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Insurance archaeologists uncover lost coverage.

Insurance Archaeologists Uncover Lost Coverage

More than $10 million is awarded to a retired sea captain in a case involving the ocean shipment of asbestos. Westinghouse is ordered to pay $90 million to clean up six hazardous waste sites near Bloomington, IN. The U.S. Office of Technology estimates that the total cost of cleaning up toxic waste sites could run as high as $100 billion.

Indeed, in today's business climate, companies can be forced to pay for the staggering amount of legal and settlement costs of occupational disease litigation, as well as the expense of cleaning up the environment. For many companies, the monetary exposure is often substantially greater than their share of the cleanup costs because of joint and several liability. Thus, if other potentially responsible parties at a cleanup site, or defendants in a tort action, declare bankruptcy, the remaining companies will find their exposure to be far greater than anticipated.

A comprehensive insurance coverage analysis locates insurance coverages that can respond to such claims. Generally, these coverages already have been paid for but are untapped because the companies have forgotten them or have lost key documents.

Obviously, a firm facing litigation that has located old coverage cannot simply make a claim and expect to receive a check immediately. Indeed, such coverage issues are being vigorously litigated throughout the nation. Court cases thus far have not been unanimously won by the policyholders, yet there have been enough favorable decisions to make an historic insurance audit an essential part of any effective claims handling strategy.

Risk managers examining the amount of money at stake will concur that no one can afford not to find all potentially available coverage. Lawyers representing insurers agree with this strategy. For example, in "Environmental Risk Insurance: Don't Count on It," an article in the July 1987 issue of Risk Management, attorneys Donald V. Jernberg and Mark C. Furse state: "Indeed, given existing case law, one would be foolish not to seek coverage under almost all old general liability policies."

Insurance archaeology, the historic insurance audit procedure, is a great deal more than simply archiving or conducting painstaking searches through dusty filing cabinets. These policies are part of the historic assets of a company. However, they are often stored in a dangerously haphazard manner. This sorry but common method of recordkeeping leaves vital assets often unprotected from fire, water, insect and vermin damage. Now, hundreds of millions of dollars in assets probably lay in cardboard boxes and paper shopping bags on the floors of storerooms or warehouses.

The objective in finding these neglected assets--and realizing their potential benefit--is to organize the information in a manner that helps to implement an effective strategy for handling claims. The insurance archaeologist does not get involved with legal issues, leaving this area to the client's in-house and outside counsel.

More Valuable Coverage

One reason why it is crucial to find historic coverages is that these older policies may be worth more than current ones. Coverages written in the 1940s, 50s and 60s, for example, typically have no pollution exclusions and have lower deductibles. In fact, pollution exclusions were not part of the standard Comprehensive General Liability policy until 1973. For many firms, this provides a very long period in which there was no restriction in the coverage for pollution claims.

Looking back with a careful eye may reveal that certain policies are worth far more than their face values. For instance, since the aggregate limits on older excess policies often applied only to products or occupational disease claims, these policies may afford coverage for an unlimited number of occurences for other types of claims, such as those related to pollution caused by operations. Moreover, many primary policies that are not rated on a remuneration basis do not have aggregate limits for property damage claims.

Another example is the area of self-insurance. Executives at some companies believe that there is no point in going back because they were self-insured. Yet, what if the retention was $50,000? That could be one month's legal fees today. And after that, there could be excess coverage written on an occurrence basis for property damage with no aggregate limit on the number of occurrences.

Saving for the Future

Obviously, older policies can offer important benefits that current ones do not. The most important advantage of finding old policies, however, is that they allow a company to save current coverage for future claims. No risk manager has a crystal ball that predicts what claims to anticipate in 1995 or beyond. But if the past 10 to 15 years are an accurate indicator, more litigation and larger claims can be expected.

Occassionally, when the insurance archaeologist is retained to conduct an historic insurance audit, the policies are available. More often, however, the data cannot be found or has been destroyed. At this point, it's necessary to search for secondary sources of information. An example of a secondary source is a schedule found in an old accounting ledger that lists only the policy number. The policy number is extremely valuable since it can provide a wealth of specifics, including the carrier's underwriting office, type of policy, year of inception and even the insured's account number.

Research and Analysis

Historic insurance reconstruction has two distinct phases: research and analysis. In the absence of actual policies, it is vital that as many secondary sources of information as possible be found. The research phase begins with a perusal of internal records, including all insurance records, available policies, correspondence, accounting records, acquisition files, corporate records, contracts and claim files.

During the research phase, it is critical to follow an inviolate rule of insurance archaeology: When someone says the records aren't there, they usually are. And that's usually where the most crucial information can be found.

