EXECUTIVE
SUMMARY |
IN BUDGET-CONSCIOUS TIMES
MANY COMPANIES MISS the
opportunity to recover hundreds and
thousands of dollars each year through the
subrogation process—filing claims against
third parties responsible for causing
damage or injury to companies and their
assets when these losses are uninsured or
fall below the policy deductible. In these
instances the company has to take the
steps the insurer would if it was
involved.
THERE ARE SEVERAL STEPS
CPAs CAN TAKE TO HELP
minimize the financial impact
of property losses. The first is to
immediately activate an investigation
team to preserve evidence and inform the
authorities and any potentially adverse
parties of the company’s loss.
THE SECOND STEP AFTER A
LOSS IS TO DEVELOP the claim.
Primary responsibility for this lies
with the company’s insurance or legal
department, but CPAs will need to
calculate the dollar amount of damages
in terms of lost production days, delays
and lost business opportunities. The
accounting department also likely has
copies of contracts, service agreements
and guarantees related to the work that
caused the damage.
THE THIRD STEP INVOLVES
EVALUATING DAMAGES the
company suffered to its building and
interior contents, and business
interruption due to lost or delayed
business. The company may want to hire
an adjuster to help with this process.
CPAs SHOULD HELP
COMPANIES CREATE AN ACTION
plan they can implement when a
loss takes place. The plan should
identify the employees within the
organization’s engineering, risk
management, accounting and legal
departments who will respond to a new
loss. Managers should be trained in how
to identify, preserve and protect
potentially valuable evidence of a loss.
| JOSEPH A.
GERBER, JD, is cochair of the crisis
management department and ELLIOTT R.
FELDMAN, JD, is chair of the subrogation
and recovery department at the
international law firm of Cozen O’Connor
in Philadelphia. Mr. Gerber’s e-mail
address is
jgerber@cozen.com . Mr. Feldman’s
e-mail address is efeldman@cozen.com
. |
n these days of corporate
belt-tightening, companies are understandably
concerned with dollars that drop to the bottom
line. Yet, there is one largely unnoticed area of
operations that could deliver hundreds of
thousands of dollars each year: subrogation and
recovery. Subrogation is a legal process that
permits an insurance company—after paying a
policyholder’s claim—to sue one or more third
parties responsible for causing the damage or
injury to the policyholder. The goal is to recoup
the insurance payments, plus the policyholder’s
deductible. Even when an insurance company isn’t
involved in the loss, CFOs and CPA financial
managers at many types of companies can use the
same practices and procedures to recover lost
profits. With the significant increase in
property and casualty insurance premiums,
companies have been raising their policy
deductibles or the amount they self-insure—the
loss the company will absorb that’s not covered by
insurance. Typically the larger the deductible or
self-insurance amount, the lower the premium.
When a property or casualty loss is less than
the deductible amount or is not covered by
insurance, CPAs can help companies recoup some of
these losses by putting a team and a process in
place to immediately investigate the loss and
pursue recovery in court against the responsible
parties. This article describes how to assemble
such a team and what it should do to get maximum
recovery.
Subrogation A
legal term, the literal meaning is
“standing in the shoes of.” In an
insurance context, subrogation involves
the substitution of one party (the
insurer) for another (the insured) to
pursue any legal rights the latter may
have against a third party liable for an
insurance-reimbursed loss the insured
suffered.
|
A CASE IN POINT
Consider a situation
that happens time and again. An outside
contractor, perhaps a plumber or an electrician,
comes onto a commercial property to repair a minor
leak or replace an electrical fixture. While the
technician is working, or shortly thereafter, a
problem causes significant water or fire damage to
the company’s property. Typically, despite
the damage to the building and its contents and
the potential interruption of business, the total
loss doesn’t exceed the deductible on the
company’s property insurance policy (which may be
as high as $500,000 or more). So the company
promptly repairs the damages at its own expense
and resumes operations. Most companies
don’t think about filing a claim or lawsuit
against the party responsible for the loss to
regain the company’s repair and downtime costs. If
the damages had exceeded the deductible, the
insurance company would have pursued recovery
against the wrongdoer; why shouldn’t the company’s
financial management team do the same thing on the
company’s behalf? How much can a business
expect to recover? Companies with aggressive
subrogation programs can expect to recover upwards
of 5% to 20% of the losses they sustain. In
virtually all companies, a certain percentage of
losses ultimately will be attributable to the
actions of the company’s own employees without any
third-party responsibility.
