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Managed Care for Property Losses

Specialty companies help insurers contain post-loss contractor costs

Property Insurers hit with large and complex claims can waste millions of dollars if they mismanage the expenses that come with repairs or reconstruction.

That is why they often turn to loss project management companies, experts specializing in overseeing the work that has to occur after a property loss. These companies work with both insurers and adjusters and typically offer services that include analyzing the extent of damage, estimating reconstruction costs, developing safety procedures at the site, recommendations for rebuilding or restoration and oversight of contractors.

“The biggest thing most firms sell to adjusters is the ability to benchmark the pricing of contractors so that it’s competitive and to oversee the contractor to faster completion of the job,” said Timothy P. Householder, associate property claim manager at Kemper National Insurance Cos. in Long Grove, Ill.

“The quicker the facility is restored, the lower the business interruption claim will be,” Mr. Householder pointed out.

Loss project management companies provide an array of services both to insurers and adjusters.

“We’re set up to provide technical engineering services and contractor services for insurers that are understaffed or inexperienced in handling medium to large post-loss projects” said Dennis Langford, president of Langford Management Associates Inc. in Philadelphia.

When fire swept through a skyscraper at One Meridian Plaza in Philadelphia in 1991, causing millions of dollars in damage, the lead insurer called him to help out.
           
That claim illustrates how a loss project management company can save insurers large sums of money by keeping an eye on reconstruction activities following a large property loss.

The fire at One Meridian Plaza left Aetna Casualty & Surety Co., the lead underwriter of $131 million in property insurance on the downtown skyscraper, responsible for post-loss expenses related to stabilizing the site and removing debris.

Litigation is still ongoing as to whether the building should be repaired or razed and reconstructed, and it sits charred and empty.

“Nonetheless,” Mr. Langford pointed out, “proper management of the activity at the site following the fire will keep the insurer’s payout considerably lower than it would have been without those services.”

The 12-alarm fire began on the 22nd floor and burned to the 30th floor, where an automatic sprinkler system suppressed the flames enough for firefighters to put out the blaze (BI, March 4, 1991).

“There were problems with the water system, they couldn’t get enough water on the fire,” Mr. Langford explained. “The fire department pulled out their people at one point and just let it burn.”

Three firefighters died and 12 others were injured. Tenants lost furniture, telephone systems, and valuable papers in the fire, which raged for 19 hours.

Mr. Langford, who had worked for the construction company that had built One Meridian Plaza, was asked by Aetna to work as a project manager to help oversee the claim. At the time, he was working as a consultant to a company that now is one of his competitors.

“Ten floors in the middle were totally burned out,” he recalled, and the eight above those had smoke damage and later were found to have environmental contamination from the release of PCBs and dioxins. “The lower floors all had water damage.”

Mr. Langford’s crew had to perform an analysis of what it would take to stabilize the structure, remove the debris, and make it safe to enter.

The building had “very serious structural damage,” he said. “The steel had sagged. We had to get shoring in and remove the debris.”

The owner of the building hired a contractor to do the work and Mr. Langford’s job was to make sure the work was completed and properly priced.

“We set up a procedure where we reviewed all the invoices submitted by the contractor, then submitted them for payment,” Mr. Langford explained.

That meant the contractor had to submit some fairly extensive paperwork to justify the activities at the site. “The procedure was that the contractor would have to submit a list of who was working in the building, where they were working, on what floors, and the kind of work they were doing,” said Mr. Langford.

His own crews took the contractor’s paperwork to the site and checked to make sure the work was being carried out as the contractor had promised.

If it was not, a meeting was called with the contractor for an explanation of why the activity differed from the description in the paperwork.

“That’s how we kept tabs on what was going on,” Mr. Langford said. “They had to support the amount of money that was paid out at the site related to the kind of work they were doing.”

If a job wasn’t being performed according to the contractor’s paperwork, “we asked them to correct it,” said Mr. Langford. If corrections were not made within two days, payments for that activity were withheld.

And, if additional workers were added to a job, but not reported to Mr. Langford’s crew within two days, the contractor would not be paid for the additional labor.

While he couldn’t provide a specific figure on how much Aetna saved by keeping close tabs on the contractor, Mr. Langford estimates it amounted to millions of dollars from possible overcharges.
           
“Some of it was differences in how they invoiced the work,” he said. “We held back payment until they could support the charges.”

And, he added, payment was withheld if the contractor didn’t perform work as promised, or if Mr. Langford and Aetna didn’t think that work was done properly.

Mr. Langford worked closely with Aetna while he monitored the contractors.

“We had a field office set up across the street from the fire. Aetna rented the space and they had their consultants there.”

Mr. Langford’s main role in the One Meridian Plaza loss was as the overseer, making sure work was done properly and charges were correct. However, his company and the many others like it around the nation offer a variety of services to help insurers manage post-loss costs.

Kemper’s Mr. Householder explained that many loss project management companies fill the roles of contractor and consultant. Some companies can actually perform the construction work required to restore or rebuild a facility or they hire on as a consultant to make sure the insurer is getting a fair price for the work.

Langford Management Associates, for example, provides contracting services at a “guaranteed maximum price,” which means the company can analyze a loss and determine the cost of any necessary repairs. That way, and insurer knows the limit of its loss before the repairs or reconstruction begins.

Mr. Langford said the service is particularly useful to insurers that face storm losses and want one company to provide a price for all repairs rather than relying on many adjusters.
“Determining which company to use depends on the size of the loss and the type of expertise that is needed,” Mr. Householder said. “They’re not used a lot when the damage is less than say $1 million. Certainly if it is less than $100,000, it is very rare, and it is unusual for an insurer to need such help if a loss is between those two amounts.”

“If an insurance company needs a company in a consulting role, the company should have an engineering background”, Mr. Householder advised.

“But”, he added, “If construction needs to be done in a hurry to save on business interruption claims, some companies can provide fast-track scheduling”, in which they locate contractors that can have the facility ready as soon as possible for tenants.

And, if an adjuster thinks a contractor’s bid is too high and wants to help in determining whether the job can be done less expensively, the adjuster will want a company that has a background in contracting, Mr. Householder noted.

Kemper uses less than a dozen companies to help with post-loss management, and among those, “there is probably no favorite”.

Mr. Householder said each company “brings a slight difference to the table” in terms of its expertise. Some companies may get the nod depending on where they are located in relation to the loss. The selection of a company is “driven by the particular problem,” he said. “It’s kind of a vague and ill-defined field,” Mr. Householder said. Many of the companies provide contracting and engineering services, “filling a lot of roles.”

While a lot of companies provide at least some services that an insurer might need after a big property loss, many large insurers can handle the work themselves.

For example, spokesmen at Industrial Risk Insurers, Hartford Steam Boiler Inspection & Insurance Co., and Protection Mutual Insurance Co. all said their companies do not use loss project management companies because the insurers have those capabilities in-house.

Written by Mike Bradford for Business Insurance, a publication of Crain Communications, Inc. November 20, 1995

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