Large deductibles or self-insured retentions have become a staple of the property insurance programs of many large and medium-sized businesses. As corporate risk managers look to cut insurance premiums, one strategy is to take on a larger share of the risk. This decision is not without potential pitfalls. While the hope is that the company will make it through the year without any significant property losses, it only takes one natural catastrophe, unplanned fire or structural collapse to cause the best laid plans to go awry. However, if the company is prepared to respond to these types of unforeseen events, it can often mitigate the impact on its bottom line through recovery from third parties that are responsible for causing or failing to prevent the loss.
Property insurance companies devote a significant amount of resources toward subrogation. For those that are unfamiliar with the concept, insurance subrogation involves an insurance company pursuing its right to receive reimbursement for a covered loss from the party whose conduct caused the loss. A significant industry has grown out of insurers' subrogation efforts and there are lawyers, engineers and other forensic consultants who practice almost exclusively in this area. Often, an insurance company will include an insured's deductible or uninsured interest in its subrogation pursuits. However, when the loss does not exceed the policy deductible, the insurance company will generally not employ the services of its subrogation team to assist the insured in its attempt to recoup its uninsured loss. In these situations, companies frequently mistakenly chalk up uninsured losses to the "cost of doing business" and ignore opportunities to recover these losses from third parties as they believe that it may cost them more in expert and attorneys fees than the loss is worth, not to mention the impact on the productivity of their own personnel in supporting the recovery efforts. Despite these very valid concerns, companies should look to retain experienced recovery consultants to assist in the evaluation of their larger uninsured losses before writing them off, as a significant recovery can be often be obtained in a cost-effective manner.
Whether a business is pursuing a property loss claim within its insurance deductible or one where no insurance exists, there are many components to turning a large uninsured loss into a successful recovery. Several of the most critical are discussed below.
From the outset, the company should be cognizant that the evidence necessary for successful recovery must be analyzed immediately and preserved. After a significant catastrophe, the focus of the company is on resuming operations as quickly as possible. While that goal is paramount, the company should take steps immediately following the loss to preserve evidence for future recovery efforts. When a business suffers a significant event, like an untimely fire or structural failure, experienced counsel in conjunction with forensic experts need to be called to the site immediately to identify preliminary cause(s) of the event and isolate critical pieces of origin and cause evidence for safekeeping. If potentially responsible parties can be identified at this early stage, they should be given notice and, if possible, the opportunity to inspect the site before demolition or repair begins. Outside counsel can be employed to communicate directly with any potentially responsible parties and manage their access to the loss site and retained evidence. While there is no bright line rule as to the length of time a loss site should be preserved for inspection, experienced outside counsel are able to strike the appropriate balance between the company's need to resume operations quickly and a potential responsible party's right to examine the loss scene. Outside counsel can also help companies protect themselves from any future charges of spoliation which can derail otherwise viable claims.
Once the loss scene has been documented and the evidence preserved, the success or failure of the recovery effort often turns on the experience and quality of the forensic experts employed. Insurance companies and counsel who regularly pursue subrogation ordinarily have a stable of forensic experts that they consult in these situations. Regardless of who is guiding recovery efforts, it is important to include experienced forensic consultants qualified in the necessary discipline(s) as part of the recovery team.
It may well be that a team of experts is required to properly investigate the loss. In a fire loss, for example, a fire scientist (often referred to as a fire "origin and cause" expert) is engaged to identify the fire's area of origin. Depending on the potential sources of ignition within the area of origin, it is likely that a consultant familiar with the expected mechanism of ignition will need to be employed. If computer equipment is suspected of having been the source of ignition, an electrical engineer should be engaged to work hand-in-hand with the fire origin and cause consultant. The team can also include testifying and non-testifying experts, if the size of the claim warrants such expense.
After expert(s) and/or counsel have been engaged, an outline of the investigation process should be developed, with input from all of the members of the investigation team. The outline should address what is needed to establish liability both from a factual and legal perspective. From a factual perspective, forensic consultants should identify any additional testing or inspection they believe necessary to complete the assignment. To the extent that potentially destructive testing of evidence is required, spoliation issues apply. The investigation team will need to prepare a protocol for testing which will need to be shared with and ultimately agreed to by any potentially responsible party before the testing can commence. The consultants need to include budgets during this step in the process for the additional forensic work. Laboratory inspection and other similar costs can be expensive and, if unchecked, can quickly mount to the point where recovery efforts are no longer profitable.
