"As originally published in Expert Perspective, a Crowe Chizek and Company LLC publication, Spring 2007. All rights reserved."
The mass disasters that struck thousands of Americans in recent years have brought renewed attention to the critical role attorneys' play in property and business interruption claims. Savvy attorneys understand the needs of potential clients, on both sides of a claim, as well as the advantages they offer such parties.
The terrorist attacks of Sept. 11, 2001, and Hurricanes Katrina and Rita generated an avalanche of property insurance and business interruption claims. When such disasters strike, attorneys can prove indispensable in the claims process, mediation, and litigation. But attorneys must be prepared to seize such opportunities to expand their business.
Insureds and insurance companies typically turn to attorneys in one of two situations.
Insureds may not feel comfortable with part of the claims process. They may not understand policy provisions or agree with the insurance company's interpretation of coverage. Insureds can encounter difficulties working with an adjuster or believe that the insurer is making unreasonable requests for information. These or similar circumstances often prompt insureds to retain an attorney to protect their interests.
Alternatively, insureds or insurers might bring in an attorney because they are concerned about the other party's actions. From an insured's perspective, a red flag may go up when the insurer denies coverage on a claim that appears to be clearly covered or disputes the very existence of damage.
Conversely, an insurer could encounter evidence of sales that the insured has not reported on sales or income tax returns. This discovery could indicate a troubling tendency toward unethical practices; even worse, it could indicate that the insured is overstating the claim.
Conflicts between insurers and insureds may exist over the appropriate period of loss. For example, if an insured opens a temporary location to mitigate its business income loss, does the period of restoration end when the temporary location becomes operational or when the insured returns to the loss location? Situations like this may require the involvement of attorneys to settle disputes.
What You Bring To The Table
Attorneys can provide much value in the property claims process. Initially, they can protect their clients' rights by ensuring policy requirements and prerequisites to coverage are satisfied.
Like any contractual relationship, both parties may lose some, if not all, of their rights if they do not comply with the terms of the contract. Insurance policies are ultimately contracts — an area in which attorneys hold the expertise.
By the nature of their work, attorneys also possess expertise in negotiation and mediation practices in general. Not surprisingly, then, the attorney brings a level of comfort and competence to the insured during the claims process. At the same time, he or she acts as a trusted adviser who can give an honest assessment of whether to pursue litigation and what cost and outcome to reasonably expect.
Particularly with insureds, an attorney can bridge gaps between perception and reality. If litigation becomes a reality, both insureds and insurers benefit if their attorney has been involved from the beginning and is already familiar with the progression of the claim, and the facts and issues surrounding the claim.
Finally, attorneys serve as essential liaisons to third parties. Insurance companies may hire experts in engineering, accounting, and other specialized fields to help in the adjustment process. Attorneys can spare insureds from managing all these interactions. Attorneys also know when to hire, and how to work with, financial and other experts.
Several situations arise again and again in property and business interruption claims.
Attorneys who work in the insurance field quickly realize conflicts may be caused by a discrepancy in levels of sophistication between an insurer and insured. For example, an insured might purchase a policy to cover ordinary payroll expense for a period of time in the event of business interruption. The insurer, however, may not reimburse amounts incurred based on their interpretation of ordinary payroll.
The attorney is left to determine whether the insureds received the coverage they intended to purchase, and if the claim falls within that coverage. This can be a particularly contentious issue if the insured thought it was purchasing coverage when it ultimately did not have coverage. This may involve determining if there is any legal recourse against the insurance agent or broker that sold the policy to the insured.
The claims process also could require an attorney to evaluate whether both parties are fulfilling their respective contractual obligations. Mitigation of loss represents another area for potential disagreement. Have the insureds taken reasonable steps to mitigate their losses? If the insured incurred costs to mitigate their losses, is the insurer obligated to cover those costs?
The attorney's role may be as simple as improving the lines of communication between the insured and insurer. Consider a manufacturing plant that has submitted a claim for a business interruption loss. If, in calculating the loss, the insurer looks only at production during the period affected, it may not capture the entire loss because the insured may have lost orders during the downtime. Attorneys can often clarify these miscommunications.
An attorney is important in helping to ensure the loss scenario presented reflects the impact on the insured's overall operations. To preclude such a situation, the insured must communicate every element of its loss to the insurer — that's more likely to happen if the insured is represented by an attorney.
Identifying The Need
Certain factors can influence whether a party needs an attorney to assist with the claims process:
- The sophistication level of the client's employees. If, for example, an insured's employees don't possess specialized knowledge or understand how to execute a claim, an attorney can walk them through the process.
- The complexity of the insured's organization. The more complex the organization, the more likely an attorney is necessary. Larger organizations often enjoy the option of submitting varied types of claims under specialized policies, which can overwhelm an insured's employees and lead to the loss of potential claims.
- The complexity of the loss. A manufacturing company that conducts interrelated operations in five locations faces a more complicated loss calculation than a company with only one location.
- The impact of the loss on the insured. If a claim is critical to the insured's survival, an attorney may help expedite the process and see that the insured receives the recovery they are entitled to.
- The interaction between the insured and insurer. Retention of an attorney may be necessary to address disputes that can arise over coverage, damages amounts, or other duties under the contract.
Seize The Day
With the jump in property insurance and business interruption claims from events like Sept. 11 and Hurricane Katrina, the possibility of litigation regarding these claims has increased. Attorneys have greater opportunities to represent their clients when these events occur. Alert attorneys can take advantage of this opportunity by understanding their clients' business and identifying transactions that require their expertise.
Eric L. Proctor, CPA, is a senior manager specializing in the accounting aspects of property insurance claims with Crowe Chizek and Company LLC, in Louisville, Ky.
Charles M. Mushlin is a senior staff member specializing in the accounting aspects of property insurance claims with Crowe Chizek and Company LLC, in Louisville, Ky.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.