By the time you read this post, policyholders along the East Coast will likely be suffering damages caused by Hurricane Irene. As so often noted on this blog, being prepared for major catastrophes means making sure your family is safe, your property is secure, and that you have good insurance coverage.
To demonstrate the importance of reviewing insurance coverage, I want to revisit a North Carolina case that considered claim preparation expenses. If you have been following Michelle Claverol’s posts on understanding business interruption claims, you will remember Fountain Powerboat v. Reliance Ins. Co., 119 F. Supp. 2d 552 (E.D. N.C. 2000) was discussed in The Value of Ingress/Egress Coverage – Understanding Business Interruption Claims, Part 33. Michelle’s post discussed the Court’s interpretation of the policy coverage for loss caused by lack of access to a facility. I am writing about another aspect of the case — coverage for claim preparation expenses.
Hurricane Floyd struck North Carolina on September 15, 1999. At that time, in Washington, North Carolina, Fountain Powerboat Industries’ manufacturing facility and corporate headquarters were affected by the hurricane. Fountain Powerboats made a claim for flood damage, business interruption and reduction losses. The location of Fountain Powerboats was a critical factor impacting their business after the hurricane. The only way to reach Fountain Powerboats’ required travel on US Highway 17 to Whichard’s Beach Road. When Hurricane Floyd struck North Carolina, it caused devastating flood damage and record-setting rainfall in many of the eastern counties. According to the North Carolina Department of Transportation, the only roads that lead to Fountain Powerboats were flooded for several days, and Whichard’s Beach Road was closed from September 16 to September 25, 1999.
Fountain Powerboats tried to keep operations going, but, due to the poor road conditions, they were forced to used large trucks to shuttle workers from “pick-up points” and transport them to the facility. As a result of Hurricane Floyd, Fountain’s production fell to 33% of full capacity and production did not return to normal until October 25, 1999.
At the time of Hurricane Floyd, Fountain Powerboats was insured with Reliance Insurance Company. Reliance issued nearly $1,000,000.00 for the flood damages to the building, but failed to pay for the business interruption and reduction losses.
In The Value of Ingress/Egress Coverage – Understanding Business Interruption Claims, Part 33, you can learn more about how the court treated the policyholder’s appraisal demand and the interpretation of the ingress/egress coverage.
Another issue in the case was Fountain’s claim for preparation expenses incurred in connection with the loss.
Section VII, part O of the Fountain Policy provided:
VII: Extension of Coverage
This policy covers:
O. Claim Preparation Expenses
Expenses incurred by the Insured or by the Insured’s representative including Auditors, Accountants, Appraisers, Lawyers, Consultants, Architects, Engineers or other such professionals in order to arrive at the loss payable under this policy in the event of a claim. This provision does not cover expenses incurred for the services of any public adjuster.
In order to present the claim to Reliance, Fountain hired Allan Klotsche as its risk manager for the loss. While Klotsche held adjusting licenses in other states, he was not acting as or licensed in North Carolina as a public adjuster. Reliance argued it did not have to pay for claim preparation services provided by Klotsche because his work resembled claims presentation work by a public insurance adjuster.
At the time of the loss, Klotsche was working as the VP and CEO of T.E. Brennan Company, a risk management and employee benefits consulting firm in Wisconsin. Klotsche first started helping Fountain ten years prior to the hurricane when he developed an insurance program for Fountain.
According to the deposition testimony, Klotsche provided “input regarding Fountain’s claim for its destroyed yacht mold, the extended period of indemnity and loss of ingress and egress.” However, Klotsche did not prepare any of the documents presented to Reliance in support of Fountain’s claim. Klotsche attended a meeting with Reliance about the yacht mold, explained coverage to Fountain, and collected and organized data on the business loss that he used to negotiate on Fountain’s behalf.
The Court ultimately determined that the claim preparation performed by Klotsche was done as a consultant and not as a public adjuster, and that this work was covered under the policy.
The Court reasoned:
Klotsche clearly assisted Fountain in the preparation of its claim and reported to Fountain. The main point of difference is whether Klotsche investigated the claim…The evidence supports a conclusion that Klotsche’s actions are more in line with a consultant than a public adjuster. There is no evidence that Klotsche independently tracked down information through inquiry. Rather, Klotsche took information given to him by Fountain and gave Fountain his professional advice and services. Therefore the fees… are covered….
This case shows that expert assistance in claim preparation can be covered under certain insurance policies, but that insurers will often argue for the most narrow and restrictive interpretation of the policy language. It is critical for an insured to understand exactly what is covered before incurring expenses.
After more than 30 years in the industry, Klotsche retired from the insurance industry and moved to Florida with his wife, Judith. Klotsche now devotes his time to helping the Big Brothers/Big Sisters. He serves as Advisory Board Chairman Emeritus, and in 2007, was awarded the Volunteer of the Year Award for his services.