From a legal perspective, counsel should put significant effort into evaluating the potential recovery of any loss early on in the investigatory process. This recovery estimate should be modified frequently along the way. It may be that at some point during the process the expected costs outweigh the potential recovery, and the investigation should be shut down. Nothing is worse than having spent significant funds investigating potential recovery only to find out that there is a legal or factual impediment to recovery that could or should have been discovered much earlier.
Contractual limitations of liability and warranties should be reviewed and considered. Often supply or construction contracts have limited warranties or limitations of liability that may prevent recovery. Large equipment failures raise certain common law issues, such as the economic loss doctrine, which can also serve to protect a responsible party from tort claims and, more importantly, potential tort damages. An attorney that is experienced in recovery efforts should be consulted to evaluate these potential legal impediments.
The legal analysis must also include a realistic assessment of the range of the anticipated damages award if the matter were ultimately to go to suit. It should not be assumed that all of the out-of-pocket expenses resulting from the event can be recovered. Courts will frequently limit recovery at law to the market value of the damaged property as of the date of the loss. If, for example, the damaged property was in poor condition or obsolete, the recoverable damages may be de minimus . Where the damaged property was not being used, was not saleable, or was scheduled for replacement or repair at the time of the loss, it could be that the fire or other casualty actually saved the time and expense of demolishing or disposing of it. What may initially look like a large uninsured loss may ultimately turn out to be a much less significant event.
The financial viability of the potentially responsible party should also be investigated. Hopefully, the potentially responsible party has provided a certificate of liability insurance which evidences sufficient coverage for the loss. If such is the case, the party's liability carrier should be contacted to avoid any potential claim of late notice. If there is no evidence of liability coverage or if the claim is of a type that is not ordinarily covered by liability insurance ( e.g. , breach of contract), the party's assets should be investigated to ensure that sufficient assets exist to satisfy any potential judgment.
Once it has been determined that a legally and factually supportable claim exists against a viable third party for the uninsured loss, the final step in the process is obtaining a recovery. There are many critical decisions to be made at this point in the process. A formal demand for reimbursement should be made upon the potential responsible party after it has been determined that there is sufficient evidence to substantiate the claim. If the target entity is also a business partner, potential business accommodations should be explored. This is particularly true if the business relationship is critical to both parties' ongoing financial success. If the business relationship between the parties is not at issue, it is almost always worthwhile to at least explore pre-litigation settlement after making an initial demand for compensation. Whether or not the target will take this offer seriously is always a question. Significant time and resources can be wasted pursuing pre-litigation settlement where the adverse party is simply using it as an opportunity to obtain pre-suit discovery. If a liability insurer is controlling the defense, it may not be as likely to offer an attractive settlement early in the process because they may believe that they can drive a better settlement through the litigation process. Where a carrier is not involved, however, prospects for early resolution are much better as the target company is unlikely to want to spend the time and money defending the claim where its efforts could be better spent on its core business pursuits.
Compulsory arbitration agreements may also apply and can be effective tools to an early resolution. The legal review of the agreements applicable between the parties must include examination of dispute resolution, choice of law and choice of forum provisions. If no arbitration agreement exists between the parties, then forum selection becomes the final critical issue before suit is filed. Choosing a forum that is most convenient and potentially favorable to the plaintiff is a question that should be discussed with experienced litigation counsel.
As larger deductibles and self-insured retentions become entrenched in the property insurance programs of many companies, the opportunities for recovery of uninsured losses should be explored. Corporate counsel and risk management professionals that know how to best guide these recovery efforts will maximize their chances of successful recoveries and assure that no money is left on the table after a catastrophic loss.
Richard D. Gable, Jr. is a Director in the Business & Commercial Litigation Department of Gibbons P.C. in Philadelphia. He currently chairs the Property Insurance Law Committee of the American Bar Association's Tort Trial and Insurance Practice section.