Ian Peters explained the nuances of insurance policies and construction contracts at a recently held event.

Making an insurance claim is more art than science, with equal areas of grey as black and white. Often the party making the claim is caught up in what appears to be a mysterious, complex, never ending process with all manner of people having their say, said Ian Peters, Risk Consulting and Claims Practice leader at Marsh. He was speaking at the Marsh Construction and Infrastructure Risk Management Forum 2014.

Projects under construction are one of the highest risk industries in terms of losses leading to claims. Things go wrong at the worst possible time. Some examples he named were the fire in Dubai’s Atlantis hotel before its launch, cyclones in Oman, and other weather-related catastrophes in the Kingdom of Saudi Arabia.

What does a policy actually say about making a claim, he asked. “It starts with a claims condition. It puts the onus on the policyholder to do certain things. Compliance to the requirements of claims conditions in an insurance policy is absolutely vital. For example, failure to notify a loss event for an insured immediately as mentioned in the claims condition can have dire consequences, perhaps which can cause a delay in carrying out meaningful investigations onsite. Failing to comply with these must-dos gets the relationship off on the wrong foot with the insurance company, which is not advisable. So there are rules that are embedded in the insurance policy as to what needs to be done,” he said.

Policyholder

The insured has to deliver the claims to the insurer and it’s not the other way around, he clarified. It a common misconception, actually it is for the policyholder to put the claims on the table and to proactively drive it. This is an important issue because if the policyholder is not proactive with the claims then frankly things do tend to descend into a lengthier process than it needs to be, Peters added.

Insurers ask for a range of information. Effectively they are able to demand quite a substantial amount of information from the policyholder and lengthy document request lists can be expected. One of the issues in the Gulf here with regard to claims is the reluctance of a party to provide information. There is a tendency to hold on to data and documentation. There is a lack of trust on where the data and documentation is going to be used.

Another important point is that the insured cannot be passive. He needs to understand the process, and not fall down on technicality, he pointed out.

Brokers can assist and advise, but it is up to the policyholder to know what’s buried in their insurance policy so that they can ensure that they comply with it.

Loss adjuster

Insurers and reinsurers are becoming more particular on the large claims because they have big dollars at stake. It’s not wise to fall down on any of these particular points, he noted.

The importance of the loss adjuster in the process can’t be overstated. He is effectively the face of the insurance company. The loss adjuster is the person who attends on day one and sets the tone for what’s to come. So he’s an important player. It is vital that the relationship between the loss adjustor, policyholder and insurance company be a healthy one, where there is transparency and mutual trust.

“Many claims stall or flounder because the key players do not communicate effectively or because there’s not that level of trust or transparency that there’s needs to be,” Peters offered. “There’s a natural tendency for a policyholder to think that the loss adjuster is there to knock down the claim. Most professional loss adjusters are there to tell it, as it is, what circumstances are there, the policies, what one has paid for, in a fair and reasonable process. There is distrust among players and now what firms tend to do with big projects is to routinely name or nominate loss adjuster firms or individuals within firms into the policy. The aim here is to try to get the parties together before the claim happens so that there is a level of trust and relationship that can be built before the loss situation comes around. I think that is an important aspect with large projects placements.”

Duties of parties

The loss adjuster does not decide on policy liability or coverage. It’s his or her job to gather the facts, articulate the pros and cons of issues and report to the insurance or reinsurance company. It is for the insurer or the reinsurer to decide on coverage issues. Insurers tend to hand claims to their adjusting team. It is quite unusual these days for a large claim to be handled by a loss adjuster who is flying solo. There’s often an array of people who are part of that team – they could be causation experts, timeline experts on delay start-up claims, accountants, among others, all advising the insurers and acting under the project management of the loss adjustor.

“It is increasingly common for reinsurers to be present and active on large claims. The reinsurer, who would effectively be the insurer of the insurer, is ultimately the party who has to foot the bill so they can have a say in what goes on and the conduct of the claim. It is to be noted here that the policyholder is not exactly in contract with the reinsurer.  This tripartite agreement often leads to issues where there are different agendas or priorities or different commercial considerations, which often leads to tensions and delayed decisions,” he said.

Lessons learned

Based on his experience, Peters noted that there are many lessons learned. “The critical period of going from construction phase of a project to an operational phase - this is an area that is increasingly seeing a number of issues developing and potentially becoming cause for dispute between parties. Or, as an absolute minimum, it causes extended investigation and legal wrangling and delay before policy liabilities are accepted. In such scenarios it becomes vital that the legal language in the construction contract aligns with that of the insurance policy.”

“While nearing the completion of a project, the point where transfer of risk occurs needs to be clearly stated and a certificate is commonly used in the various policies and documents. Conflicting references to such documents are actually surprisingly common. Certainly if there is any handover or sectional completion before a final completion, then care must be taken in this dangerous period. The contractor needs to know the insurer’s responsibility for such parts of the project that are being taken into use, where the insurer’s responsibility is passed to the owner. In turn, the owner needs to ensure that appropriate certificates that will be required by the operational insurers are obtained. So both parties need to be on the same page here in this critical period. It is important that all concerned fully review both the insurance obligations and the project obligations. Often the focus is getting the project over the line, and its vital that the policyholder gets his rights in the rush to complete the project,” he explained.