Forensic Engineering

Avoiding Pitfalls of Late Investigations: Observations from an Expert's Notebook

It was November 2003, when the electric service equipment feeding a manufacturing facility failed causing a "direct and catastrophic" power surge causing a fire within one of the machines in the plant. The damage to the electric service equipment was repaired by the utility company personnel and power was restored to the facility on the same day of the loss.

The insured's business ran three shifts and fulfilled a busy schedule of orders. Failure of one or more of their machines caused significant interruption to their operation and led to potentially significant loss of business.

The insured immediately contacted the insurance company and reported the loss providing a description of the events involved and the financial impact they'll suffer, if they didn't repair/replace the damaged machine almost immediately. The assigned claims adjuster immediately dispatched a representative (not necessarily a qualified expert) to the site of the loss to investigate the loss and verify the damaged. It was determined that the machine should be replaced and the insured successfully identified a suitable replacement, which the insurance company approved and paid for.

The above scenario represents a good example of responsive claims-handling practices and definitely represents excellent customer service and what appears to be a very "happy ending" to all parties. Unfortunately, that was not the end of the story. Few months later, in April of 2004, the insured contacted the insurance company and reported that two large machines, which they depend on heavily in their operation, have been acting "erratically". The insured concluded, based on what their vendors were telling them that the machines were damaged as a result of the power surge in November of 2003 and that they would require complete rebuilding for an estimated cost of $958,000. The insured indicated that they expect the insurance company to also be providing funds to compensate them for loss of business, since these machines would fail consistently during the day and could not produce the same volume they were designed for.

The insurance company informed the insured at that time that their claim would be investigated and looked into and that they would be paid for the damages if and when they are determined to be related to the loss. At that point, the insured informed the insurance company that they have retained a public adjuster, who later claimed that the two large machines could not be rebuilt and needed to be replaced for a total cost of $3.4 million. Additionally, the insured retained a legal counsel to help "win" their claim.

Obviously, the claims adjuster would have to identify the nature and extent of damage to the machines and the nature of the power failure to be able to determine if the damage is related to the loss. Given that two machines were operational most of the time and the damage was limited to certain components which were not directly connected to the power supply, the adjuster decided to look deeper into the claim. That's when the adjuster discovered serious obstacles that almost prevented their investigation: First, there was no information about the original failure of the power system as the utility company refused to provide any details of the repair and diagnostic activities completed in relation to facility and the loss. The company later indicated that personnel who responded to the loss were not available to provide any information and that their records were incomplete. Additionally, all damaged parts from the electric service, removed on the day of the loss were not accounted for and could not be found.

Inside the building, the adjuster discovered that the two machines were connected to a separate electric service fed from a different part of the electric grid around the facility. When the adjuster requested to view the damages, the insured refused to shut down the two machines long enough to allow for comprehensive testing to determine the nature and extent of damage. The insured's employees who were present at the time of the loss were no longer employed at their facility and could not be located to provide background information.

In light of these problems and pressure exerted by the insured's PA and attorney, the claim was escalated to a different claims adjuster who retained an outside legal counsel and an engineering expert. The expert was asked to answer three specific questions:

• What was the root cause of the loss?
• Who's responsible, if anyone?
• What is the nature and extent of damage to the machines?
• Is the damage related to the loss?

Recognizing the Need:

By now, you are probably asking yourself: what could the previous adjuster have done differently to avoid escalation of the claim? At the same time, you probably recognize that in certain situations, no matter what you do, the claim can escalate and lead the insured and the insurer to a courtroom to settle their different views of the claim. Nevertheless, a full and detailed investigation immediately following the loss would have minimized the likelihood of the claim being escalated and would likely have yielded more accurate and comprehensive information that can be used to answer the questions arising from the insured's later claims.

Recognizing the need for forensic engineering investigation can be challenging because of many factors. As in the case described above, not all claims start with the litigation. Instead only some end up in litigation several months, if not years, after the loss occurs. Hence, the claims adjuster would have to recognize the need based on what they determine is the potential of a claim to end up in litigation, rather than based on initial claims made during reporting time. A general rule of thump is to assume that any claim could end up in court and therefore should be treated as such.

