Proving an Insured Loss: Policyholders Need Experts Too


The claim is ultimately settled for an amount even greater than the company’s original estimate — and considerably more than the insurer’s first offer.

In two other instances, retailers — one on the West Coast and another in the South — suffered fire losses at major facilities. In settling their claims, both utilized the services of outside consultants to help determine inventory losses, establish the business interruption and extra expense claims, and adjust the loss — and both received favorable settlements. Yet their net recovery differed.

Because the West Coast firm had added a cost of loss adjustment expense endorsement to their policy, they were reimbursed for the costs of those services.

The retailer in the South, however, had to pay for the experts’ services with their own funds, as was the case with the metal processing firm.

A devastating property loss can demoralize the management of any business. But compounding the problem all too frequently is the disappointment in discovering that the substantial expenses incurred in proving their damages to their insurer(s) are not normally covered by their property insurance policy. Historically, the costs of employing experts to prepare and support a claim are the insured’s responsibility.

An Evolution

There was a time when property losses were settled quickly by experienced independent general adjusters who had sufficient authority to evaluate conditions using few, if any, outside experts. As the insurance industry evolved in the 1970s and 1980s, carriers began to use more and more outside specialists — including forensic accountants, engineers, contractors, testing laboratories, and so forth — to work with their own adjusters in evaluating a claim. Many factors contributed to this evolution, not the least of which was the carriers’ desire to manage claim settlements using a centralized structure with claim-approval authority residing at the home office and not in the field.

To regain parity, insureds today find it increasingly important to employ their own outside consultants to help document and expedite their claims if they are to obtain a satisfactory claim recovery and restore their business operations as quickly and completely as possible. Consequently, the use of experts — including accountants, engineers and public adjusters — has become a common procedure in property damage loss settlements. The fees of these outside experts, no matter how well-earned, can be an added burden when they are borne entirely by the insured.

Recognizing the Need

Fortunately, leading insurance companies have gradually come to recognize that their business policyholders do face increased financial exposure in preparing, supporting and settling a loss, and many carriers are now providing various ways to cover this exposure. Although some include varying degrees of coverage in the basic insurance form, more often than not, payment to the insured for loss preparation costs is regarded as not covered under the basic policy. Therefore this important coverage must be addressed by adding an endorsement, which should be seriously considered when placing or renewing property insurance coverage. The insured pays an additional premium yet closes a serious gap in their financial exposure following a property and/or business interruption loss.

The most common endorsement is the “Cost of Inventory, Appraisal and Adjustment” endorsement.

However, substantial variation exists among the many clauses and endorsements available, with some offering much broader coverage than others. It usually takes special diligence on the agent’s or broker’s part tomake sure their client’s policy provides the right protection. To that end, it is essential to understand what the variations are and how such differences can affect the insurance recovery.

Understanding the Intent of the Coverage

In examining the policies and forms of some 20 major property underwriters to see how coverage to reimburse policyholders for loss preparation costs is handled, it was interesting to see that some are quite detailed in their provisions, while others are remarkably brief.

What’s more, the length of the endorsement does not necessarily reflect the true breadth of the coverage. And no matter how the extension of coverage is...