THREE STEPS TO RECOVERY
To assist companies
with their recovery efforts and thus help minimize
property and casualty losses, CPAs should
understand three steps insurance companies
typically take in cases of property damage.
Step 1:
Begin an immediate investigation.
Since the first step in any
successful recovery is proving responsibility for
the loss, CPAs should immediately activate an
investigation team to preserve evidence. In
addition to the company’s corporate accounting
department or CPA firm, players assembled or
waiting in the wings should include in-house
counsel or the company’s outside law firm,
forensic consultants, insurance adjusters (even
for self-insured losses which must be “adjusted”
for accounting and tax purposes) and experienced
recovery counsel who can lead the team’s overall
efforts. The adjusting process involves
determining the cause and amount of a loss, the
indemnity recoverable by the insured and the
amount to be paid under the terms of the policy.
The team should inform authorities and the
potentially adverse parties (the individual or
business suspected of causing the damages) of the
circumstances of the company’s loss. Depending on
the facts and circumstances and whether any
personal injuries or exposure to toxic materials
occurred, interested local, state or federal
authorities might include the Occupational Safety
and Health Administration (OSHA), the state
department of labor and industry or the
appropriate environmental protection agencies.
Potential adverse parties might include the
general contractor on the job at the time of the
loss; subcontractors such as plumbers,
electricians or HVAC providers; and the
manufacturer, seller or installer of any defective
product that caused or compounded the loss. To
help begin its investigation, the company should
ask these parties to provide all relevant
information about their product or service.
Without a rapid response, crucial physical
evidence may be lost or destroyed in the cleanup
process. This will hamper and possibly negate the
company’s recovery efforts. Working with
experienced forensic consultants and attorneys
skilled in recognizing and preserving physical
evidence, the company should
Photograph evidence in place.
Carefully tag or otherwise identify
it.
Remove the evidence and secure it to
prevent intentional or negligent destruction.
Step 2:
Developing the claim.
Although primary responsibility for
putting together the claim rests with either the
company’s insurance or legal department, CFOs and
CPAs will play a significant role in helping to
analyze and finalize the damages. Although
initially such damages may be categorized as lost
production days, delays in production or even lost
business opportunities, CFOs and CPAs will be
responsible for converting the losses into dollars
and cents and for providing that information to
either the insurance or legal department.
Depending on how a company is organized, the
accounting department may have documents critical
to the underlying theories of liability, including
service agreements and contracts, guarantees and
warranties or other documents that relate to work
performed (or not performed) by a potential
adverse party. The company’s risk management and
legal departments will need to see these contracts
and related materials as they will significantly
facilitate any claims.
Step 3:
Establishing damages. Even
when losses fall within the company’s deductible
or self-insurance amount, CPAs still should
calculate the loss amount for accounting and tax
purposes. Companies frequently overlook this step
or dismiss it as insignificant. Either the
in-house risk management team or an outside
adjuster should assess the damages as accurately
and thoroughly as possible and gather all
supporting documentation required to prove the
claim. (For losses that trigger coverage above the
deductible or self-insured limit, the property
insurer typically will assign a staff or
independent adjuster.) The investigation and
recovery team should work with the adjuster to
ensure a quick and fair resolution to the damage
claim. To establish damages CPAs should
help the adjuster evaluate losses such as
Building damages. Includes
damage to a structure and its component parts
including walls, floors, ceilings and roof, as
well as electrical, plumbing and HVAC.
Interior contents. Ranges
from furnishings and fixtures to equipment and
machinery.
Business interruption.
Covers financial losses the company sustained
from the partial or total disruption of its
operations.
