At a recent session on disaster recovery that attracted several dozen CFOs, an official of a major insurance broker implied strongly at the beginning of his address that the audience didn’t understand certain aspects of property insurance very well.

Judging by the attendees’ reactions to several of the presenter’s comments, he was right.

“What’s your insurance policy? It’s a contract,” said Robert Glasser, East Coast claims director for Aon. “It’s probably the least-read contract that everyone in this room has. If you get a contract to rent 2,000 square feet of office space, you give it to your attorney to review. Do any of you give your insurance policy to an attorney to review?” Silence ensued, and no hands went up.

Speaking at a CFO Leadership Council meeting in New York, Glasser stressed that understanding a company’s insurance coverage is ultimately a finance chief’s responsibility, regardless of the presence of a risk manager. “You broker gives you a binder, it has your name on it, and you feel good,” he said. “Then all of a sudden you have a loss and you say, ‘Gee, I thought I was covered.’ ”

Glasser applied the premise to different types of property coverage. For example, he pointed to contingent business interruption insurance, intended to cover a company for lost profits and extra expenses resulting from an interruption of business at the premises of a supplier or customer.

Say your company location is in a desert climate in a Western state, not near any water, so you don’t have flood insurance. You do have a contingent BI policy, so when your key supplier in Thailand is forced to shut down for two weeks by a typhoon-caused flood, meaning it can’t ship the materials you need to make your product, you’re relieved that you’re covered.

But you may not be. Glasser, pointing out what really is a fundamental tenet of business-interruption insurance, four conditions are required for a valid claim: that (1) there is physical damage to property, which (2) is of a type covered under the policy, caused by (3) a specific peril insured under that policy, which (4) directly results in a necessary interruption of the insured’s operations.

In the example given, you may have had contingent BI coverage on your supplier, but if the policy doesn’t specifically cover flood damage to the supplier’s premises, (3) is missing and you’re not covered.

A CFO in the audience wasn’t quite ready to accept that. “Did you really say,” he demanded, “that if I have a manufacturing operation in the Mojave Desert, which would mean flood insurance would be insane, and my supplier is in Thailand but if it gets flooded, I’m not covered?”

“Correct,” Glasser said, nodding sadly.

Sandy damaged or destroyed thousands of small and midsized companies, including an amusement park in Seaside Heights, N.J.

Glasser then put a twist on the scenario, using a real-life example: the flood damage suffered in the New York metropolitan area from Superstorm Sandy in October 2012. His office is on the 32nd floor of 199 Water Street in downtown Manhattan. “Why would you buy flood insurance if you’re on the 32nd floor of a building?” Glasser queried the crowd. But then, as he described, Sandy hit, salt water came in and damaged the building’s electrical equipment, and all the elevators broke down, so tenants had no ingress or egress. Then civil authority kicked in, with the mayor pronouncing an evacuation of lower Manhattan, so tenants couldn’t get to the building anyway.

“But,” interrupted another audience member, “the owner of the building wouldn’t have flood insurance?”

“If the building owner has flood insurance,” Glasser patiently explained, “then the building owner is covered for damages to the building.” But a tenant is not covered, unless it has flood insurance.

Someone else asked, “Did Aon have flood insurance?”

“Yes,” Glasser deadpanned, eliciting a smattering of somewhat pained laughter.

He offered other examples of how Sandy led to uncovered damages that caught insureds off guard. For example, he noted that one client, a catering company that serves a high volume of events like weddings, bar mitzvahs, and holiday parties, got a call from the Long Island Power Authority after the Tuesday storm saying its power would be out for two weeks. So company management canceled on a large number of its own clients.

What happened next? Friday came, and the power was on. The caterer tried to claim business-interruption damages, but “the insurance company took a hard line,” said Glasser. “It said, ‘Look at your policy. It says as long as you have a loss of power, you have a claim. Your power came back on.’ That really burned a lot of small and midsized companies.” If his catering client had been a one-off, the insurer likely would have paid, he speculated. However, because of the exposure it was subjected to, given the widespread, devastating losses that Sandy wrought, it didn’t want to set a precedent.

Standard language in a property insurance contract also burned another Aon client, a luxury hotel in downtown Manhattan. The hotel suffered almost no damage, but it lost power. The problem was, it had a sublimit of only $25,000 for power loss. “This hotel’s average room rate was $800,” Glasser said. “With the number of rooms it had, $25,000 was the first 10 hours. If anyone had said, ‘If we lose power for several days, what would that mean?’ they would have said it would be easily $200,000. It was in the words. It was standard language that no one thought to address.”

Similarly, property insurance policies commonly have a deductible in the form of a waiting period after a damages-causing event during which clients can’t claim damages. But whether the period is, say, 24 or 72 hours, it’s important to know whether that means continuous hours or doing-business hours, Glasser noted. If it’s the latter, you may have thought your waiting period was three days when actually it was nine days.

The insurance companies don’t always win, though. He told of another hotel in Atlantic City that suffered a water-main break. The owner had two other hotels in town, so the insurer nixed the hotel’s business-interruption claim, saying that its customers could have been sent to the other hotels. “We were able to demonstrate that the other hotels were fully booked on a pre-loss basis,” Glasser said. “And I learned what a ‘whale’ was — a really high roller. We tracked the whales and found out that they like certain casinos and don’t go to another one just because theirs is closed. We were able to completely negate the insurance’s company’s theory.”

Meanwhile, Glasser offered a few other pieces of advice for the audience:

• “When you have a loss, it’s your loss. It’s not the insurance company’s loss. So you want to have your own engineer or contractor determine how you want to rebuild your facility. And if you want to reconfigure it, you can do it, as long as it’s of ‘like kind and quality.’ A lot of insureds don’t realize that. They think they have to build it to the footprint or operations they had pre-loss.” But if you want to build something that’s more efficient or buy different machinery with your claim payoff, you can.
• Insurance is not for revenue, it’s for profits and incremental expenses. Regardless, hire your own forensic accountant to estimate lost profits, Glasser advised. [Disclaimer: brokers like Aon provide forensic accounting services.] “When the insurance adjuster says to you that you don’t need to hire a forensic accountant because they’re going to hire one, and forensic accountants are independent — well, baloney. The forensic accountant that is paid by the insurance company would love to have that claim come in as low as possible. It’s like letting the IRS figure out your taxes without giving them any documentation.”
• Get “claims preparation fee” coverage in the event you need to hire a forensic accountant. It’s a no-brainer, Glasser said, because it costs nothing. “A lot of policies have a standard $5,000 [for that], but I would recommend you have a minimum of $50,000. Even if you did $250,000, I promise you that there won’t be any premium adjustment for that. It will be a throw-in.”

Image: flickr user Antonio Quintano, CC BY 2.0. The image is unaltered from the original.