The need for “contract certainty” # 2 Claims Preparation Fees

http://www.dreamstime.com/-image24719108The second area that has to be addressed sooner rather than later is claims preparation fees.

Under an Industrial Special Risks (“ISR” ) Policy, the Insured has the right to appoint a claims preparer. The words from the Mark IV, both Advisory and Modified versions reads:

Item No. 2

“The insurance under this item is to cover such reasonable professional fees as may be payable by the Insured and such other reasonable expenses necessarily incurred by the Insured and not otherwise recoverable, for preparation of claims under the Insured’s Material Damage and Consequential Loss insurance policies and the Insurer(s) shall indemnify the Insured for such reasonable fees and expenses.”

With these covers, the Insured and/or broker selects a Sub-Limit and a premium is charged for the cover. There is no requirement under such a policy for the Insured to obtain permission to appoint a professional expert to assist them.

The position is much more complicated under a business pack, however, some follow the same approach as the ISR policies.

A few offer a very small limit to cover accountants costs to verify a claim. This is next to useless in practice.

Next you have some that purport to provide cover for anywhere between $5,000 and $25,000 cover for claims preparation services as standard, under the policy. There are two things to watch for:

1. what sections of the policy does the policy allow the appointment; and

2. does the Insured have to obtain permission?

Some policies have a combination of a standard cover and the ability to purchase additional coverage for an extra premium. This extra cover can be for the same sections as the standard cover, or it may be limited to just fire/property losses and business interruption, or just business interruption.

The same issue can arise with some product recall policies. AIG is an example.

Again, some require the Insured to obtain permission to appoint a claims preparer before the client can seek to recover the expenses.

Some insurers appear never to want to grant cover. This immediately causes problems for the Insured and broker, particularly where the loss is significant. There are documented cases of claims in excess of over $2.5 million where the Insurer has refused permission.

To keep track of who offers what, the easiest way is to use www.PolicyComparison.com and use the “Product Feature” comparison option.

Can you imagine how an business owner, who has suffered a loss and who has been recommended to use a claims preparer by their broker or someone who has found the service to be of benefit, asks for assistance and is told that permission is denied? What type of opinion do you think the Insured then forms of  his broker, his  insurer and the insurance industry in general, as a result of this?

Concurrently, even where permission is granted it invariably takes days or weeks for permission to be granted, which considerably slows the claims preparer involvement in mitigating the loss.

Some may suggest that I do not like this arrangement as I am a claims preparer and it is effecting me. Nothing could be further from the truth. I would ask that either the cover is removed from policies, or that insurers charge a fair premium and then allow the Insured to appoint professionals when they, the Insured, deem they need help. It all comes back to contract certainty and if we are going to grant cover as an industry, we grant it once an insured peril has triggered the policy. If we are not going to grant cover when a loss occurs then say so up front so that brokers and Insured are not conned into thinking they have coverage which is purely illusionary.

In countries such as the United Kingdom, there are a number of schemes where claims preparation is insured by a seperate insurer and these covers do not require permission. This may be an solution if business pack insurers are uncomfortable in granting the cover. They remove it from their policy and the Insured purchases a cover that will respond as it should when they need it from an insurer they can trust!

I certainly intend getting this issue sorted for any future policies that I draft for insurers or brokers.

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