Claims Journal Magazine - Spring 2013 by Insurance Journal

SPRING 2013 | VOL. 2, NO. 2

Cosmetic Damage Exclusions and First Party Lawsuits

Building a

Disaster Resistant Future

Guide: Property Restoration & Disaster Recovery

How to Handle Sinkhole Claims

Sharpen your perspective. Bring an insurer’s complex financial infrastructure into focus with the unique insight and in-depth analysis in Best’s Insurance Reports – Online ®. Go beyond the data to learn the reasons behind an insurer’s rating and discover what makes one company financially secure or another more vulnerable. These reports provide an independent perspective and expert commentary you won’t find with any other insurance intelligence tool. Gain the right vantage point for your global insurer research with Best’s Insurance Reports – Online.

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opening note

EDITORIAL

Winning the Game

he insurance industry is winning the game — at least when it comes to homeowners claims. Overall customer satisfaction with the property claims experience remains high, according to J.D. Power and Associates’ 2013 Property Claims Satisfaction Study. The study found that homeowners insurers continue to get high marks for claims handling despite facing two of the heaviest years — 2011 and 2012 — for Insurers must fully train claims. Overall satisfaction in the 2013 call center reps to prostudy is 832 (on a 1,000-point scale), increasing from 823 in 2011 and 818 in 2010. vide the claims experi For the about 8 percent of homeownence their customers have ers in the United States filing a property claim this year, the average settlement come to expect. amount is $8,517, up from $7,937 in 2012. While the amount of the settlement to cover contents increased by nearly $250 year-over-year, the amount to cover the cost of repairs increased to $7,844 in 2013 from $7,151 in 2012. The average out-of-pocket expenses paid by homeowners nearly doubled to $3,888 in 2013 from $1,945 in 2012. The most frequent reasons for filing a claim are tornado/hurricane (33 percent); hail (22 percent); and water damage not caused by weather (14 percent). The study measured satisfaction with the property claims experience among customers who filed a homeowners claim by examining: settlement; first notice of loss; estimation process; service interaction; and repair process. “Despite increases in both the frequency and average severity of property damage in the United States during the past two years, the fact that customer satisfaction remains high is a testament to how diligently the personal insurance industry has responded to its customers,” said Jeremy Bowler, senior insurance practice director at J.D. Power and Associates. However, satisfaction with the service interaction process declined by nine points in 2013, compared with 2012. Much of the drop likely is due to homeowners filing claims via direct channels — typically online or by calling a call center — rather than through an agent, according to researchers. The study found 68 percent of customers file their recent homeowners claims through direct channels, up from 57 percent in 2012. Satisfaction is 50 points higher among customers who file a claim through their agent than among those who file a claim through direct channels. “For the industry average, the call center experience fails to deliver the same level of service as an agent,” Bowler said. Andrea Wells Among customers surveyed in 2013, 72 percent who filed Editor-in-Chief awells@claimsjournal.com with an agent say their agent helped put them at ease; 56 percent who filed direct say their call center rep did the same. “The key for insurance companies is to ensure their call center representatives are fully trained to provide the claims experience their customers have come to expect,” Bowler said. 4 Claims Journal | Spring 2013

Editor-in-Chief Andrea Wells | awells@insurancejournal ClaimsJournal.com Editor Denise Johnson | djohnson@claimsjournal.com Vice President Content Andrew Simpson | asimpson@insurancejournal.com Insurance Journal East Editor Young Ha | yha@insurancejournal.com Insurance Journal Southeast Editor Michael Adams | madams@insurancejournal.com Insurance Journal South Central Editor/Midwest Editor Stephanie K. Jones | sjones@insurancejournal.com Insurance Journal West Editor Don Jergler | djergler@insurancejournal.com Insurance Journal International Editor Charles E. Boyle | cboyle@insurancejournal.com MyNewMarkets.com Associate Editor Amy O’Connor | aoconnor@mynewmarkets.com Columnists Steven Plitt Contributing Writers Ralph Burnham, Vidya Dinamani, Joe Emison, Lori Widmer, Jason Wolf

SALES

V.P. Sales & Marketing Julie Tinney (800) 897-9965 x148 jtinney@insurancejournal.com Claims Journal/Southeast Howard Simkin (800) 897-9965 x162 hsimkin@insurancejournal.com West Dena Kaplan (800) 897-9965 x115 dkaplan@insurancejournal.com South Central Mindy Trammell (800) 897-9965 x149 mtrammell@insurancejournal.com Midwest Lauren Knapp (800) 897-9965 x161 lknapp@insurancejournal.com East Dave Molchan (800) 897-9965 x145 dmolchan@insurancejournal.com New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classified Advertising (800) 897-9965 x125 classifieds@insurancejournal.com

MARKETING/NEW MEDIA

Marketing Administrator Gayle Wells | gwells@insurancejournal.com Advertising Coordinator Erin Burns | eburns@insurancejournal.com (619) 584-1100 x120 New Media Producer Bobbie Dodge | bdodge@insurancejournal.com Videographer/Editor Matt Tolk | mtolk@insurancejournal.com

DESIGN/WEB

Vice President/Design Guy Boccia | gboccia@insurancejournal.com Vice President/Technology Joshua Carlson | jcarlson@insurancejournal.com Design and Marketing Executive Derence Walk | dwalk@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com Web Developer Chris Thompson | cthompson@insurancejournal.com

IJ ACADEMY OF INSURANCE

Director of Education Christopher J. Boggs | cboggs@ijacademy.com Online Training Coordinator Barbara Whiffen | bwhiffen@insurancejournal.com

