Our firm has experienced substantial changes in the past year. We have a new address, new staff, new equipment, and more litigation than contract and transaction work. There are two constants: me and our need to update our website.
If you recall, I write about legal issues that are annoying me. This month’s prize is asset protection coverage provided by insurance policies. Because carriers make money by minimizing claim pay-outs, there is a substantial disparity between the value of the protection that we think we have and that actually provided.
Asset replacement polices are best. Adjusters confirm what you owned and lost and the replacement cost. Fair market value policies generally under insure assets. With the exception of appreciating assets and real estate, think of fair market value as the flea-market value of your assets.
It is easy to under insure by undervaluing your assets and purchasing too little coverage. This is especially true for growing companies, appreciating assets, and new acquisitions. It is pretty easy while focusing on growth to purchase additional or more expensive assets and forget to re-evaluate and purchase additional coverage. With the exception of some schedule item coverage provisions, where the item is listed and separately insured, the policy value is a firm cap.
If you are under-insured and another party has caused the loss, you may file a lawsuit against that party to secure the difference between your policy coverage and the actual loss value. These suits are called excess loss or uncovered loss cases. Four things impact the effectiveness of this remedy. (1) Courts generally do not accept proof of replacement value and limit awards to fair-market value. (2) Lawsuits cost money and take time. (3) Your carrier will have subrogation rights against any award for the amount it paid you. In some, but not all, jurisdictions, subrogation rights are subordinate to the injured party’s rights to be made whole. (4) Proof of fair market value in the courtroom requires evidence to give a jury the ability to determine value such as appraisals or evidence of ownership, purchase date, price, and depreciation. Receipts can be destroyed in a fire or flood. It is a substantial task to replace receipts with other proof, i.e., seller, credit card, and banking records.
The value of a policy can be reduced by the size of the loss. In major losses, carriers hire outside adjusters who apply carrier-friendly standards to minimize the value of the claim. It is useful in these circumstances to hire your own “public adjuster” who works on a contingent basis – another expense – to document the loss and provide unbiased evidence of value.
In major losses it is useful to employ counsel early-on. Public adjusters do not document both replacement value for the claim on your policy and fair market value for a claim against a third party unless asked to do so. Before requesting this additional work, you and your counsel should make an assessment of the likelihood of an uncovered loss and the strength of any third party liability claim.
Counsel also is useful when your carrier inevitably turns the pay-out process into a complex negotiation based upon its adjuster’s devaluation of your claim. It is important to match up with the carrier and to protect the record from creating ammunition for use by the defendant in an uncovered loss claim.
Lastly, whether pursuing a claim against your carrier or another party, it is easy to under- insure by failing to purchase business interruption coverage. Resolution of claims can take many months, if not years, if the matter goes to court.