The PRI claims process often receives attention only when losses threaten or occur. By being knowledgeable and prepared to deal with these situations policyholders can avoid delayed compensation, unnecessary effort and expense, or worse, impairment of an otherwise valid claim. Our roundtable of PRI claims managers addresses key questions about the claims process. In our next edition we will present the views of PRI brokers and buyers.
Q. Making a PRI claim can seem an arduous and legalistic process, even when the facts seem pretty clear. Why does it have to be that way?
Richard Walsh, Claims Director and Counsel of Zurich Emerging Markets Solutions, answers: No matter how favorably disposed insurers may be to policyholders’ claims, they owe a fiduciary responsibility to reinsurers, obligating them to investigate all claims matters thoroughly. Documentation would be needed to demonstrate to a third party that a covered event had occurred. A policyholder will have a better perspective and understanding of the process if he puts himself in the insurer’s shoes and considers what would be needed to demonstrate coverage to a third party.
Q. Are reinsurers, treaty or facultative, ever consulted by insurers during the claims management process, or are they merely informed?
Walsh: Reinsurers will typically expect periodic reports of the status of any claim but not expect to be involved in the ultimate decision-making process. Nonetheless, reinsurers will typically make it a point to audit any claim file resulting in a loss payment.
Q. PRI policies typically call for policyholders to seek to minimize loss and to obtain the underwriter’s consent to any loss settlement agreement. To what extent must the policyholder take guidance from the insurer in managing the loss situation?
Jack Collier, General Counsel of Sovereign Risk Insurance Ltd., responds: The extent to which a policyholder will perceive the need to take input from the insurer will depend on the severity of the loss and whether the insured will call on the policy at all. The less severe the loss, the less likely the insured will do more than provide the minimum notices under the policies to keep it in force and work out the problem himself.
In such a case—where there is a small loss where coverage is not likely to be triggered—the insurer will have little interest in consulting with the insured, beyond being kept apprised of the insured’s efforts to mitigate or avoid the loss.
When a loss is likely to be catastrophic, whether it is covered or not, the insured will send all required notices to insurers and will, out of fear of inadvertently prejudicing insurers’ rights, start to seek input from the insurers on every substantive point of a workout or mitigation situation.
Insurers are circumspect about jumping on the bandwagon if the loss is not clearly political in nature. If the loss may be commercial and not relevant to its policy, the insurer will look on with interest, but will do so at arm’s length so as to avoid the implication that he considers the event to be covered under his policy, thus giving him consultation rights.
If the loss is clearly political in nature and likely to be covered, the postures change a bit and the insured demands that the insurer consent to a course of action to mitigate loss or waive his right to deny a claim on the basis that the insured took such action without his consent. Note that this is during the “Due Diligence” period before a loss has actually been established under the policy. If, at this time, it is the insurer who is insisting on being involved in the mitigation strategy, then he bears the risk and cost of pursuing the strategy pushed by him.
Of course, it is impossible to say what will be required in every situation, but guidelines would dictate that the insurer cannot “stonewall” when asked for input. He may have to get an agreement from the insured that he is not liable merely for consulting, but his goal cannot be to set up a claim to fail by saying that the insured did not do all it could have to avoid or mitigate a loss when the insurer refused to get involved. Likewise, the insured must not disregard the insurer’s input and take action that exacerbates the loss unless the insurer has consented to that course of action.
In summary, consultation must be undertaken with a view to protecting each party’s rights under the policy, but with a real purpose of mitigating losses.
Q. Public agencies are credited with the ability to deter some PRI losses. What can private market insurers do to help avoid or minimize a loss? How well does this work in practice?
Collier: Private sector insurers do not generally engage Host Governments in loss mitigation or avoidance activities. However, two recent examples are worth highlighting.
In the Argentina crisis, many insureds were facing catastrophic losses due to exchange controls enacted by the Argentine Central Bank in the face of the 3 to 1 devaluation of the peso relative to the dollar. At the height of the crisis in Argentina, the Argentine Central Bank decreed that borrowers who owed debts to lenders insured by a member of the Berne Union did not require prior approval of the Central Bank to convert and transfer funds to make payments of principal or interest on the insured loans. Several private insurers who were members of the Berne Union were able to make it possible for a number of their clients to effect conversion and transfer of regularly scheduled principal and interest repayments out of Argentina, thereby avoiding losses and enabling their bank clients to keep these private market-insured loans performing and current.