ADMINISTRATION

Chairman Mark Wells Chief Executive Officer Mitch Dunford Accounting Manager Megan Sinclair | msinclair@insurancejournal.com

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www.claimsjournal.com/subscribe Claims Journal, the National Property Casualty Claims Magazine is published quarterly by Wells Publishing, Inc. 3570 Camino del Rio North, Suite 200, San Diego, CA 92108.. Subscription Rates: Free to qualified readers. Disclaimer: While the information in this publication is derived from sources believed reliable and is subject to reasonable care in preparation and editing, it is not intended to be legal, accounting, tax, technical or other professional advice. Readers are advised to consult competent professionals for application to their particular situation. Copyright 2012 Wells Publishing, Inc. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. Claims Journal is a publication of Wells Publishing, Inc. Postmaster: Send change of address form to Claims Journal, Adam Dunford, 3570 Camino del Rio North, Suite 200, San Diego, CA 92108. Article Reprints: For article reprints: For reprints of articles in this issue, contact Rhonda Brown at 1-866-879-9144 ext. 194 or rbrown@fostereprints.com. Visit insurancejournal.com reprints for more information.

How much are these common claim-handling weaknesses costing you?

What issues challenge your staff and what to do to eliminate them.

ValeInfo.com/errors

No manager wants their appraisers, adjusters and estimators passing out blank checks, but if their claim-handling skills aren’t sufficient, the misapplications, oversights and errors they commit could be just as costly. For example, the difference between repairing or replacing a set of kitchen cabinets when adjusting a fire loss can be anywhere from $3,000 to $12,000. And that’s just one example of the kind of misjudgments we see both beginners and experienced professionals make all too often. In fact, we’ve identified five types of weaknesses including: (1) policy interpretation; (2) basic practices; (3) core knowledge; (4) estimating proficiency and (5) technology application that challenge even the most efficient and profitable claims departments. To see which issues are the biggest obstacles for your staff and what to do to eliminate them, call us or visit our website today.

ValeInfo.com /errors Call Toll-free (USA & Canada) 800-233-7095 www.valetrainingsolutions.com A member of the Cunningham Lindsey Group

where learning is engaging

Your complete resource for online continuing education as well as comprehensive mastery programs for: Automotive and Property Damage Estimating • Property, Casualty and Workers’ Compensation Adjusting • Tractor-Trailer, CA EQ, PDR and other specialty courses.

C0NTENTS

SPRING 2013 | VOL. 2, NO. 2

CLAIMS REVIEW 8 Insurance Covered Half of U.S. Disaster Costs in 2012: Swiss Re 8 New Study Finds Lower Acceptance of Insurance Fraud 8 Property Claims Customer Satisfaction: J.D. Power SPECIAL REPORT 12 A Tale of Two Claims: The Hidden Value of Building Permits 14 That Sinking Feeling: Sinkholes the Next Hot-Topic Risk? 20 Building a Disaster Resistant Future 28 2013 Guide to Property Restoration & Disaster Recovery

IDEA EXCHANGE 18 Tips for Developing Voice of Customer Programs 22 Cosmetic Damage and First Party Lawsuits 25 Essentials: Direct Physical Loss in All-Risk Policies 34 Final Offer: The Fraud Game

On The Cover Building a Disaster Resistant Future 6 Claims Journal | Spring 2013

CLAIMS DEPARTMENTS 4 Opening Note 9 Dollars & Sense 10 Web Exchange 11 Business Moves 19 People 24 Snapshot

You know what happened. Weâ€™ll tell you why.

Getting to the truth: Itâ€™s what Donan has done for its customers since 1947. To find out how, call 800-482-5611 or visit donan.com.

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CLAIMS REVIEW | NEWS & TRENDS

Insurance Covered Half of U.S. Disaster Costs in 2012: Swiss Re

atural catastrophes and manmade disasters caused $186 billion in economic losses globally in 2012 and took approximately 14,000 lives, according to global insurer Swiss Re’s latest sigma study. The United States bore the brunt, about $119 billion of that total hit, and private and public insurance picked up the tab for more than half of the damage. Large-scale weather events in the United States pushed the global total of insured weather-related claims for the year to $77 billion, the third most expensive on record. The amount is significantly lower than 2011, when record earthquakes and flooding in the Asia Pacific caused historic insured losses of more than $126 billion, the highest ever

recorded, Swiss Re reported. Nine of the 10 most expensive insured loss events happened in the United States in 2012. The high insurance penetration in North America meant that $65 billion, over half of the $119 billion in economic losses in the region, were covered by private and public insurance. Hurricane Sandy was the most expensive event for the year in terms of economic and insured losses. The hurricane caused an estimated total of $70 billion in economic losses, making it the second-most damaging hurricane on record after Katrina in 2005. Insured losses were approximately $35 billion, out of which $20 to $25 billion were covered by the private in-

surance market. The remaining insured losses were incurred by the National Flood Insurance Program. The 2012 drought was the highest recorded loss in agriculture insurance, according to Swiss Re. CJ

