The profound impact of COVID-19 leading businesses to file first-party insurance claims is now well known. Further, insurance companies are systematically pushing back on potential coverage for COVID-19, with some issuing blanket coverage denials without investigation. In other words, this is not an ordinary claims environment. Against this backdrop, many policyholders are facing what may be their first significant insurance claim. This primer will familiarize such policyholders with the initial steps of the first-party insurance claims process. Whether a potential claim is related to COVID-19 or not, understanding the claims process is the best first step towards avoiding pitfalls and maximizing chances of recovery.
To Present Your Claim, First Understand Your Insurance Coverage.
We have previously written about several potential avenues of coverage for first-party losses related to COVID-19. Such coverage is dependent on the particular terms of your commercial policies, so the first step is for policyholders to understand what coverage they have under the first-party policies in their insurance program. What are the specific triggers for your various coverages? What are the different limits of liability for those coverages? What exclusions to coverage are likely to be raised?
It is important to understand these coverage details for at least two reasons. First, you should make sure that the presentation of your claim is consistent with the terms of the policy. Second, some losses may fall within more than one coverage with different limits. Allocating losses within these coverage “buckets” will help maximize your potential recovery.
You Should Give Your Insurer(s) Notice Strategically.
Giving notice of loss is both the first step in the claims process and the policyholder’s first opportunity to frame the claim. The notice should include basic facts about the loss, timing, locations involved, and may identify the policy language that the insured plans to rely on for coverage. Keep in mind that it is the insurer’s responsibility to look for coverage in the policy, but they are more likely to find coverage if you lay it out. Taking care to map the facts of a claim onto specific policy language lets a policyholder control the claim’s narrative. An effective notice presents the facts of a claim accurately but favorably.
Insurance policies typically require that policyholders give notice promptly, though the specific language varies. Many property policies have a further requirement that the insured submit a sworn proof of loss within a specific period of time, often 90 days. While delay in providing notice or proof of loss may not necessarily preclude coverage under applicable state law, giving prompt notice and timely submitting proof of loss is the best practice and avoids unnecessary claim issues.
Policyholders may question the prudence of giving notice of losses related to COVID-19 at all when many carriers are issuing blanket denials of coverage for COVID-19, especially where notice falls close in time to a renewal. Notice of loss typically prompts carriers to assign a claims reserve to the policy, i.e., money set aside to satisfy future claims payments. Reserves factor into renewal negotiations; higher reserves may mean a higher premium increase.
What is the point of giving notice of a claim that will not be covered if it will cause premiums to increase at renewal? First, an insured will never obtain coverage for a claim that is not made. Second, insurer denial of coverage for COVID-19 without an analysis of the policy and facts in question is premature. It is impossible for a carrier to make a proper determination about a claim without investigating and considering the facts. Finally, such a large proportion of businesses have losses arising from COVID-19 that it likely will impact renewal premiums—in an already hard market—regardless of whether your organization makes a claim. Do not let carriers scare you away from giving notice for a claim.
You Should Collect and Preserve Evidence of Coverage Triggers and Losses.
Understanding policy terms and coverage also guides policyholders in collecting evidence of coverage triggers and presenting the evidence within the coverage framework. Coverage triggers differ depending on the type of insurance and coverages involved. Also, remember that you may be able to recover from more than one coverage “bucket.” Examples include:
Coverage for Property Damage. Property damage is typically triggered by physical loss or damage to property. The best practice is to collect evidence of any and all structural changes or diminished use of property. For COVID-19 claims, this includes records of infection of persons on the insured’s premises and any cleaning and sanitizing efforts.
Contingent/Dependent and Attraction Property Coverage. These coverages are typically triggered by losses resulting from an interruption to another business that impacts the policyholder’s business. In the case of contingent or dependent property coverage, the other business may be a supplier or customer. In the case of attraction property coverage, the other business may be a nearby sports arena or airport that drives business to the insured (e.g., the sports bar next to the football stadium). Evidence of a trigger for contingent or dependent property coverage will come from a third-party location but otherwise be similar in scope to the evidence of property damage at the policyholder’s property.
Civil Authority Coverage. Civil authority coverage is typically triggered by an order of civil authority that prohibits or impedes access to the insured’s premises and that resulted from a covered cause of loss (e.g., property damage) to a property within a set distance from the insured’s property. Here again, evidence of coverage triggers will come from another location. It will also include the civil authority order itself.
Losses. Covered losses will depend on policy specifics but will typically include lost profits resulting from a covered loss; extra expenses, i.e., non-ordinary expenses necessary to stay in business while property is repaired or replaced; expediting expenses related to speeding up repairs or replacements; and, in some cases, the cost of cleaning and decontaminating the insured’s premises.Calculating lost profits in particular is a fact-intensive exercise. Insureds should collect current evidence of cancelled events or bookings, sales, etc. and carefully look back in time at historical data to calculate what profits would have been if the covered loss had not occurred. It is prudent for an insured to retain a forensic accountant for this work and, to the extent the claim is covered, such claim preparation fees are often covered under the policy as well.
In the case of COVID-19 losses, policyholders should track and save cleaning records and receipts, communications related to infected or likely-infected persons who are in contact with an insured’s property, communications and orders from civil authorities such as governors and mayors, and otherwise track efforts to locate and eliminate the presence of the virus on the property.
Insurers Will Often Respond with a Reservation of Rights and Questions.
Inexperienced policyholders may expect the insurer to either accept or deny their claim outright. While that can happen (particularly for denials), often an insurer’s response to a property claim is to ask the insured additional questions about the losses and reserve its rights. The questions are often geared at eliciting responses to limit or provide the insurer with a basis to reject a particular loss or the claim entirely. For example, with COVID-19 claims, many insurers have asked whether there were infected individuals or some kind of tested confirmation of the presence of COVID-19 at the insured’s locations. Policyholders should take serious care in responding to such questions to avoid providing the insurer with an easy basis for a denial.
The concept of reservations of rights can also be confusing to insureds. In short, the insurer is purporting to preserve their right to deny coverage at a later date while they investigate the claim. A reservation of rights is not a denial. It is, however, a signal to an insured that its carrier has doubts about coverage for all or part of a claim. Insureds should pay particular attention to any policy language a carrier cites in a reservation of rights letter and compare it with the actual policy language for consistency. Insureds should also prepare a response reserving their own rights under the policy.
Whether you are filing your first or your tenth insurance claim, the process does not need to be overwhelming. Work with coverage counsel, be proactive and candid when communicating with your carrier, maintain detailed records, and you should keep a firm handle on the process.