In recent years, many contractors who have made claims under insurance polices have observed that the timescale for the investigation, adjustment, agreement and settlement of claims by international insurers has steadily increased. Against this backdrop, it is those contractors who have deployed a rigorous project management approach to their claims and who have been prepared to invest time, and sometimes money, in the process that have seen claims paid by insurers at proper value and in a timely manner.
In this and our March newsletter we provide a twelve point checklist which provides an overview of the claims process and highlights some key points to be taken into account by contractors seeking to maximise their insurance recoveries. In this newsletter we identify the points in the checklist up to the point of submission of a claim, and in our March newsletter we will consider how to deal with the insurer's response.
Tip 1: Put sufficient and effective insurance in place
You should ensure that input from all relevant parties and professional advisers has been obtained to determine the risks to be insured and ensure that adequate cover has been put in place.
One of the difficulties we sometimes encounter is that the parties are so keen to conclude contractual negotiations and get started on the project that insurance requirements may be considered only briefly and only when much of the contract has been put in place. Ideally, however, the insurance requirements would be considered in conjunction with related parts of the contract, such as the indemnity provisions and those dealing with the contractual allocation of risk. Otherwise, parties run the risk of contractual inconsistency and ambiguity, with potentially serious consequences if losses occur.
Equally, where there is more than one insured party it is important to consider, for example, whether there is to be:-
- a waiver of subrogation clause (being a clause which prevents insurers from being able to recover any losses they pay to one insured by seeking compensation from a co-insured1); and / or
- a non-vitiation clause (being a clause which protects the insurance cover afforded to an insured from the consequences of an act by another co-insured which could otherwise prejudice the insurance cover).
Such considerations may not seem significant when work is about to start but can make a significant difference if a big loss occurs. There is a further risk that if insurance is considered only at the end of the negotiations you may in effect be going to the insurance market with little time left for detailed negotiations (and hence in a weak bargaining position), never an ideal position to be in. In short, a (relatively) small investment at the outset can pay dividends if the worst happens.
An effective information gathering system must also be established across the whole business to ensure that all material facts are disclosed to the insurer at the inception of the policy and that no misrepresentations are made, otherwise cover might later be declined by insurers once a claim has arisen, on the ground that the contractor breached its duty of good faith to the insurer when the insurance was originally arranged.
Tip 2: Know your insurance
You must ensure that risk managers and key personnel understand the key terms of the policy such as the applicable law, the policy period, which parties are insured and for what interest, the notification obligations, the obligations in respect of ongoing disclosure or notification of a change to the risk, any particular warranties or conditions precedent to recovery and dispute resolution provisions.
By way of example, under English law the contract will be one of good faith (with the result that it is crucial that you understand your pre-contract disclosure obligations) and breach of warranties or condition precedents can be fatal to a claim even if the breaches appear of little practical consequence and do not result in any tangible prejudice to insurers.
Tip 3: Ensure claims reporting systems are in place and that compliant notifications are made
Notification must be in strict compliance with the policy otherwise cover may be at risk. If in doubt as to what needs to be notified and when, you should seek legal advice at an early stage. Having in place effective reporting systems across the different parts of your business will assist in ensuring that notification is made as required.
Different policies will have different notification requirements (see Tip 2) but there may be different notification obligations in relation to both (i) actual claims and losses and (ii) circumstances which might lead to a claim. For example, in the context of professional indemnity insurance, the collapse of a tunnel or bridge for which you were responsible is likely to be something which must be notified, but what about when references to concerns with the works are first made in the context of informal discussions? Great care must be taken – the English courts have in the past been kept too busy by such issues.
Tip 4: Project manage the claim from the outset
There may be voluminous correspondence (paper and electronic) between the multiple parties often involved in a project. The key detail may be hidden in one crucial communication, however. Accordingly, effective management is key. Necessary steps required may include: establishing a process for preserving all relevant material/evidence including all electronic data, identifying key factual witnesses, maintaining a project/claim archive of documents to prove the loss, logging communications with insurers' representatives (including loss adjusters) and recording details of calls and meetings, preparing copy sets of documents for disclosure to the loss adjuster/insurers, and liaising with brokers and lawyers instructed in respect of the claim. Care should be taken to preserve legal privilege wherever possible.
Tip 5: Prove the claim effectively and efficiently
There may be particular provisions in the policy in relation to co-operation with insurers and insurers' right to access to documents and personnel as well as the submission of a formal proof of loss or other formal claim document, and these should be complied with. Any deadlines for submitting information under the policy must be met. You should ensure that all the necessary internal and external resources, such as legal advisers, accountants or forensic accountants are engaged in quantifying the loss and advising on how the claim is to be presented.
Tip 6: Understand who is who in the claims process
In this regard it is important to understand who is on whose side. You should remember that in the context of a claim, a broker acts for the insured while the loss adjuster acts for the insurer. While you should be responsive to reasonable information requests from the loss adjuster and seek to develop a constructive relationship with them, you should not make statements or give any information to the loss adjuster that you would not give to the insurer. It is too easy to make comments which later prove unhelpful to the claim, and particular care should be taken in relation to the less formal means of communication, such as email or telephone.
What do you need to be aware of if the claim is accepted or rejected? This will be addressed in next month's newsletter.