New Study Finds Lower Acceptance of Insurance Fraud

indings from an online Insurance Research Council (IRC) public opinion study reveal 24 percent of Americans believe it is acceptable to

increase an insurance claim by a small amount to make up for deductibles they are required to pay, lower than the 33 percent found in a 2002 telephone survey. Eighteen percent believe it is acceptable to increase a claim to make up for premiums paid in previous years when they had no claims, the lowest percentage since the question was first asked in a 1981 in-home survey. Younger respondents, especially young

men, were more likely to view claim padding as acceptable. Among males age 18 to 34, 23 percent agree it is OK to increase claim amounts to make up for premiums, compared with just 5 percent of their older male counterparts and just 8 percent of females aged 18 to 34. The IRC study also found that 86 percent of Americans agree with the statement “insurance fraud leads to higher rates for everyone,” while 10 percent agree that “insurance fraud doesn’t hurt anyone.” CJ

Property Claims Customer Satisfaction

he “2013 Property Claims Satisfaction Study,” published by J.D. Power and Associates, is based on more than 5,500 responses from homeowners insurance customers who filed a property claim between May 2011 and January 2013. The following insurance companies ranked highest in property claims satisfaction. Based on a 1,000-point scale here’s how they stacked up: Customer Service Index Ranking Amica Mutual 907 CHUBB 902 8 Claims Journal | Spring 2013

USAA* Encompass COUNTRY The Hartford Nationwide Erie Insurance Automobile Club of Southern California (AAA) MetLife Auto-Owners Insurance American Family Liberty Mutual Allstate Travelers

904 867 859 858 858 856 853 853 849 844 839 838 834

State Farm 832 Farmers 825 AAA NCNU Insurance Exchange (Formerly CSAA) 819 Safeco 817 Industry Average 832 *USAA is an insurance provider open only to U.S. military personnel and their families and therefore is not included in the rankings. Included in the study but not ranked due to small sample size are: Alfa Insurance; Cincinnati Insurance; Fireman’s Fund; The Hanover; and Shelter. CJ

DEPARTMENTS

Dollars & sense 25% $16 Billion

The percentage increase in premiums for vacation and rental homes in the National Flood Insurance Program, effective Jan. 1. Properties that have suffered repeated losses or substantial damage over the years will also see a gradual 25 percent rate increase, beginning Oct. 1.

The number of individual endorsements revised by ISOâ€™s 2013 CGL filing in 2013. ISO made mass changes to 24 additional insured endorsements and 34 professional service endorsements. Additionally, six new CGL endorsements are introduced in this filing.

The record amount that farmers will be paid in crop insurance claims for 2012 because of the widespread drought. It is the second year in a row that U.S. farmers have received record crop insurance payments as flooding and drought in 2011 was followed by an even worse drought last year. Last yearâ€™s loss represents at least a 47 percent increase from the $10.8 billion record loss in 2011.

134 Million

The number of people expected to live on the U.S. coast if the current population trends continue. The already crowded U.S. coast will see population

grow from 123 million people to nearly 134 million people by 2020, putting more of the population at increased risk from extreme coastal storms like Sandy and Isaac, which severely damaged infrastructure and property last year, according to a report done by researchers at the National Oceanic and Atmospheric Administration (NOAA), with input from the Census Bureau.

24%

The percentage of wedding claims reported by Travelers related to vendor problems. Claim data found that vendor problems resulted in the most frequent causes of wedding day mishaps. Illness and injury accounted for 19 percent of the total wedding claims, with 15 percent attributed to venue issues. Wedding day mishaps associated with weather accounted for 14 percent of claims. CJ

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Spring 2013 | Claims Journal 3/28/13 2:23 PM9

DEPARTMENTS

web exchange Video Highlights

Creating a Hailstorm at IBHS http://www.insurancejournal.tv/videos/9099/ Creating a hailstorm is no easy task, according to researchers at the Insurance Institute for Business & Home Safety, who said the project was several years in the making. Duplicating Mother Nature, researchers were able to compare how different types of residential roofing and siding materials perform during a full-scale indoor hailstorm conducted at its research facility in South Carolina. Claims Journal’s Denise Johnson took us inside the facility and interviewed the people who helped bring the storm to life.

Podcast Highlights Cargo Theft Trends and Investigation Tips http://www.insurancejournal.tv/videos/9163/ In an interview with Claims Journal, Keith Lewis, vice president of operations at CargoNet, points out the hotspots and states where cargo theft occurs most and provides tips for adjusters investigating cargo theft claims. How Motorcycle Crashes Are Investigated http://www.insurancejournal.tv/videos/9346/ Former police officer Lance Phy, now a senior consultant with Rimkus Consulting Group, explains why motorcycle accident investigations differ from investigations of vehicle crashes. While skid marks may be useful in auto crash investigations, fluid spills, paint transfer and crush damage are better indicators of how a motorcycle crash occurred.

In a Reader’s View Should Winter Storms Have Their Own Names? The creeping acceptance of a mercenary scheme to name winter storms is not among the most important things in the news, or even the weather. But like an ill wind, it carries an unmistakable whiff of chaos and dissipation. The system for naming hurricanes and tropical storms was developed over decades to facilitate communications about weather patterns that can endanger large swaths of 10 Claims Journal | Spring 2013