People all too frequently do not know where or how to search. Well-meaning but inexperienced staffs have reported that the information isn't there. In most instances, the information is there or it exists in secondary sources.

Valuable records may be stored in a remote warehouse. A classic example is an organization that forgot to look in an underground storage vault. A subsequent audit revealed that all the company's accounting records dating back to the late 1800s were stored there.

Interview Key Personnel

After assembling all the documents that can be found in the internal records, the next step is to interview every key person involved in the insurance program for the period being reconstructed. These individuals are often the best sources for learning where and how old records are kept and details about the insurance program, including the names of former brokers and other key personnel.

It is usually necessary to interview at least four--and sometimes twice that many--people before locating someone who truly understands records retention. This search is worth the effort. In one instance, the last of seven interviewers provided information about where several cardboard transfer cases of old insurance records were stored. At the bottom of one were two policies, each written for a $10 million limit of liability. Do not forget, retirees can also be valuable resources.

External Sources

Sources outside the company can provide surprising amounts of crucial secondary evidence. These external sources include government records, outside auditors and/or counsel, and third parties that entered into contracts which required proof of insurance.

One of the most worthwhile places to search for records is London. Working through London brokers, who keep records on behalf of Lloyd's underwriters and the British companies, it is possible to reconstruct the details on numerous primary and excess programs.

A broker's slip is the document a London broker takes to the floor of Lloyd's to have underwriters initial and sign off on their respective percentage. This is often the next best thing to finding a policy. The slip describes the coverage and provides the details of the policy period, the named insured and the underlying limits for the primary policy.

Sometimes broker's slips can be used in tandem with other documents to painted complete picture. For instance, a search for secondary evidence of insurance may yield five other documents that identify the primary insurer but no information as to policy limits. Yet those five documents, when combined with the information from the London broker's records, can provide everything needed to understand both the primary and excess programs.

Another valuable outside source is government records, including state and federal archives, various military departments and even data from municipalities. On a recent trip to a federal archive, $40 million in coverage that was placed in the 1950s was located. The company had been searching for records of this coverage for several years; it was tucked away in a carton waiting to be destroyed.

Routine destruction is a common practice in the records retention policies of most organizations. When rescuing clients' records, insurance archaeologists are sometimes only a few steps ahead of the maintenance workers who were asked to discard the cartons.

Missing Coverage

Even if supporting documentation which establishes the existence of a policy is found, the coverage terms may be missing. Fortunately, coverage terms for the missing policies can be reconstructed by finding the same policy issued to another insured in the same time period.

The insurance industry uses standard policy forms within certain revision dates. In one case, a sample policy was found in government records--the same form they had purchased for 13 years.

In concluding the research phase, it's important to keep an accurate log of where documents were found and by whom. If several years later litigation arises with an insurer over the authenticity of a document, it may be necessary to prove specifically where and by whom a document was found.

Analyze and Understand

The analysis phase of historic insurance reconstruction cannot begin until all the information obtained during the research process is organized in chronological order by policy type. Then, it is vital to analyze and understand every line in every available document. Nothing is more important than understanding precisely what information the documents contain.

At the end of the analysis phase, it should be possible to prepare a policy register with a summary of the terms and conditions of every policy in the company's coverage history. The language of the pollution exclusion and other key terms should be analyzed and understood. The application of aggregate limits must also be studied and outlined in detail.

With the sort of policy register and bar graph chart pictured in Figure 1, the risk manager can understand the entire coverage history and negotiate effectively with all carriers for the entire period of time covered in the audit.

A Benefit to All

Different parties benefit from historic insurance reconstruction. Corporations can find as much additional insurance money as possible. Insurance companies also benefit; the primary insurers want to spread the risk, and the excess insurers seek more primary insurance. Outside counsel and the Environmental Protection Agency also encourage insurance audits.

It's never too early to begin a reconstruction. Crucial records are probably stored where they are subject to hazardous conditions. And, just because records are there today does not mean they will be there tomorrow.

Moreover, as time passes, people move and memories fade. There are mergers and acquisitions of corporations and insurance brokerages. Each time this occurs, more documents are discarded and lost forever. Finally, the task of reconstructing the coverage becomes more difficult and costly.

Whatever effort it requires, if there is a suspicion that past insurance coverage needs to be assessed, it would be a wise decision to begin an exploration. The cost is negligible compared with what may be at stake. Whether consultants, attorneys or an entire new department are devoted to the task, they should proceed as quickly as possible. In view of the current litigation climate, no one can afford to remain in business without tapping all their available assets. [Figure 1 Omitted]

Sheila Mulrennan is president of IAG Ltd., a firm offering historic reconstruction and coverage analysis
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Mulrennan, Sheila
Publication:Risk Management
Date:Mar 1, 1989
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