2011 has been a year filled with global natural disasters, marked earlier by the Japan earthquake and more recently by the Thailand flood. These events are continuing to have financial consequences for companies around the globe with facilities, trading partners or clients in the impacted regions. First-party property and business interruption insurance is a critical financial resource for companies suffering losses because of natural disasters.
The insurance claim process for natural disaster losses typically involves company representatives with financial and risk management responsibilities. However, in-house lawyers can also help the company protect its insurance recovery effort.
Whether the insurance claim ultimately requires litigation or not, certain strategies should be employed from the outset to increase the likelihood that the company will collect maximum insurance dollars.
1. Master or local policies?: For companies with operations in more than one country, first-party coverage typically involves a global program, including a master policy in the country of the company’s headquarters and local policies for company locations in other countries. The master and local policies often contain similar language.
However, for certain issues, differences in the language may be subtle, yet important to the policyholder’s claim. For example, the master policy may include a lower relevant sublimit or higher deductible than a local policy. Thus, it is important for counsel to analyze all potentially applicable policies early in the claim process to determine which policy the claim should be pursued under.
2. Choice of law: Master and local policies frequently include choice of provisions that designate the law or forum of the country in which the policy was issued. Decisions regarding which country’s law best protects the company’s interests in the case of natural disaster losses should be made early in the claim process..
Certain countries have developed insurance coverage law that is less favorable to policyholders than the law that has been developed in the United States. Additionally, not all countries allow for jury trials or significant discovery. Depending on the issues it may be important for the policyholder to protect its ability to litigate in a particular jurisdiction under a particular law. This means that the policyholder should evaluate potentially applicable laws and decide under which policy to pursue coverage and how to frame arguments to seek to ensure application of that law.
Additionally, during the claim evaluation process, the policyholder should pay careful attention to the status of the claim discussion and whether it may be necessary to take proactive measures to avoid litigation or arbitration in an unfavorable forum.
3. Attorney-client privilege: The goal when responding to any claim is to work cooperatively with the insurer to obtain payment as quickly as possible so the company can quickly return to “normal” business operations. Coverage litigation is often low on the list of important considerations. However, the possibility of such litigation cannot be ignored.
The loss evaluation and insurance claim process involves a number of oral and written communications between employees and third-party consultants regarding the nature of the claim and extent of the company’s loss. It is important that the policyholder be able to evaluate its claim without concern that its insurer may access those communications and use them in a coverage dispute. Thus, counsel should implement procedures to seek to protect privileged internal communications regarding the claim and be involved in sensitive communications.
If it is necessary for particular employees to regularly communicate among themselves regarding the claim in order to assist counsel, those employees should be identified and it should be documented that their communications are at counsel’s direction. Finally, insurers may argue in the context of coverage litigation that communications with retained consultants are not privileged. Thus, steps should be taken to protect, if possible, all such communications.
4. Insurer communications regarding the claim: Property and business interruption claims are often complicated. It may take months for a company to fully evaluate the nature and extent of its losses, sensitive coverage issues and the right strategies for maximizing coverage. Communications with the company’s insurer(s) can later end up as exhibits should coverage litigation ensue. Thus, in the first instance, a limited number of individuals should be designated to communicate with the insurer(s) regarding the claim.
Counsel should coordinate with those individuals regarding the information that is provided to the insurer(s) to ensure that the information provided is consistent, and seek to reduce the risk that early communications, before the company has fully evaluated its claim, may later be used against the company to support a coverage denial. Early insurer communications should be factual, there should be no agreement regarding legal issues such as the number of “occurrences,” applicable sublimits or deductibles, or how or whether policy provisions or exclusions apply until counsel has decided the approach that best protects coverage.
5. Alternative dispute resolution (ADR): In the face of a coverage dispute, policyholders may be concerned that suing their insurer could disrupt an otherwise positive business relationship. That should not prevent the policyholder from pursuing arguments that favor coverage. Many disputes can be resolved without litigation—a number of ADR procedures can be employed to resolve coverage disputes without disrupting an otherwise good relationship.
For example, the parties can agree to binding mediation, with limited discovery. Creative approaches can be pursued that allow the policyholder to protect its interests, without litigation. However, in some instances it may be necessary to invoke the court system, including the potential for a jury trial, to effectively increase the chances of a successful insurance claim.
Many companies around the world presently are involved in evaluating property and business interruption losses stemming from the spate of 2011 natural disasters. Counsel should be involved early in the claim process to help employ strategies and protections that decrease the likelihood of coverage battles and protect the companies’ position should that unfortunate event arise.