the planet. Storms must reach sustained winds of at least 40 mph before they earn a name from one of several rotating lists established by an international committee of the U.N. World Meteorological Organization in Geneva, Switzerland. Officials even have a deliberate procedure to retire the names of the most damaging storms once a year. Then there is the Weather Channel’s system for naming certain winter storms, which looks to have been developed by the Channels’ marketing staff in a fluorescent-lit meeting room deep within its offices off an Atlanta-area highway interchange. The channel’s comically vague explanation of its process says it will assess “several variables” before naming “noteworthy” storms — including whether they affect rush hour. The alleged benefits presented by the network include ease of “hashtagging” on Twitter. This isn’t much of a bid for gravitas, and the Weather Channel’s choice of storm names doesn’t help. A good portion of its list — including Gandolf, Khan, Rocky and Yogi — consists of names closely associated with characters from science fiction, popular movies and cartoons. How long will it be before this pseudoscientific system mutates to encompass more unremarkable weather patterns? Brace yourself for future storms like Heat Wave LeBron or Stiff Breeze Bieber. (The Philadelphia Inquirer/AP) The story generated several comments. Vince Phillips says: Naming winter storms is absolutely ridiculous. I know the Weather Channel wants to gain an audience, but because they decided to go glitzy and become a shallow entertainment medium, they’ve lost credibility and naming winter storms is part of that Madison Avenue superficiality. Common Sense says: Winter storms have always been known “as the storm of (year).” This naming of winter storms is absolutely absurd! Like hurricanes, only the big one’s names are remembered and winter storms are remembered by the year. CJ

ClaimsJournal.com Web Poll

Will requiring gun owners to purchase liability insurance help curb gun violence?

Undecided. (13 votes) 6.45% Yes, without a doubt. (42 votes)

13.36%

Maybe, in some cases (87 votes) No, it will not help at all. (509 votes) Total Votes: 651 votes

78.19%

DEPARTMENTS

Business Moves The Navigators Group The Navigators Group, a specialty insurance holding company, plans to move its corporate headquarters from New York to Stamford, adding 200 jobs in Connecticut within the next five years. Stanley Galanski, The Navigators Group president and CEO, said the firm expects to finish the move from Stamford around Labor Day. The company began in 1974 as a family-owned underwriter specializing in ocean marine insurance.

regional coverage while providing a full complement of forensic engineering and professional consulting services. The Salt Lake City office will work with the local market to address a variety of issues involving property damage, construction defects, fire and explosions, vehicle accidents, and product failures, the company said.

GEICO GEICO plans to fill 400 new positions in sales, claims and customer service in Arizona by the end of 2013. The Tucson office opened for business in April 2003 with fewer than 50 associates. Within five years, the office expanded to 800 associates as it gained market share. The regional office employs more than 1,200 associates. CJ

Frasco Frasco Investigative Services, a national insurance investigation corporation, opened a new Midwest regional office. Centrally located in the Chicago area, the office is headed by regional manager Richard Cyr, who is an industry veteran with more than 20 years of experience. In addition to the Chicago office, Frasco has seven offices along the West Coast, as well as a Northeast Regional office in Boston that provides local coverage for clients in the Northeastern and Mid-Atlantic Regions. Southport Lane, Dallas National Insurance Co. Southport Lane, a New York-based private equity firm, completed its acquisition of Dallas National Insurance Co., a Texas-based property and casualty insurer specializing in general liability and workers’ compensation. Under the terms of the transaction, Southport Lane will make a $50 million investment in Dallas National, raising its capital and surplus to $107.5 million, and will acquire 100 percent voting control through an investment subsidiary. The acquisition has been approved by the Texas Department of Insurance and the Delaware Department of Insurance. The company’s core operations will remain in Texas.

There isn’t a cause we can’t uncover. Utilizing a rewind approach, our professional engineers and registered roofing consultants reconstruct events to reveal causes. Areas of expertise include: civil, structural, mechanical and electrical engineering. To find out why, call 800-482-5611 or visit donan.com today.

Rimkus Rimkus Consulting Group, a forensic engineering consulting service, has opened new office in Salt Lake City. The new office is led by Rimkus District Manager Christopher R. Grubbs. The addition of this location will provide increased DONAN16484.indd 1

Spring 2013 | Claims Journal 3/21/13 9:58 PM11

SPECIAL REPORT | PROPERTY DAMAGE

A Tale of Two Claims: The Hidden Value of Building Permits By Joe Emison

his is a tale of two roof claims after a major hail storm in Decatur, Texas, that were handled the same way, but should have been handled differently. The carrier should have paid out less and could have avoided future losses, but didn’t. In total, the carrier believes its combined ratio could be improved up to one point through loss adjusting expense (LAE) savings if it had had the right information about these and similar claims. The first claim to come in — let’s call it the Alpha house claim — was the second roof claim in a five-year period for the property, both in response to significant wind and hail weather. The second claim — let’s call it the Beta house claim — was also the second roof claim in a five-year period due to confirmed weather. The severity on the prior claims was similar, although the severity of the current claim on the Alpha house was quite a bit less than that on the Beta house. There was one other big difference between Alpha and Beta: the homeowner in Alpha had repaired the roof properly after the first claim. In contrast, the homeowner in Beta had stapled some shingles to the roof to cover the initial damage, pocketed the rest of the claims check, and waited for the next weather event to worry about actually replacing what seemed like a still-functional roof. Unfortunately, the carrier did not know that the Beta house was any different from the Alpha house — it appeared to the adjuster that the storm hit Beta more strongly than Alpha, not that Beta’s roof had been improperly repaired. The carrier cut checks to Alpha and Beta and should have worried about the future shape of Beta’s roof … but didn’t. Building Permits There’s a great way to see if proper repairs were done after a significant claim: building permits. Major repair work — work that affects the soundness of a structure-almost always requires a permit, and most of the time, contractors and homeowners do pull permits for major repair work. That doesn’t mean that there aren’t parts of the country where repairs are usually done by Uncle Jim, a trip to the

12 Claims Journal | Spring 2013

lumber store, and bottle of Jack Daniels, but generally speaking, building permits are a great way to follow up on significant repairs. Take the following table, generated from analysis of building permits against carrier loss data:

Where the local building department enforces the roof code properly — meaning that the local authorities issue fines if unauthorized/unpermitted work is going on — an overwhelming number of wind and hail claims are followed by roof permits. Similar statistics Building permits provide a hold with other repairs great way to see if proper that are meaningful to the health and soundrepairs were done after a ness of the structure. significant claim. While specifics vary from state to state and jurisdiction to jurisdiction, in general, any type of construction work that could result in an unsound structure (from foundation issues to plumbing issues) requires a permit. Enforcement of building codes does vary by jurisdiction

and based upon type of work. For example, a jurisdiction on the coast might enforce the roof code very strictly, but might be more lax with respect to the electrical code, where electricians doing small residential projects are not fined significant amounts of money if found to be working without a permit. Property Condition The best part about getting building permit information as a follow-up to a prior claim is that it isnâ€™t just interesting information. Itâ€™s usable insight. As an adjuster, there are two significant actions that you can take based upon this knowledge: if this is actual cash value (ACV) coverage as increasingly, roof coverage is becoming, knowing that the roof was not properly repaired will make a huge different in ACV calculations. And you have proof, so the claims experience is backed up with defendable data. In more and more claim workflows, there is a growing communication channel between claims and underwriting. Having access to defendable property condition intelligence allows a claims adjuster to provide important feedback to their underwriting counterparts that in turn could have a significant impact on policy renewals. Even if a carrier doesnâ€™t retrieve building permit information for claims followup, simply telling homeowners repairing a claim that they should get a permit because that will provide a record of the proper repair being done, is a great way to increase the chance that the work will be done properly. It also helps give warning to homeowners that the carrier may choose to certify that the home is in proper condition through building permits in the future.

to the public under open records laws, and many building departments provide permit histories free of charge. Some even provide them over the Internet, retrievable on demand. There are a number of aggregators of building permits as well, including BuildFax, which can provide permit histories on demand for a small fee. No matter how you choose to retrieve

building permits, there is no doubt that they add a significant level of actionable intelligence to policy and claims management, and it is only a matter of time before they are used as a matter of course. CJ Emison is the founder and chief technology officer of BuildFax. He frequently speaks on cloud architecture. BuildFax collects and organizes construction records on millions of U.S. properties.

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Mechanics of Getting Permits Building permits are usually issued by the local municipality, or in the case of an unincorporated area, by the county. Since they are produced by a government entity, they are required to be made available DONAN16485.indd 1

3/21/13 10:02 PM Spring 2013 | Claims Journal 13

SPECIAL REPORT | PROPERTY

That Sinking Feeling Always a serious situation, sinkholes just became the hot-topic risk. How should adjusters approach the claims? By Lori Widmer

rom New Guinea to New York City, the earth is opening up underneath us. A sign of the Apocalypse? No, a sign of another sinkhole — which while scary and sometimes deadly — is a lesson in science more than a lesson in religion. News surrounding sinkholes in Florida have served as an industry-wide wakeup call to a risk that has always been there and isn’t going away. The threat is easily overlooked, and that plays a big role in the losses being exacerbated. While sinkholes are not restricted to one area of the country, their presence or sudden appearance can be predicted, to some extent, by understanding what’s underfoot. Sinkholes are naturally occurring events that are caused by a process that occurs underground every day in various parts of the world. Ranging from the minute (3 feet or under) to more than 2,000 feet in depth and diameter, sink-

holes can occur over time without being noticed until the landscape is suddenly or drastically changed. Blame it on Karst Sinkholes occur in areas where rock under the surface is made up of limestone, carbonate rock, salt beds or rocks prone to dissolution by groundwater; also known as a karst process, according to the U.S. Geological Survey (USGS), part of the Department of the Interior. As water circulates through the rock or as the rock dissolves by other means, spaces develop. A sinkhole could be large, yet because the surface of the earth is intact, they go undetected — until the hole swallows up the ground above it. While Florida is riddled with sinkhole activity, no area east of the Rockies seems immune. The USGS suggests that states prone to sinkhole activity include Florida, Texas, Alabama, Missouri, Kentucky, Tennessee and Pennsylvania. The effects are dramatic. In 2006, a Manhattan street opened up and swal-

lowed an SUV. The collapse was blamed on a water main break that eroded the ground under the street. In Allentown, Pa., in 2011, a suburban yard dropped out of sight, leaving a hole 100 feet wide and 40 feet deep. During a rainstorm in Utah in July 2011, the road opened up 40 feet wide and 30 feet deep, and a car fell in, killing a 15-year-old. Then there’s the sinkhole on Feb. 28 that killed a Florida man when the ground collapsed under his house, leaving a hole nearly 20 feet wide and 29 and a half feet deep. Typical Claim Issues States have different laws for sinkhole coverage, but in Florida, the laws have been refined to address not just coverage, but the definition of what constitutes sinkholes and structural damage. That’s because claims are outpacing premiums by up to four times the amount collected. For example, Citizens Property Insurance Corp., the state’s largest property insurer, paid more than $84 million in sinkhole losses; earned

