Subrogation and fire claims management in property insurance

Insurance

Minimizing Net Claims Payments by Pursuing Subrogated Recoveries

Is a Central Claims Management Responsibility

This report aims to discuss how to minimize net claims payments through the process of pursuing subrogated recoveries and how this may be considered as a central claims management responsibility. The objective of the report is to therefore provide an understanding of fire claims for property and business interruption as well as to explain some fundamental principles of subrogation. The report also attempts to critically discuss the topic through insights into particular case law and policy conditions. Claims payments and the process of claims recovery entails a great deal more research then simply sending a check to some unfortunate victim of a fire incident. It also entails identifying any and all structural damage to a home or business and the external buildings on a premise, discovering the true cause of a fire and linking that cause to third parties so as to discover opportunities for claims recoveries. Consider that a poor installation of a new electrical system or the installation of a faulty computer wiring system may have been a true cause of some business entity's fire and/or other damage and may therefore provide an occasion for an insurance carrier to recuperate and/or offset some large claim through the process of claims subrogation. It must be emphasized that it should be the responsibility of the claims management function to pursue these potential opportunities or they may be simply overlooked and lost.

Subrogation Opportunities

Subrogation is a legal process used by insurance companies where after they pay for a loss they seek to recover the amount of the loss from another party who may actually have been legally liable or responsible for the damage. Historically, subrogation was founded on early treatise and doctrines dictating what the laws of subrogation entailed in the eyes of the courts. Subrogation was always considered to be a substitution of another person in the place of a creditor so that the person in whose favor it was exercised succeeded to the rights of the creditor in relation to a debt. Again, it is nothing more than different parties having successive claims upon a property; of suretyship; among joint debtors; among parties to bills and notes; in the administration of estates; and of course under contracts of insurance.

Unfortunately, claims departments and their adjusters are often not properly informed or completely knowledgeable in this potential area for financial recovery and may also miss the chance because of business as usual attitudes. For example, damage assessment may often require the hiring of licensed engineers who have the foundation of knowledge that may be required to thoroughly or systematically inspect and detail the true cause of fire and damage a business or property has undergone. but, how often have claims been paid after this type of fire even though some minor research would have uncovered a newly installed electrical system installed by an unreliable or unlicensed contractor or individual. Insurance carriers in this scenario have to discover the underlying cause of the fire and this type of data could offer claims management teams an opportunity to follow up in an effort to subrogate those parties for the amount of all lost claims. For this reason and more, it is critical for claims adjusters and insurance entities as a whole to fully grasp scenarios such as these in order to minimize net claims payments by pursuing subrogated recoveries.

Why is it important

It is important to take advantage of subrogation because of the cost of claims. The contents of a business are insured separately and apart from a building or series of structures. In many circumstances where a total loss was the result, the contents of the business often complicate claims. Consider that business claims recoveries usually include very large manifests or Schedules of Loss. Businesses are entitled to replacement values of all properties that they replace and even when an item is not replaced it represents a depreciated value or the Actual Cash Value (ACV). This can include very large assessments when business equipments' life time values are calculated.

Also some other expensive claims outputs include business property that may no longer be safe for the day-to-day business operations and all related expenses that can be associated with relocation could be subject to claims based on a "loss-of-use" portion of a business insurance policy. This includes any and all advance payments would be counted toward a final claim settlement and even a businesses' telephone or utility installation costs of a temporary work space as well as storage expenses, furniture rental for temporary business sights, extra transportation costs to and from these locations or relocations. These types of scenarios also often lead to future to changes required for new replacement buildings since building codes periodically change and newer business facilities are required to conform to ever-rising safety and environmental standards. These changes therefore add additional community related costs associated with those changes.

Very few individuals consider trees and shrubbery and debris Removal costs. Often businesses have policies that cover external and internal trees, shrubs, and other plants on a limited basis. More than likely these specific areas have associated aggregate limits but they can still add up to a great deal of money for some businesses. Also, when covered losses leave debris that also have to be removed, these associated costs may also apply in certain scenarios. Like trees and other external costs, claims for water damage caused by the extinguished of a fire are more than likely covered for the majority of businesses so claims generally pay for these damages.

And finally, business interruption for lost revenues incurred by a business due to a fire or other covered event that interferes with business operations often entail very large settlements. When an organization is forced to close down completely while their premises are being repaired also may lose to their immediate competitors. Business interruption insurance for example usually covers the profits that would have been earned based on financial records had the disaster not occurred. So, with these very expensive claims related costs, it is essential that carriers surrogate as many of these costs as possible and because of the inherent relation to the claims process, claims management offices and functions should be fully responsible for investigating and implementing the subrogation process. Claims managers have the authority to oversee settlements and to point claims adjusters in the right direction for initiating any necessary investigations in regard to subrogation.

Conclusion

In conclusion, this report aimed to discuss how to minimize net claims payments through the process of pursuing subrogated recoveries and how this should be a central claims management responsibility. The objective of the report was to provide insights into why it is critical for carriers to understand the inherent costs of business fire claims including the ever expensive business interruption principles of subrogation. It must be emphasized that the responsibility of claims management be responsible to pursue these potential cost redemption opportunities because the claims function is in the best position in the realm of carriers to institute the necessary policies and procedures for the subrogation process.