New dimensions

Comments on the Buncefield Oil Depot explosion in 2005 focused mostly on the extensive loss and damage over a very wide area. Residential property was damaged, but by far the largest losses were suffered by businesses that saw their buildings, machinery, plant and stock damaged or destroyed. To add to their problems, they then suffered business interruption losses through being unable to trade, either because of the damage or denial of access. So began many first-party insurance claims and subrogation (third party) actions involving many insurers, lawyers, experts and counsel.

While the path to the subrogation was plotted, the businesses began to recover with the help of their insurers and with loss adjusters at the centre of the majority of the claims.

A growing trend

With the continual drive to control litigation costs, limitation of the number of experts and the need for more effective results, insurers are looking closely at the composition of their defence teams. More frequently they are prepared to see loss adjusters appointed as expert witnesses on quantum, working alongside others such as forensic consultants and of course the plaintiff's expert.

The use of loss adjusters as expert quantum witnesses in insurance-derived litigation is increasingly recognised as bringing a different dimension and skill to the evaluation of cases where quantum is key, or is simply a part of the overall litigation.

In achieving the profession's qualification, chartered loss adjusters will often be qualified not only in insurance but also in other disciplines, having a sound combination of investigative skills and expertise in loss management and measurement. Many chartered loss adjusters are dual qualified, being perhaps chartered surveyors, engineers or accountants; indeed, many professions are represented within the institute. Further, theirs is one where the written word is vital, bringing with it the benefit of clarity and precision that is essential in serving the courts.

Cost issues

The most obvious arena in which loss adjusters come to the fore is in the analysis of subrogation actions and at this point it is worth mentioning the decision on appeal in Cuthbert v Gair [2008] EWHC 90114 (Costs), in relation to the recovery of adjuster fees when instructed by insurers '“ which among other things clarified that an insurer cannot recover costs that are part of its ordinary business overhead. Further, it is important to ensure that loss adjuster fees that would otherwise be recoverable are not rendered irrecoverable because the manner of instruction was incorrect. As suggested by CILA, once litigation is reasonably in prospect, insurers would be prudent to involve a solicitor through whom loss adjuster's future work can be managed, and, if the adjuster is to be involved in work the solicitor would normally undertake, it is important to ensure there is an agency relationship established between the adjuster and the solicitor, with the latter responsible for payment of the adjuster's fees (with no doubt a suitable arrangement for passing that cost to insurers).

The role of an expert witness is beyond the work a solicitor would undertake and with the individual appointed as part of the legal process there does not appear any reason why the fees of a loss adjuster in such a role would not be recoverable.

The early appointment of the adjuster as quantum expert ahead of litigation can deliver real value by allowing analysis and consideration of a first-party claim to begin before it is actually concluded. This can result in significant savings in the cost of the action by avoiding protracted review and discussion that can otherwise occur with an appointment made long after the first-party claim is concluded. Of great importance is the correct selection of the individual with the skill sets required to fulfil the task to be undertaken. While there is no 'one size fits all' solution, adjusters are generally experienced with knowledge and quantum skills across a broad range of areas.

Getting a feel for the business

In understanding the role and task of the adjuster on appointment as quantum expert in a subrogation action, it is worth considering an example; let's say a negligent fire destroying a third party owned manufacturing plant.

The adjuster will first seek to gain a thorough understanding of the first-party business, not limiting this to the business undertaken but extending it across buildings, the site infrastructure, order purchasing, manufacturing processes and all other detail relevant to the operation.

In such incidents, there will commonly be significant business interruption losses, so before seeking to analyse the loss it is vital to establish and understand the trading position of the business, the market conditions it was operating in, its relationships with customers and suppliers as well as the strength of the competition.

This is simply about gaining a 'feel' for the business, such that the adjuster can understand the issues that will have faced the first-party claims team; meaning that latterly it is possible to consider with greater clarity whether the actions taken were reasonable and the strategies adopted appropriate.

Subsequently, the adjustment of the first-party claim will be thoroughly reviewed by the adjuster to ascertain that the claim has been adjusted fully in accordance with the policy under which subrogation is being sought.

This would include a detailed forensic analysis of each head of claim, typically buildings, contents, stock, loss of rent, fees and business interruption, from which the adjuster would seek to derive true indemnity values.