premiums for that coverage came in at just $19.6 million. Thanks to rate caps of 10 percent annually, Citizens and companies like it have no way of recouping the losses. Hence the reason many insurers are limiting how much sinkhole liability they carry, and the reason why a few insurers in the state won’t cover it at all. Maria Abate, shareholder with Colodny, Fass, Talenfeld, Karlinsky, Abate & Webb, P.A. in Ft. Lauderdale, said her state has sinkhole coverage, as well as catastrophic ground cover collapse, which is required coverage on every policy. In 2005, Florida law also required structural damage to a building, including the foundation, as part of the definition of a sinkhole loss. That specific language, according to Abate, resulted from years of refining the definitions and regulatory language so that frivolous claims were reduced. Laws prior to 2005 simply stated that any physical damage to a building caused by sinkhole activity would be covered. This led to claims for cracks or damage that may not have been caused by a sinkhole. In 2005, due to the amount of claims made for minute cosmetic damage, the law changed to require structural damage. However, Abate said structural damage definition was not specifically defined in the law until 2011, leading to divergent court rulings. That made the change in 2011 essential, which gave structural damage a technical clarification. “Today the sinkhole statutes require coverage for structural damage to a building as defined by law, which was caused by sinkhole activity.” Even with the new definitions, Abate said most claim amounts are still at or near policy limits. “These are expensive claims due to the need to remediate the land and fill the sinkhole.” Adjudicating Shifting Sands When is a sinkhole really a sinkhole, and when is damage covered? That’s the question adjusters must sort out. It’s a question with no easy answer, depending on state laws. While states like Florida have done well to create legislation that curbs frivolous claims, the industry is still being pulled under by the volume and dollar amount of claims. Jaime Wester, owner of Champion Foun-

dation Repair in Tampa, said her company has seen the struggle to bring definition and fairness to the sinkhole issue. She sees insurers a bit behind the eight ball, thanks to the unpredictable nature of sinkholes. “When there are hurricanes and storms, it’s easier for insurance companies to track,” she said. “With sinkholes, the loss depends on the situation.” Part of the problem, asserted Wester, rests within the building industry. “The

building codes aren’t strong enough, so let’s just drain a swamp and put some houses up on three-inch slabs. Of course the houses are going to have problems.” The sinkhole situation has created a trepidation that borders on overkill, as Wester illustrated. “You have to have a home inspection, and if they find one crack, you won’t get coverage. You can’t even have a crack in your driveway.” continued on page 17

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Spring 2013 | Claims Journal 15 3/21/13 10:08 PM

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SPECIAL REPORT | PROPERTY continued from page 15

Wester was at a conference on sinkholes attended by attorneys and structural engineers. The topic was the definition of structural damage. “I sat there for four hours — no one had an answer. If they can’t figure it out, how do you expect an adjuster to figure it out?” she asked. Perhaps that’s why coverage in other states is not standard on homeowners policies. Loretta Worters, vice president of communications for the Insurance Information Institute in Manhattan, said Florida is the only state requiring sinkhole events to be covered by insurance. In other states, coverage is either required to be available or excluded from the general homeowners policy. Melissa Fox, deputy press secretary for the Pennsylvania Insurance Department, backs Worters’ view. She said Pennsylvania is second only to Florida in the number of sinkhole events. Fox suggested that may be reflected in the state’s homeowners coverage. “Here in Pennsylvania, damage due to sinkholes/earth movement is not a standard coverage in your homeowner’s policy. To get this coverage, you would need to purchase it separately as an endorsement.” Tennessee is also ripe for sinkhole activity. The USGS map shows a wide swath of karst from carbonate rock occurring throughout much of the state. Christopher Garrett, Tennessee’s Department of Commerce and Insurance director of communications, said his state mandates sinkhole coverage. Worters said there are some steps adjusters and insurers can take before a sinkhole event occurs. She said no one can know when a sinkhole will hit, but there are ways to recognize a developing problem. Buildings with developing cracks, she said, and door jambs and windows that suddenly don’t work properly could be signs of an impending issue. Worters suggested understanding the geology of the region as a basis for understanding the potential for sinkhole damage in the future. Also, adjusters and insurers should determine how often municipalities inspect their underground lines, particularly water lines. “Moving water is a major triggering mechanism.” When adjudicating a claim, Abate said adjusters must make sure damage is consis-

tent with sinkholes. Also, it’s key to establish when the damage was first observed. A common problem with claims, she said, is the backdating of dates of loss to fall under the more flexible regulations prior to 2011. Also, she said adjusters should make sure damage falls within the policy period. Was damage reported by this owner or a previous one in the past? “A good investigation can uncover prior sinkhole claims,” she said. The inspection will also lead adjust-

ers to their next step — calling in specialized help. If there is damage consistent with a sinkhole, Abate suggested adjusters can contact geologists and engineers. Sinkholes are a phenomena that are difficult to prevent, but not impossible to predict. Adjusters will continue to try understanding the risk. “It will probably take a court case,” Wester said. “It will take a judge to define it and the decision be upheld to set a precedent.” CJ

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Spring 2013 | Claims Journal 17 3/21/13 10:09 PM

