Chapter 10 Adjusting the Commercial Property Loss

• Library: The Commercial Property Insurance Policy Deskbook (ABA) (2018 Ed.)

CHAPTER 10 Adjusting the Commercial Property Loss

Adjusters who usually deal with a business entity, and its officers or employees, rather than an individual find claims handling is often, but not necessarily always, easier. The commercial insured prefers, similarly, to deal with an experienced commercial claims adjuster because two professionals working together can resolve claims with little ire.

The experienced adjuster who deals with commercial claims usually has knowledge of the business and the people who operate the business. Some insurers even assign a single adjuster to a major commercial insured to handle all claims presented by the commercial insured. Familiarity and a good working relationship over a period of months or years benefits both the insured and the insurer.

A fire can be devastating for a business if it is not rapidly put back to work after the fire is extinguished. The adjuster must recognize this fact and act quickly to complete a fair and thorough investigation. To adjust the commercial property loss, the adjuster must be familiar with the coverages and be ready to read and understand the policy. This will work if the insured, through its public adjuster (PA) or through the office of its risk manager, will work together with the adjuster because the insured's people had also read the policy, understands it and is ready to fulfil its conditions.

An adjuster and insured must always be absolutely certain which endorsements apply to the insured. The adjuster reviews the loss notice and re-reviews the coverages to ascertain which coverages apply to the type of loss reported. He or she makes immediate contact with the insured so that he or she may inspect the loss.

If there is a potential loss of earnings it is important to collect as much business documentation as possible so the history of the business can help the adjuster and his or her consultants to determine the amount of loss. Loss of earnings forms vary greatly. It is important that the terms and conditions are explained to the insured and why the adjuster should collect documents for analysis, possibly by a forensic accountant, including:

• four years of corporate tax returns;
• four years of profit and loss statements and balance sheets;
• bank account statements and cancelled checks;
• one year of source documents on payroll, expenses, costs that continue, costs that do not continue, leases, contracts, and any other relevant business documents; and
• if business information is kept on computers, the software used and a backup copy on a disk is necessary for the adjuster, or the retained forensic accountant, to work up the amount of loss.

The adjuster must always conduct a thorough investigation at the scene of the loss. He or she must establish the cause and origin of the loss and obtain a general idea of the extent of the loss and what expert assistance will be required to complete the investigation and adjustment. If cause and origin of the loss are not obvious it is imperative that the adjuster retain the services of a cause and origin expert or engineer.

If a general adjuster is not available, the adjuster must determine whether the loss is too complex for his or her skill level or involves legal issues the adjuster will seek authority to retain an insurance coverage lawyer experienced in major losses, commercial insurance coverage issues, and/or potentially fraudulent claims. The attorney will provide advice and counsel to the adjuster who will assist, as a lawyer, the adjuster to make it possible to complete the adjustment of the complex commercial claim.

Investigation of a Claim

Rarely, the adjuster will find a potential coverage issue where the loss might not be covered. Wishing to avoid a waiver by simply investigating, the adjuster will seek agreement from the insured that the investigation he or she is conducting does not act to waive any of the rights of the insurer and the insured. The agreement, called a "nonwaiver agreement," is a mutual agreement between the insured and the insurer that nothing done in the investigation of the claim will act to change the positions of the parties or waive any of the rights either party has under the contract. The insured should not be concerned by a nonwaiver agreement. If the insured is concerned about the nonwaiver agreement the adjuster will recommend that the insured consult with personal or corporate counsel. However, if the concern remains, and the insured refuses to sign, the adjuster will send the insured a reservation of rights letter that accomplishes the same result, unilaterally.

The investigation continues pursuant to the reservation of rights. The nonwaiver agreement and the reservation of rights letter are equally effective for maintaining the status quo while the investigation is being conducted; however, the nonwaiver is preferred by an insurer because it is a mutual agreement between the insured and the insurer whereas the reservation of rights is a unilateral statement of the insurer.

In Scottsdale Insurance Company v. MV Transportation,¹ the issue on appeal was whether an insurer that had properly reserved its rights could obtain reimbursement of its expenses of defending its insured against a third party lawsuit where it was determined, as a matter of law, that the policy never afforded any potential for coverage and there was no duty to defend. The court held "yes." In reaching its decision, the court discussed at length its prior holding in Buss v. Superior Court.² Similarly, in a first party situation, the reservation of rights or nonwaiver agreement allows the insurer to reject, deny, or disclaim a claim if the investigation establishes no coverage.

A Colorado District Court found that the insurer properly asserted an exclusion from coverage. Moreover, defendant's reservation of rights sufficiently informed plaintiffs of the potential grounds for denial of their claim, as the letter included policy language describing several exclusions, including wear and tear, deterioration, weather, and faulty construction, design, or maintenance—the same policy language on which the insurer relied.³

Though insurers sometimes send a reservation of rights letter, even when problems have not surfaced as a result of the initial investigation in first party cases, this function is merely to protect the insurer against claims of waiver and bad faith claims.⁴

The Examination under Oath: A Tool Available to Insurers to Thoroughly Investigate Claims

When the initial investigation conducted by the adjuster raises questions of whether the policy applies to the facts of the loss or there is a legitimate suspicion that fraud is being attempted, the first party property policy allows the insurer to require the insured to produce documents and appear for and testify at an examination under oath (EUO). The EUO can be taken by the adjuster or anyone appointed by the insurer. Usually, because lawyers are professional interviewers, the insurer will select an attorney to examine the insured.

It is important that every person involved with commercial property insurance understand this important condition of the policy and that, if asked, the insured must comply or lose all right to indemnity from the insurer. Similarly, the adjuster fulfilling the obligation to adjust a first party property claim needs to understand the reasons for, and law supporting, the use of the EUO so that the adjuster can conduct an EUO, if needed.

The insurance EUO is a formal type of interview authorized by the insurance contract. It is taken under the authority provided by a condition of the insurance contract that compels the insured to appear and give sworn testimony on the demand of the insurer or find his, her, or it claim rejected for breach of a condition. A notary and a certified shorthand reporter are always present to give the oath to the person interviewed and record the entire conversation.

The EUO is a tool used sparingly by insurers in the United States. It is only used when a thorough claims investigation raises questions about the application of the coverage to the facts of the loss, the potentiality that a fraud is being attempted, or to assist the insured in the obligation to prove to the insurer the cause and amount of loss.

The Reason for the Examination Under Oath

Courts that construe submission to an EUO as a condition precedent to recovery generally do not require the insurer to prove that it suffered actual prejudice from an insured's unexcused refusal to submit to an examination.⁵ The courts recognize that the EUO provides a mechanism for the insurer to corroborate the claim by obtaining information that is primarily, or exclusively, within the possession of the insured.

Because of the formality of the proceeding, the task of establishing rapport with the person interviewed so that relevant information may be obtained from the insured is more difficult than in an informal interview. Unlike legal proceedings where questions are limited to those seeking a "yes" or "no," or brief answer, the EUO is different since it properly seeks...