As a risk manager, it’s your job to safeguard the company against certain liabilities. Unfortunately, though, no business is immune to accidents, and when they do occur, it’s easy to feel overwhelmed. The last thing you want to add to your plate is a claims process. But by taking the time to understand it now, you’ll be able utilize the coverage your company needs. We sat down with Rick Woollams, president of claims at AIG, to give you some tips that will guide you through the entire process — from the initial response to the resolution:
Rick Woollams: There are a few things that can be done. For example, in the more severity-prone lines of business (such as excess casualty), it’s a good idea to have a conversation with your insurance provider before a loss event happens. We can talk about how the process works — right ways and wrong ways to handle it. We can even put you in touch with the person you’d most likely be working with in the event of a claim. That way, you can build rapport and understand everything you need to know before you actually need to know it.
RW: The most basic way to smooth out the claim is to provide as much relevant information as possible. The more you’re able to tell us on day one, the less we have to go back for later. Even if you’re not certain something is relevant, report it anyway.
For example, if you’re being sued, we need the complaint filed against you. If the case has been ongoing, tell us about depositions and motions. If the lawsuit turns on the interpretation of a contract, we need a copy of the contract. A lot of claims arise out of properties that have been leased. If you’re a store in a shopping center, and there’s a problem concerning your use of the space, we need a copy of the lease.
RW: That happens sometimes. There are ordinary and extraordinary claims. Risk managers should always reach out to their insurers when facing an extraordinary claim.
I think it’s worth the time to pick up the phone and inform your insurance carrier’s organization that something unusual is on its way. We can talk about what makes the case strange, what you’re going to need to know, and how else we can help. I’m not going to hand this off on somebody lower in my organization or less knowledgeable.
RW: I see this a lot in excess casualty claims. That’s where we will respond to a liability type of event on your behalf if the claim exceeds a certain threshold covered by a different policy or self-insurance. A common threshold is $25 million.
Our policy doesn’t respond until either that other carrier or the policyholder has paid the amount of the retention. We’re really big in that business, and we’re good at it. Oftentimes, we’re told about claims that aren’t being responded to because the primary policy has resolved them.
A lot of policyholders will send us notice of every little slip and fall. They want to ensure they meet their obligations. And when they get our letter saying we won’t be taking any action, they breathe a sigh of relief because it means they’re not going to have us looking over their shoulder. A sprained ankle will never cost $25 million, so we just stay out of the way.
RW: Every once in a while, we find people who want advice on every little thing. They want to kibitz, and they’re disappointed by our letter — assuming it means we don’t care. I laugh when I get that reaction. We love to offer our advice and counsel. We’re craftsmen at this, and we like it when someone values our opinion.
However, that’s an unusual response. Generally, we’re going to assume you’re just filing the claim to protect yourself and hoping that we’ll leave you alone.
RW: A lot of risk managers wait too long to report a claim. This is a huge problem with claims-made policies — an insurance product in the commercial world. The timing of notice is a very material thing. Policyholders must report claims made against them within the policy year the claim was made. It’s the difference between covered and not covered.
So, for instance, if the policy ran during calendar year 2014, and a claim was made against you in 2014, you must tell us about it in 2014. Otherwise, it’s not covered.
RW: In the commercial world, businesses often try to shift risk. However, if it’s done incorrectly, risk managers can mistakenly think they’re covered.
There are two main ways to shift risk. One is through indemnity provisions in contracts, which shift liability of work done by one party for another. Another is with insurance, when a company is covered as an additional insurer on another company’s policy. So if there’s a problem with a vendor’s services, you can report it as an insured beneficiary to your carrier, rather than your insurance. More losses on your insurance will lead to higher premiums. By shifting the risk, you avoid that. In general, that’s a good thing, and it works. But the devil is in the details.
RW: One thing we see is the details around those kinds of risk transfer mechanisms. Technical provisions in state law often govern contractual indemnity provisions — to the point where there are specific phrases that must be in the contract to make the risk transfer work. Essentially, you have to say the magic words.
So if you’re a policyholder, and you’re relying on indemnity provisions to shift liability, we’re very interested because that becomes a defense we would assert on your behalf to effectuate that risk transfer. We want our customers to be good at it, but customers sometimes get tripped up because either the transaction occurs in a state where they don’t know the rules or they fall back on other states’ rules.
RW: Additional insurers are not all equal. The language in another company’s policy that makes you an additional insurer can come in lots of shapes, sizes, and colors, so risk managers must ensure they’re getting what they think they’re getting.
Ask the counterparty for the additional insured endorsement — see it, read it, understand it. Don’t just accept a certificate of insurance. This is a common shortcut, but it doesn’t provide the details or outline exactly how you’re being insured or what the qualifications are.
RW: A big one that I see is losing control of the information flow to the insurer. We often witness internal fights between risk managers and other constituents for control of claims — litigated claims in particular.
That can put a policyholder’s law department in control of a matter, cutting the risk manager out of the information flow. Often, lawyers aren’t that attuned to what the insurance carriers need to do their jobs. If the lawyers become uncommunicative to the carriers, you’ll have a problem. Risk managers, on the other hand, know it’s important to keep their carriers informed if they want money from them.
RW: I’ve seen situations where the risk manager had to go to the CFO or general counsel and say, “I don’t care who runs this thing, but if you want the insurance money, you’re going to have to talk to these people. If you don’t care about the money, then don’t change a thing. But you’ll need to post a reserve for this yourself.” That usually gets their attention. But I can see how a new risk manager might be unprepared for that kind of internal fighting.
As a risk manager, you’ll probably have to navigate the claims process in the midst of stressful circumstances at some point, but by keeping this advice in mind as you work through the process, you’ll put yourself in a great position for a successful outcome.