In a more recent situation in Venezuela, with the Chavez regime’s imposition of the CADIVI controls for foreign remittances, private markets insurers have been establishing a presence in Venezuela and working with borrowers whose loans are insured in the private market to manage the CADIVI process in the most efficient way possible. This assistance enabled many borrowers to get debt service out of Venezuela when it would otherwise be blocked, leading to Currency Inconvertibility claims.
Q. What are the most common problems policyholders have in pursuing PRI claims, and how can they be avoided?
Two PRI claims managers of long experience, Tom Ripp, Senior Vice President in AIU Claims Management, and Robert O’Sullivan, Associate General Counsel for Insurance Claims of the Overseas Private Investment Corporation (OPIC), respond:
Ripp: The most common problem we see is that full details of the claim are not provided when a claim is first submitted. When the claim involves some type of adverse host government action, detailed information explaining the circumstances leading up to a claim and/or information on the taking or alleged dispute is vital. This is important to establish that an insured event has occurred and to understand any actions or allegations made by the foreign government entity. Details showing the calculation of the loss are also crucial. It is often difficult to understand the basis of the amount claimed. Information showing exactly how the loss is calculated will often help expedite the claim process.
Another way to expedite the processing of a claim is to keep the insurer abreast of meetings and discussions that the insured has with the foreign entity when a serious problem develops. This will help speed the processing of a claim if one is submitted. Also, if the insured is in a position to involve the carrier in discussions, it can expedite the claim process and help the carrier process the claim quicker.
O’Sullivan: An investor making its first PRI claim faces a situation that is very different from the usual insurance claim process. PRI claims and claim determinations are custom-crafted, not standardized. They are factually complicated, require a firm grasp of the terms of the insurance contract, and many of the compensation provisions of the insurance contract rely upon technical accounting concepts. The insured itself must do what standard forms, checklists, charts, reference manuals, and computer programs accomplish with respect to the consumer insurance claims with which we are familiar. Too many insured investors just insist that complex issues are simple and try to bluff their way through or drop out of touch and then complain of delay.
On the positive side, the PRI claims process is more flexible and personally interactive than mass-market consumer claims processes. Working together with the insurer to identify and resolve the issues is a surer path to getting paid in the right amount than attempting to avoid the issues, or leaving it to the insurer alone to sort them out.
PRI contracts are negotiated agreements, not boilerplate form contracts. The contract terms are the means by which the insurer manages risk, and they represent an agreed allocation of risk. It is unrealistic to think that an insurer will ignore material contract terms or renegotiate them in a claim situation. The starting point has to be a review of the contract terms to outline the issues that will have to be dealt with in pursuing the claim.
The claim process is interactive and flexible. The insured can take the initiative to make the process work, even from the initial stages. If the insured’s review of the contract identifies problem areas, the insured can discuss them with the insurer. Credibility and clear communication are important. If the insured is dissatisfied with the process, it should try to change it. If exchanges of correspondence have led nowhere, try a meeting or teleconference. If the process is stalled, the insured should ask what the outstanding issues or questions are. It should not then be offended to receive a list of issues or questions, fail to think them through and respond to them, and, above all, should do not drop out of touch for months on end with a claim pending.
The quality of the initial application for compensation is the most important factor in determining how quickly and smoothly the claim process moves. There is no particular form required. OPIC provides guidelines and model certificates based on its standard contracts, but a particular claim has to focus on the specific contract on which it is based. The general areas at issue are whether the event that caused the loss is within the scope of coverage, what compensation is payable, and whether the insured complied with its duties under the contract.
Q. In the end, what if the policyholder isn’t satisfied with the insurer’s claim determination?
O’Sullivan: PRI contracts typically contain arbitration clauses. An insured who is dissatisfied with the insurer’s decision should first try to discuss it with the insurer and get the insurer to reconsider it, short of the formal dispute resolution procedure. OPIC has a standard practice of reaching detailed determinations on claims, which become public, and sending any proposed adverse determination to the insured for comment before denying a claim. Other insurers may be open to reconsideration, even without such formal procedures. If the insured remains dissatisfied and wishes to invoke the formal process, there is no reason to delay. Arbitration clauses often shorten the otherwise applicable statute of limitations, arbitration is easy and relatively easy to initiate, filing avoids a time bar on a claim against the insurer and does not preclude further negotiations. ■
Common Responsibilities of Policyholders in PRI Claims Situations:
- Loss minimization
- Timely notice of loss potential and submission of claim
- Burden of proof
- Cooperation in claims investigation
- Securing insurer’s consent to loss settlement
- Assignment of interest and subrogation to insurer