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Information is key in complex business interruption claims

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Superstorm Sandy, which hit the northeast U.S., and massive flooding in Thailand are among catastrophes that have reshaped the way insurers and buyers deal with business interruption claims.

Aside from Sandy in 2012 and the Thai floods in 2011 that caused widespread supply chain disruptions, the 2011 earthquake and tsunami in Japan, a 2013 fire at an SK Hynix Inc. production plant in Wuxi, China, and Hurricane Katrina's devastation of the U.S. Gulf Coast in 2005 have driven changes in business interruption claims management and insurance.

“Business interruption and business continuity is a continuing learning process,” said Todd Reed, Boston-based manager of national insurance property operations at Liberty Mutual Insurance Co.

The most important lesson learned is being more proactive in business continuity planning to mitigate potential business interruption and contingent business interruption losses should an event occur.

“We're talking about something that I think is going through an evolution, and there is more awareness than in the past,” said Monica Ningen, Armonk, New York-based head property underwriter for the U.S. and Canada at Swiss Re Americas.

While various catastrophes in the past decade have increased awareness, “it's still a preliminary awareness to the extent of how big supply chain dependency can be in terms of contingent business interruption,” she said.

“Multinational risks exist with companies small and big, whether the business is in Iowa or London,” said Gerald Kissner, Chicago-based associate vice president of large property and catastrophe claims at CNA Financial Corp. “Global catastrophes, including the Thai floods and Japanese earthquake and tsunami, significantly impacted manufacturers' supply chains around the globe.”

“Sandy highlighted and reinforced the need for insureds to understand their exposures, and what can happen when events affect a large, heavily populated area of a country, including energy and transportation infrastructures,” he said.

Sandy-related losses affecting telecommunications companies, housing providers and transportation entities have drawn “awareness to businesses associated with the service economy,” Ms. Ningen said.

The fire at the Hynix plant, reportedly the world's No. 2 computer chipmaker, “was a large builder of awareness around the interconnection of supply chains,” she said.

“Supply chains are becoming more exposed and more vulnerable” as clients and businesses in general continue to increase their global footprint, said Doug Backes, Johnston, Rhode Island-based manager of staff claims at FM Global.

In response, insurers have developed industry-specific supply-chain footprints to better understand their potential accumulation of risk, Ms. Ningen said.

To help mitigate challenges after a business interruption or contingent business interruption claim has been filed, insurers and buyers are seeking more definitions and specificity in property/casualty policy language.

“There's been some movement toward clarification of coverages and wording in terms of coverage intent,” Liberty Mutual's Mr. Reed said.

“Policies are starting to more closely define which expenses will be considered as continuing or discontinuing and are starting to specifically name those expenses,” said Rob Fox, Waltham, Massachusetts-based director of Crawford Forensic Accounting Services, a unit of Crawford & Co.

“Clients are ever more reliant on contract certainty,” FM Global's Mr. Backes said.

Insurers also have developed a variety of technologies to help them handle business interruption claims.

Solid documentation to support a business interruption claim and having a backup system are essential, sources said.

“If policyholders don't have their financial information duplicated somewhere in a safe environment, that can lead to challenges,” said Mr. Reed, who said having a backup system should be part of every risk management program's best practices.

“We recommend the business has a backup for the records off-site away from the risk location,” said Melanie Elias, associate vice president and director of claims at Minuteman Adjusters Inc., a Farmington Hills, Michigan, claims adjuster. Such claims are document-intensive and often involve forensic accounting, she said.

Brian Flynn, Atlanta-based global chief information officer and executive vice president at Crawford & Co., said he has seen business interruption claims generate up to 80,000 documents.

That prompted CNA to build an in-house claims forensic accounting team to assist buyers calculate a business interruption claim, said Eva Skordilis, Chicago-based director of forensic accounting.

“Having this capability allows for more direct communication with our customers, which helps facilitate resolution. This team may also assist with oversight if a claim is outsourced to an outside forensic accounting firm,” Ms. Skordilis said.