For companies of all sizes, getting property claims settled and paid can be an arduous and time- and resource-intensive process. Even before an incident occurs, companies can better position themselves by understanding the likelihood of a “hot potato” situation — one in which carriers look to shift responsibility to other policies and products — and knowing how to manage it. The first step is to learn how to identify potential overlap in coverages and policies, strategize proactively and take strategic actions when issues arise.
Overlap and issue awareness
The first step in mitigating hot potato claims is understanding sources of potential coverage overlap. In our experience, these are the areas of greatest overlap to be aware of:
For example, a large commodities trading firm experienced a $65 million theft of product, which was initially thought to be third-party theft. The firm’s outside counsel understood the theft to be external, so the claim was filed under their stock throughput policy, which covered inventory. The stock throughput insurer needed more proof that it was not an internal theft, which proved challenging to do to necessary standards. Ultimately, by filing the claim under that coverage, the firm took a longer and more expensive road to getting it paid years later.
In another example, a large shipping and distribution firm experienced a cyber breach wherein a virus disrupted internal communications and damaged laptops. The overall cost for reprogramming laptops was $200,000 and the company then wanted to replace them, which was another $200,000. The total loss of $400,000 was not covered under their cyber policy due to an exclusion for first party property. The property policy coverage was well below the $1 million deductible and the stock throughput insurer pushed back, demanding proof that the hack wasn’t an internal matter.
Both of these examples illuminate the issue of hot potato claims — the potential for overlap or finger-pointing by insurers. Taking a more proactive stance, and understanding overlaps and potential issues, is the first step in mitigating the hot potato situation.
Strategies for managing hot potato claims
Planning ahead is a best practice and there are a number of actions companies can take before a loss occurs. When that’s not an option, there are still strategic ways to move forward after a loss occurs.
Before the loss occurs
Understanding overlap between policies helps companies plan ahead and construct different scenarios that might occur. Risk managers should carefully review current policy wordings and do various calculations of how deductibles will apply. Depending on the business, they might also consider adding Joint Loss Agreements. These are common for property and boiler and machinery policies, but they can, and should be, used more often in other areas. It’s important to get a comprehensive picture of the insurance clauses and understand which policy should apply specifically as the primary. It’s often preferred not to let policies apply on a pro rata basis.
Companies should also understand the primary and excess positions of the insurers based on that specific wording or differences in conditions or limits. It is also a best practice to utilize the same insurers on overlapping policies where possible, the same brokers on the lines of coverage and the same third-party adjusters if applicable. This can reduce the finger pointing.
Based on the primary and excess positions, risk managers should clarify if multiple program deductibles apply. This review, along with reviewing owner/lessor/insurable interest contracts, can help when claims do arise. And as a best practice, policies should be tailored with manuscript endorsements.
After the loss occurs
In the case of a loss, companies should triage all possible causes right away. For instance, in the two examples above, the stock throughput insurer challenged whether the theft and breach were internal. Companies need to have all the data to identify the cause as soon as possible. Then they should put all potential insurers on notice. An effective approach to the claim is to imagine what each insurer will be thinking when they see the claim -this will help troubleshoot the coverages and options. Brokerage claims professionals can help by providing new insight into options and policy wording. These professionals can also provide guidance on the entire process, including what information will be needed.
There are several areas where this background knowledge and experience is critical: cyber (breach coaches, forensic consultants, attorneys); property (building management, M&E consultants, industrial hygienists, restoration consultants); crime (law enforcement, forensic accountants, investigators); environmental (Environmental Protection Agency, cleanup); and industry-specific practitioners or regulatory practitioners such as those in the Food and Drug Administration and the Occupational Safety and Health Administration.
Companies should always follow a standard set of best practices, staying on top of changes to policies regularly and communicating broadly with stakeholders. When claims arise they should have a system in place to gather and analyze data quickly.
Today, after decades of soft market conditions, where traditional policies were expanded to cover a broad range of additional coverages, the market has hardened for claims too. Now is the time to reset, focus on specific needs to help with cost and secure policies that are tailored to current needs and mitigate overlap.