How much of a typical large property claim (property, builders risk, business interruption, and extra expense losses in excess of $5,000,000) actually gets paid by insurance, and how long does it take to settle a large claim with an insurance company? After 20 years of consulting on a variety of large property losses, I have my own ideas, but unlike smaller losses, for which statistics are regularly compiled, very little information is publicly available about large property claims. This is partly because they are relatively infrequent, but primarily because the settlement process tends to be highly confidential and limited to a small set of experts and consultants.
I was recently asked to participate in a survey that attempts to bring more information to light about the large claim process. The results of the survey confirmed what I have observed myself, that resolving large claims has become more difficult over the past 20 years, multiple claim disputes at various stages within any given claim process are common, insureds often incur expenses they believe are covered by their insurance but are not, and large claims are taking longer to settle.
The survey of independent insurance consultants and other insurance experts, conducted by Arthur J. Gallagher & Co., concluded that property insurance usually pays only about 75% to 85% of the final amount claimed (85% for physical damage, 75% for business interruption and 85% for extra expense), and even these figures are misleadingly high, because they are percentages of the final claim amount which has usually been reduced in earlier stages of the claim process. The total of all economic damages associated with a large property loss that end up being paid by insurance is only 65% to 75%.
The survey responses also suggested reasons why settling these claims has become more difficult. These most significant, from my experience, include:
- There has been an increasing tendency for large projects/properties to be insured by multiple participating insurance companies, each with a seat at the settlement table, often making resolution more difficult;
- With more insurance companies on a single risk, insurers may rely on outside claim managers with varying and often unclear authority, who add an additional layer of participants into the claim process;
- Competitive pressures, soft insurance markets, and lower interest rates, have caused insurers to be even more recalcitrant about paying claims;
- Claim adjusters within insurance companies do not have as much settlement authority as in the past;
- Insurance companies have cut back on training of claims personnel and compensation has not kept pace with other insurer functional areas, leading to fewer employees with significant large-claim experience.
The survey results also reported that it takes significantly longer to settle large claims than in the past. Almost a third of physical damage claims were not settled within six months of the property being repaired or replaced, and approximately 10% of physical damage claims took more than a year after repair or replacement to settle. Business interruption/delayed opening claims were even more difficult to resolve. According to the survey, 40% were not resolved six months after the end of the interruption or delay period and 14% were still unresolved one year after the end of the interruption/delay.
Regarding coverage disputes, the survey disclosed all sorts of reasons why some portion of the damages were not covered at all or were only partially covered by insurance. In my experience, these disputes can occur in any of three general stages in the claim process:
- The first I call the threshold stage, in which the parties seek to come to an agreement about the facts pertaining to the damages sustained, often after consulting outside causation and engineering experts. Disagreements on causation for the loss can be extremely significant, depending on the policy’s causation exclusions. The insured must be careful when submitting the claim to anticipate these exclusions.
- In the second stage, the insured often requires coverage expertise to determine what damage is covered and what is not. With physical damage, these determinations are about the extent of the damage, necessary repair, and functional upgrades, as well as the meaning of coverage terms in the policy. With extra expense, judgment is required to understand abnormal expenses as well as the meaning of policy language, especially when extra expense coverage is limited to amounts reducing the repair or delay period and the resulting business interruption loss.
- The business interruption/delay component of large losses are usually resolved well after the physical damage loss and requires further expertise because actual damages cannot be substantiated. Assuming that there is agreement that there was a period of interruption or delay, the parties often disagree over what performance would have been had there been no loss event, the meaning of various “soft cost” definitions, and whether reasonable steps were taken to avoid or reduce the delay.
Of course, one very important aspect of the claim process should occur well before any loss occurs, when the insurance policy is purchased. Careful review of coverage proposals and negotiation of coverage terms with an eye toward possible claim disputes is critical and can serve to avoid uncovered losses.
Given that a large property loss is a relatively infrequent occurrence, for most managers such a claim is often a first time experience where lessons are learned the hard way. A better understanding of the claim process will help improve management practices. It is not enough to buy property insurance and hope for the best.