Haynes and Boone, which represents both small and large companies against insurers.
Property insurance — underwritten by the likes of American International Group, Hartford Financial Services and FM Global, and sold by brokers such as Marsh & McLennan, Aon and Wells Fargo — comes in a dizzying array of flavors. Stripped-down policies cover damage to plants, machinery and personal property. That typically includes theft and vandalism due to looting after storms, notes the Insurance Information Institute.
Then come the add-ons for economic losses. "Business income" insurance covers lost pretax profit plus ongoing expenses such as wages. The "extra expense" option takes care of moving costs if the company has to set up in a temporary location. Amply protected entrepreneurs can even recoup lost profit from having no access to the property, due to either a government blockade (via "civil authority" insurance) or a natural obstacle like 8 feet of stinking sludge ("ingress/egress" coverage). Afraid a key vendor will get whacked by a hurricane and shut down your production? There's "contingent business interruption" insurance for that.
Complicating matters are all the separate limits and deductibles for each type of coverage. The policy holder's goal: to slice and dice all the options to maximize the overall payout. "You want to tap all the limits available," says Martin.
First step: Immediately ask your adjuster for an extension on submitting proof of loss. Later, reiterate that request in writing.
Next, dust off your policy to figure out exactly what it covers. (Chances are you've long since forgotten, if you ever really knew.) You'll probably want to hire a forensic accountant — Ernst & Young, Huron Consulting and Navigant have a few — who can fashion your claim in a way that insurance companies will buy it. (Note: Do not use the same firm that does your books to manage your claim.) You'll need a lawyer, too, of course, and perhaps an engineer who can help assess the damage. The fees can add up, but some policies may cover them, says Martin.
Why do you need all those green eyeshades? Say you have a $10 million property policy. That means that the most you can expect to receive — for both property damage and other economic losses — is $10 million. Accounting for the property damage component is straightforward. Let's call it $5 million. Accounting for further economic losses, however, is more of a shell game: Did those extra losses result from the wind, the flood or the government?
To continue the example, say that within that $10 million policy are provisions for other types of coverage: up to $6 million for flood, $3 million for contingent business interruption and $2 million for civil authority. (The sum of these optional sub-limits can exceed the size of the total policy, though the holder can only get up to the $10 million in total coverage.) Now say the deductibles for each type of coverage are $500,000, $100,000 and $50,000, respectively. (Dizzy yet?)
Remember, the goal is to nab as much of that remaining $5 million left on the policy after property damages as possible. In this case, there is plenty of room under the flood provision, but the deductible is steep. The strategy, if possible: Spread the losses across the other two categories that have smaller deductibles. To be sure, calculating those scenarios — and getting them to pass muster with the insurance companies — can get hairy in a hurry.
Rather than identify every last penny of loss and where to allocate it, the severely cash-strapped can submit an initial estimate and receive an interest-free advancement on a property loss claim. As the loss calculations become clearer, policy holders can go back and amend the claim.
Some other important tips:
Document everything: If you hired, say, a debris-removal service, create a traceable account number and assign it to that vendor. Also, preserve evidence of damage by shooting video during the cleanup.
Don't sign anything: When submitting an initial claim, make sure it doesn't say final proof of loss. "Leave yourself an opening," says Werner Powers, partner at Haynes and Boone. "The extent of your losses may not be known for months and months."
Check for vendor endorsements: You may be as important to your vendors as they are to you. Some may even cover your losses under their own policies.
Don't get whipsawed: Say you have two carriers — one covering losses from wind, the other covering flood (flood insurance is underwritten by the federal flood insurance program) — and both sides think the other should shoulder the costs. Many states, such as Texas, have "prompt-payment" statutes requiring insurers to conduct thorough investigations to prove (or, rather, disprove) the cause of damage. Rather than get whipsawed between two giants, says Martin, let the carriers duke it out.
Given the horrendous losses from Katrina and Rita, insurers are likely looking to buff their images by being reasonably accommodating. But then, pressure from shareholders can be more relentless than a Category 5 hurricane — and that's good news for guys like Martin. Note that lawsuits against property policy carriers must be brought within one year from the time of the disaster, versus between two and four years (from when the carrier denies coverage) for disputes over other kinds of insurance.
The other good news, says Martin: "The rules are inherently more favorable for the insured."