Other. Includes other
damages that reasonably arise from the property
loss, such as lost business opportunities or
market share or other economic impairments.
What an Investigative Team
Should Look Like
The investigative and recovery team
should include
The company’s own CFO or CPA
to calculate the loss in
terms of dollars, lost production time
or other measurements potentially
relevant to the company in connection
with its quarterly or annual performance
and any tax losses attributable to
casualty claims. The CFO or CPA
investigative team leaders must
coordinate their investigative efforts
with company executives and
public-sector authorities, including
local, state and federal representatives
(as in police departments, fire marshals
and OSHA) and give notice to potentially
adverse parties (manufacturer, seller or
installer of a faulty product) that may
be responsible for the cause or origin
of the loss.
Forensic consultants t
o assist in conducting the
loss site examination, including
interviewing witnesses, examining and
collecting physical evidence, obtaining
applicable plans and blueprints for the
structure and ideally reaching a
professional opinion as to the
mechanism(s) responsible for the cause
or origin of the loss.
Experienced outside recovery
legal counsel to help
coordinate all activities (especially
inviting potentially responsible parties
to retain adjusters to assess the
property damage during their own
investigations).
|
PLANNING FOR THE FUTURE
In addition to
understanding the process of putting together a
claim against responsible parties, it’s important
for CFOs and CPAs to work with other company
executives in advance to create an action plan the
company can implement when a property loss takes
place. The plan should identify the employees in
the company’s engineering, risk management,
accounting and legal departments who will respond
to a new loss and assign specific duties and
responsibilities for investigating the loss,
recovering from it and assembling and presenting
any claims the company makes to its insurance
company or the third parties potentially
responsible for causing the loss. There
are financial benefits to having such a plan in
place. For example, one large national retailer
maintains a proactive loss recovery program,
relying heavily on members of its risk management,
accounting and finance and legal departments.
Additionally, outside counsel provides critical
support following property losses.
Typically, these losses involve damages to
company buildings by delivery trucks, leaking or
ruptured sprinkler lines resulting in water
damage, fires of all sizes in both warehouse and
public retail space and occasional collapses of
ceilings or displays. Given the company’s
significant property insurance deductible of
$500,000, many of these losses are less than that
amount. Accordingly, the retailer’s property
insurer frequently is not involved in any loss
investigation, adjustment, payment of claim or
pursuit of third-party liability. As the
result of careful preplanning, the department
store’s parent company, working with its outside
counsel,
Developed a list of available
forensic investigators and experts. While
companies don’t typically keep these experts on
retainer, it’s a good idea to put together a
preferred list in advance of a loss.
Educated its managers on the need to
carefully investigate and document losses and to
involve both outside counsel and outside forensic
investigators. Special training programs using
case studies will help an organization prepare its
personnel for a loss. Interactive training of loss
team members will enable the company to take a
more coordinated approach following a real
incident.
Trained its managers on how to
identify, preserve and protect potentially
valuable evidence.
Instructed its accounting department
to carefully calculate any and all losses
sustained including building damage, contents or
merchandise damage, business interruption, lost
sales, loss of business opportunity or any other
damages attributable to the casualty. As a
result of this careful preparation, the department
store chain is able to maintain evidence of a
loss, evaluate and calculate damages and quickly
notify and present a detailed claim to potential
adverse parties. Because of its proactive
approach, the retailer has improved its bottom
line, collecting literally hundreds of thousands
of dollars from third parties in connection with
otherwise uninsured losses in recent years.
WHAT’S NEXT?
Subrogation and
recovery departments have become important revenue
centers for both insurance companies and for their
insured policyholders. As accountants, CFOs or
risk managers for their employer or client, CPAs
will be evaluated, at least in part, on the basis
of the quality of the recovery programs they
establish. By leading such efforts, CPAs can take
advantage of the same opportunities that directly
improve every insurance company’s profit and loss
statement. To do otherwise is to leave dollars in
the pockets of the very entities responsible for
causing losses rather than recovering them on
behalf of the organizations that suffered the
damages. |