In certain circumstances '“ for example, a plaintiff having failed to install correct fire prevention and protection measures which contributed to the fire spread '“ these derived values will be modelled by the adjuster against alternative fire damage scenarios developed by a forensic consultant, delivering alternative indemnity values in each scenario.

Such analysis and potential modelling would not be limited to incurred property losses but extended to the business interruption claim with the impact of each scenario on gross profit, increased costs of working and savings, measured accordingly.

Detailed investigation

In terms of process, having gained the essential understanding of the business, the adjuster would normally follow a structured routine across the various heads of claim. The settlement will be investigated in detail with all substantiating documentation being reviewed and more detailed information scheduled and listed as being required.

At the simplest level, the claim will be arithmetically examined in its entirety and the allocation by head of policy cover checked. There will be a full review against the cover offered under the first-party policy to identify whether any commercial considerations, as between the claimant and their insurers, affected the settlement or indeed whether anything was agreed 'ex-gratia' to policy coverage for such losses might not be recovered through subrogation. On leased or tenanted buildings, or indeed leased machinery, this would include a review of the leases to determine the insuring responsibilities were correctly followed.

At a more detailed level, consideration will be given as to whether the incurred costs were reasonable and whether or not the loss was correctly mitigated, with appropriate salvaging operations. Were elements of the reinstatement of buildings or machinery accelerated at a cost which exceeded the derived benefit? Alternatively, were there elements on the critical path to business recovery that were missed and which had a negative impact on the overall cost? Were alternative trading/ manufacturing methodologies such as sub-contracting or alternative premises adopted or considered such that gross profit losses could have been mitigated?

All of these factors draw heavily on the adjuster's knowledge and experience combined with a practical and pragmatic understanding of what happens in the aftermath of a fire.

Beyond the high-level reviews, there will be a very clear focus on specific heads of claim. For example, when considering the building claim, the adjuster will be examining decisions on the extent of demolition and evaluate the scope of reinstatement and the methodology adopted in terms of pricing.

Attention will be given to identifying and evaluating improvements in scope and specification which may have occurred either through a requirement to comply with legislation or other reasons. A variety of analytical cost tools and cost data will be utilised in this part of the process.

Similar analysis will be made of the claim for machinery and plant, considering improvements in specification and productivity, age, obsolescence and written down values.

Consideration of stock claims will include investigation of reconciliations, understanding purchase agreements, appraisal of procurement methodologies and determination of stock return percentages. The adjuster will be alert to redundant stock levels as well as to the opportunity for salvage, and ultimately whether the method for valuation was appropriate '“ ensuring no overlap with the business interruption claim.

Financial aspects of any loss, concluded under the business interruption coverage, will also necessitate a detailed review. While business interruption policies are formulaic in their approach to loss measurement, there is subjectivity in projecting performance of a business as it recovers from a major loss. The historic trading pattern will be evident from available records but there will be factors that may have had an effect on future results irrespective of a loss occurring.

The economic climate will have a bearing, as will changes in buying patterns, fashions, availability of raw materials and competitors. All of these factors affect trading and should have been considered when determining turnover trend during the period the business was affected by the incident. Similarly, there will likely have been savings in business costs.

The overall settlement under the first-party policy will have been dictated by the terms of the policy and will likely go beyond that recoverable in a third-party action. Accordingly, having reviewed the settlement under the first-party cover, it is necessary to determine the appropriate level of third-party indemnity.

For example, the policy may have extensions that bring additional benefits '“ e.g. 'public authorities clause' which deals with costs associated with compliance with new building and possibly planning regulations in force at the time of reinstatement.

It is also likely the claim will have been concluded on a replacement as new basis. This is not always the correct measure for a third-party loss, and the adjuster will seek to determine whether there is a viable resale market and may determine a valuation on that basis.

Thorough and concise

In drawing these strands of enquiry together, the loss adjuster will, as quantum expert, aim to deliver a report to the court that is thoroughly researched, thoroughly reasoned, concise and capable of full substantiation, while also clearly stating areas of uncertainty or where it has been necessary to make assumptions.

The adjuster must not be influenced by instructing principals, must not stray beyond his or her area of expertise and must maintain an open mind in discussion with all other experts '“ being prepared to amend opinions. Above all, no expert should ever forget his or her duty is to the court.