Additionally, time factors add to the complexity of decision making. Insurance companies strive to deliver the highest quality service to their insured within the shortest amount of time. Conducting a full forensic investigation might delay the conclusion of a claim and add to the insured's frustration not to mention the impact on their financial situation as a result of the loss. As a result, insurance adjusters work diligently to conclude claims and reach fair and equitable settlements. The problem is with situations where quick resolution involves destruction of the scene, spoliation of evidence or loss of information and critical witness accounts. In these cases, an adjuster would have to find effective and efficient ways to reach settlement with the insured without compromising their ability to conduct a comprehensive and detailed forensic investigation.

Another significant factor involves the cost of an investigation. Typically, the decision to investigate or not is made based on the initial estimate of the loss. Though this may make a lot of sense from a business stand point, insurers should again consider the potential cost rather than the initial amount reported by the insured. A comprehensive evaluation of the loss and the property may provide enough clues to the potential loss at a later date.

Many factors also contribute to the problem. Some of these factors can be avoided by applying common sense business practices. Most important is direct and efficient communication between the insurance adjuster and the expert they retain initially to investigate a loss. Retaining the right expert as well as communicating the goal of the investigation from the beginning could save the insurance company many situations where they are caught trying to investigate a loss months after the fact.

The role of an expert is crucial in advising the insurance adjuster on ways to avoid the pitfalls described above. An expert with the proper experience in insurance business would advise their client about potential problems during early stages of the investigation. In our example above, the original investigator hired to verify the damage should have informed their client of the involvement of other parties in the loss and the potential of future litigation against third parties. The investigator should have also documented the cause of the loss thoroughly by conducting interviews with the utility personnel as well as the insured's employees and vendors, reviewing documents such as service reports and photographed / preserved remains of any components damaged and removed from the electric service to. Moreover, the initial investigator should have documented the condition of all equipment connected to the power supply at the time of the initial inspection.

An expert should be able to respond promptly. An expert can initiate the investigation, document the scene, preserve any available artifacts and secure evidence in a relatively quick fashion. An expert should also be able to provide the insurance company with information needed to give notice to potential parties who may have interest in the scene and evidence. Providing adjusters with preliminary description of known facts, and different possible scenarios can assist them in locating parties who may have interest in performing parallel or joint investigations in a timely fashion. Once all parties were given notice of the loss, the scene well documented and evidence secured and preserved, an expert can turn it over to the insured to repair or replace damaged equipment. Many of these tasks can and should be conducted in parallel to valuation of damages, if feasible.

The insurance adjuster can request a budget for the work to be done by the expert. The expert should be able to review the tasks needed to complete the investigation and estimate the time needed for each task then provide a budget for the work to be done. An expert should also be prepared to divide the investigation into phases and assign an estimated amount to each phase prior to initiating the investigation. That way, the preliminary investigation is completed early in the process and additional phases can be performed if and when needed based on the outcome of the claim.

Summary:

To avoid risking the loss of evidence, information and witnesses, an adjuster should consider launching a forensic investigation immediately following report of the claim. Assume that any claim can end up in court and act accordingly. To minimize down time for the insured and control cost of investigations ascertain critical facts early in the process to avoid loss of information, evidence and witnesses. Thoroughly document the site and all potentially relevant equipment including large machines and other systems. Engage the right expert who has strong technical and litigation experience and above all understands your needs as an insurance claim adjuster. Communicate directly and clearly with your expert(s) and ask for availability to respond promptly and a detailed description of tasks needed to complete a thorough investigation. Request a budget for the work to be completed, preferably divided into the different phases.

As for the case described early in the article involving the claimed damage to the machines, the investigation is still continuing, with higher difficulty and expense to the insurer as we attempt to ascertain all the facts and fill in the blanks related to missing information. This was definitely a situation that could have been avoided if the investigation was initiated properly early in the process.