IDEA EXCHANGE | TECHNOLOGY

3 Tips for Developing Voice of Customer Programs

here is a lot of buzz about Voice of Customer (VOC) programs these days. Many VOC programs focus around existing products and services and serve to drive higher customer satisfaction. The most popular VOC programs talk about capturing customer data/feedback to create closed loop systems where open issues/concerns are prioritized based on customer needs and expectations. Putting the right internal processes in place is also important to ensure that teams learn from customer data and drive continual improvement. Robust and successful VOC programs steadily improve the quality of service that the customer receives. The same type of process is equally effective when developing new products and driving key new features into an By Vidya Dinamani existing product line. The more VOC is an ongoing part of product development, from the initial idea to requirements to testing and acceptance, the stronger the product will be, and the better it will resonate with customers, meet their needs and exceed expectations. The best customer feedback is related to products in use today. However, it’s unfortunate that most users of the product don’t actually get to interact with the people and teams that design and build the products they use. Most often, defects, and maybe new ideas, get routed to the vendor/partner manager — the designated point of contact for the organization. Vendors often have an account manager whose job it is to keep customers happy. They are an interface to their client organizations. So you have a system that completely separates the users of the product from the teams that build the product. Any VOC is an anonymous list of issues, not connected with a person. Any response to that VOC goes into a funnel without ever knowing what, if any, responses made it back to the end user. No wonder users get frustrated with products, and product teams blithely go on building new features, or spend their time working out defects. There is a better way to immediately connect end users with product teams. Follwing are three ways to work with a vendor to incorporate your voice into their product. On-site Visits: As users of the software, be open to asking your vendor to come on site and interact with end users. Don’t just invite the account manager, extend the invitation to actual product

18 Claims Journal | Spring 2013

managers and product developers. This is the easiest way to get accurate feedback about the use of the product within your organization back to the vendor team. If onsite is problematic, consider remote viewing options that share your desktop. Developers who come back from customer visits talk about their experience for months to come. Problem Not Solution: It’s easy to focus on the defects of the product and talk about what doesn’t work and provide ideas on how to solve or workaround the issue. Your product manager should be asking you what problems you’re trying to solve. Instead of waiting to be asked, tell your vendor what you’re trying to do — not just what’s wrong with their software. Tell them the broader business problem that you’re trying to solve. By focusing on core of what you’re trying to solve, the chances of finding an innovative solution together are so much higher. Co-Development: Between giving requirements and acceptance testing, the usual touch points between users and vendors, there’s a world of possibility in interaction. Co-development means embedding one of your users into the vendor product team. It can be as small of an investment as less than 15 minutes a day, and can have a huge impact. There is no guessing what the customer wants, no surprises in testing, no misses in terms of workflow or usage, and the product does exactly what you want, when you get it. Voice of customer is a powerful way to influence product direction, but insist on a partnership program that will truly drive customer satisfaction. CJ Dinamani, vice president, product management and marketing for the Mitchell Solution’s Auto Casualty division.

DEPARTMENTS

PEOPLE Crawford & Co., a global independent provider of claims management solutions, named Larry C. Thomas CEO of Contractor Connection. Thomas previously served as president for Contractor Connection, which provides insurers with a managed repair vendor network for residential and commercial property claims programs and has more than 4,500 members operating in the United States and Canada. Amerisure named Becky Kenyon regional vice president of claims. In this position, Kenyon will report to Don A. Smith, vice president of claims. As a member of the claim management team, Kenyon will contribute to developing the department’s strategic and operational strategy. She will also provide loss cost containment and claim-related customer service to support the department. Prior to joining Amerisure, Kenyon was vice president, property/casualty claims at Berkley Risk Administrators, a nationwide provider of integrated risk management services. In addition, she spent more than 25 years with Travelers (formerly St. Paul Cos.), where she held leadership roles. During her tenure at Travelers, Kenyon led various areas of claims operations and was responsible for developing strategy, policies and procedures. Marsh appointed Mark Walls workers’ compensation market research leader within its Workers’ Compensation Center of Excellence. He will be responsible for developing market research, insight and other content for Marsh colleagues, clients and prospects on emerging issues, trends, regulatory and other changes that affect the workers’ compensation market. Walls brings to Marsh more than 20 years of experience in self-insured workers’ compensation claims handling, most recently serving as vice presidentclaims for Safety National. He is the founder and manager of the Work Comp Analysis Group on LinkedIn, the largest online discussion community dedicated to workers’ compensation issues, with more than 18,000 members. Walls will be based in St. Louis and report to Christopher Flatt, Marsh’s Workers’ Compensation Center of excellence leader. The ACE Group named Chris Maleno division president, ACE USA.

In this role, Maleno will oversee all operations for ACE’s U.S.-based retail commercial property and casualty franchise. He will report to John Lupica, chairman, Insurance-North America. Maleno joined ACE in 2007 as president of ACE USA Regional Operations, where he was instrumental in driving the company’s customer and broker segmentation strategies. He subsequently served as division president of ACE Casualty Risk with responsibility for the profitable growth of ACE USA’s casualty products including excess liability, construction, environmental and public entity. He was appointed chief operating officer of ACE USA in 2011 with day-to-day oversight of the company’s commercial property and casualty and accident and health businesses. Maleno brings nearly 25 years of experience in the insurance industry to his new role. Prior to joining ACE, he held several senior leadership positions in casualty underwriting and regional operations management within the industry. Barry Floyd was named chief financial officer at Paul Davis Restoration, a national provider of water, fire and mold damage cleanup and restoration services for residential and commercial properties. Paul Davis, the franchisor, is headquartered in Jacksonville, Fla. and was founded in 1966. The company is a nationwide property damage restoration network with more than 300 locally owned franchises. Previously, Floyd served as controller and director of franchisee accounting for the company. He is a Florida certified public accountant and has been employed by Paul Davis since October 2000. Nichole Ritz joined The Institutes as director of member knowledge for the CPCU Society. She is responsible for developing and implementing an effective strategy that will achieve the CPCU Society’s strategic goal of providing members with relevant knowledge Ritz has extensive experience in assessing member needs and providing multiple strategies specific to knowledge management, acquisition, engagement and retention. She previously worked at the Project Management Institute (PMI), where she developed and supported complex membership initiatives, including broad strategy and business plans for the North America and Asia Pacific regions. CJ

