THE HISTORIC INSURANCE AUDIT:
A NEW BEST PRACTICE

Insurance archaeology originally developed as an asset recovery tool for companies caught up in two huge waves of retroactive liability claims: asbestos contamination and environmental cleanup imposed by Superfund legislation. Companies faced with liability for actions that took place decades ago discovered that old Comprehensive General Liability (CGL) policies were applicable if damage occured within the policy period. Necessity spurred treasure hunts for the valuable old policies, and insurance archaeologists developed a specialized set of tools to aid this search.

From Treasure Hunt to Treasure Mapping

In the past decade, as the potential legal liabilities faced by organizations of all types and sizes have continued to multiply, and as insurers have grown ever-more creative in finding grounds for claims denial, companies have increasingly recognized that a complete audit, recovery and organization of their past and present insurance policies is an essential "best practice" of risk management. With current and potential legal liabilities taking up an ever larger proportion of any company's risk portfolio, managing the insurance portfolio has become as essential as managing expenses, revenue and assets.

The process of notifying decades worth of insurers of a claim and then dealing with the inevitable and overwhelming requests for documentation that follow can severely tax any company's ability to pursue coverage. A company that does not come prepared with full details of all possible coverage will be at a disadvantage in dealing with its insurers. Moving proactively to locate and organize historic insurance policies and to document all secondary evidence of coverage saves time and money in the hour of need -- when it's time to seek defense and indemnification for liabilities of long ago.

As experienced consultants trained in policy reconstruction, insurance archaeologists plan and implement a formal audit of all pertinent historic coverage. If the audit identifies missing policies, insurance archaeologists can conduct a thorough search for the missing documents -- and if necessary, of secondary evidence of the policy's existence and terms. Such a review may span 40 or 50 years of coverage, including policies for numerous corporate divisions and predecessor companies. The following is an outline of the process as it has evolved over the past two decades.

Phase 1: Marshal Existing Assets

• It is advisable to begin an audit by pulling and organizing all existing primary and excess liability policies or secondary evidence of coverage. Detailed examination of the documentation will probably reveal gaps and discrepancies in information. Surprisingly, policies are often discovered that were not considered missing since they had not appeared on any lists. This exercise alone may add millions to the pool of available insurance.



• Once policy records are organized, a chart should be prepared by IAG of the coverage that has been identified. Color can be used to illustrate the type of documentation available for each policy so that it is easy to see where additional research is necessary for missing or incomplete policies. A well designed chart makes it easy to identify priorities for further research and to quantify the possible monetary rewards.



• Once the valuable assets have been painstakingly assembled, working copies should be made and the original records preserved in fireproof vaults or file cabinets.

Phase 2: Research Missing or Incomplete Policies
Investigate Internal Sources

• Indices of various corporate departments should be reviewed to identify those non-insurance records which could either document missing policies or provide leads to possible outside sources of records.



• In the course of reviewing the corporate records, any possible external sources of records, such as brokers or outside counsel should be identified.


Interview Key Personnel


• Interviews with former employees and brokers can establish their recollection of the missing insurance policies and the internal procedures for records retention. Leads can also be developed to outside sources of information, such as former brokers and state and federal government departments that may have required insurance documentation.



• All domestic retail and surplus lines brokers should be contacted for records relating to any missing or incomplete policies.


Expand the Search to Outside Sources


• All domestic retail and surplus lines brokers should be contacted for records relating to any missing or incomplete policies.



• If any Lloyd's policies are missing, information can often be obtained from the London correspondents of the domestic brokers. Due to Lloyd=s dominance in the North American insurance markets over many decades, the records maintained by the London brokers are often repositories of a wealth of documentation of both primary and excess coverage.



• Other priority outside sources identified in the internal records and interviews, including additional insureds, outside counsel, auditors, government agencies and financial institutions can also produce a variety of documentation for the missing policies.



• Other priority outside sources identified in the internal records and interviews, including additional insureds, outside counsel, auditors, government agencies and financial institutions can also produce a variety of documentation for the missing policies.



• If evidence that a lost policy existed can be clearly established, a sample of the standard form for the lost policy can assist in reconstructing the terms and conditions.



• If evidence that a lost policy existed can be clearly established, a sample of the standard form for the lost policy can assist in reconstructing the terms and conditions.

Phase 3: Organize the Data
By this point, corporate managers will typically have assembled thousands of pages of records relating to hundreds of policies issued over several decades. Understanding the complexities of an historic insurance program as well as the pre-acquisition coverage of numerous predecessor companies is the primary objective of an historic insurance audit. The savings in time and money will be exponential if the following steps are taken:

• Key policy terms and conditions, such as pollution exclusions, application of aggregate limits and notice provisions, are analyzed.



• A database is created, flexible enough to accommodate lengthy text and to search based on customized search criteria.



• The bar graph chart [Link to chart] is used to illustrate the analysis of the key policy terms and to formulate a strategic approach to claims handling.

        Over the past decade, insurance archaeology has evolved as a powerful tool to help corporations deal with a fundamental reality: in these litigious times, few large insurance claims go undisputed. The best response is to be prepared for the inevitable and remember that you may have to manage negotiations simultaneously with scores of insurance companies regarding hundreds of policies. The policyholder that has immediate access to its entire coverage history is ready to respond effectively to an insurance company's challenges.