Larry Thomas

Becky Kenyon

Chris Maleno

Mark Walls

Spring 2013 | Claims Journal 19

SPECIAL REPORT | PROPERTY DAMAGE

Building a Disaster Resistant Future By Denise Johnson

e wary of anyone who promises disaster-proof construction. According to the experts, there is no such thing as a disaster-proof home. “As we like to say here, at some point Mother Nature will overwhelm even the best engineering,” said Julie Rochman, Institute for Business and Home Safety (IBHS) president and CEO. That does not stop some hucksters from trying to sell the idea. “Unfortunately, what you see after a disaster is people playing on victims’ fears of a recurring nightmare. The danger is when people start all of a sudden saying, ‘I can prevent this from ever happening again. You can live in a disasterproof home.’ Very, very unlikely, A, the people would want to live in those types of homes, B, could afford them, and C, that they would actually work at all levels and for all hazards,” Rochman said. Disaster-resistant building, on the other hand, is doable and something the insurance industry is trying to encourage. In the future, experts believe that thanks to disaster-resistant buildings, following a catastrophic flood or other event, insurance adjusters will handle smaller losses, getting people back into

20 Claims Journal | Spring 2013

their homes more quickly and efficiently rather than giant losses. “The idea is that if we could just get the roof right; just get people to our FORTIFIED Retrofitting Standard… for hurricanes and high wind and hailprone areas, which is a large portion of this country, we could probably save half of all property losses in a given year,” Rochman said. Proof is in the testing. In 2012, IBHS conducted a full-scale, high-wind test of commercial structures. One was built using common construction methods and based on outdated building codes, the other was built using current code requirements for masonry construction. There was close to 10 times more physical damage to the normally constructed building versus the “stronger” building: $44,769 versus $4,660. Rochman said her organization and others are identifying affordable, workable solutions that will narrow the damage and destruction path of storms, allowing people to stay in their homes and businesses, and letting the communities recover much more quickly. That day of turning a catastrophe into small losses is not here yet. Those advocating disaster-resistant building say they are making some progress, but that it too often takes a

major disaster for communities to take new building materials seriously. The attention is never more razor sharp than after a catastrophe. “It is very challenging to get somebody to think about hurricanes or floods … when the weather is good. We very frequently align our messaging around weather events,” said Leslie ChapmanHenderson, president and CEO of the Federal Alliance for Safe Homes (FLASH), a consumer advocacy group for strengthening homes formed 15 years ago in response to Hurricane Andrew. Disaster-Resistant Building Lags There are several reasons for the slow pace: building codes, cost fears, inertia and lack of education. The differences in building codes and practices can make the difference in whether a home is still standing after a storm. According to Chapman-Henderson, building codes are a minimum building standard, not an ideal. “If you aren’t even at the current model code, that means that you’re not benefiting from what somebody thought was the least you could do,” said Chapman-Henderson, a former Allstate claims manager. Builders can be resistant to change. “I think inertia is one thing. Builders,

particularly in places where there are not codes, have been doing things a certain way — we call it tribal knowledge — and they don’t like to change. There’s some resistance there,” Rochman said. Another barrier to more disasterresistant building is cost, or the perception that it costs more. Both builders and homeowners believe disaster mitigation upgrades to a home will be expensive. “One of the things that we try to do at IBHS is to educate people about the relatively small cost of doing things the right way, and doing things the traditional way,” Rochman said. In 2010, the research facility showed the cost difference for a disaster-resistant residential building was just 3 percent to 5 percent higher depending on building code requirements, which vary by state. In a post-Sandy analysis, IBHS said that if New Jersey and New York followed “minimal engineering-based hurricane design guidance” it could increase a home’s wind-resistance while only adding up to 2 percent more to the cost of average homes. Cost fears are largely unfounded, according to Joe Basilice, president of New Orleans-based OceanSafe, a global manufacturer of steel insulated panels. He said disaster-resistant homes are cost-savers because they are built to be environmentally friendly and energy-efficient. And the quality should last. “The quality control in the construction is very, very important no matter what types of building you’re building, but especially if you’re going to build a hurricaneor a disaster-resistant building. It’s got to be built properly. That’s another very key point,” Basilice said. He said AIG warranties OceanSafe buildings against natural disasters because of the way they’re constructed. The consumer group FLASH primarily targets families in its disaster mitigation education because, according to ChapmanHenderson, commercial structures already enjoy the benefit of unique engineering attention. Disaster Resistant Buildings According to Basilice, the geographic area mandates the building materials used. An OceanSafe hurricane-resistant model home built in New Orleans as a demonstration project survived Hurricane

Isaac undamaged. The Myrtle Grove home was built with wind-resistant (up to 150 mph) steel structural insulated panels and high-impact, double pane windows, and a standing seam metal roof was elevated 15 feet above sea level. Less can be more when it comes to a disaster-resistant home. “In our building, there are no nails. Everything is screwed or bolted. The difference with a structural-insulated panel building, all the pieces make the sum of one part, so it’s almost like building a can. Once you put everything together, it moves in one part, so it’s very, very difficult for the roof to blow off it. It’s very difficult for a wall to blow off. That’s also what gives you such a great insulation, which makes it energy efficient,” Basilice said. IBHS said using ring shank nails instead of smooth nails or staples to attach the roof sheathing can double the strength of a home’s roof and costs about a $100 for an average home. There are other steps that homeowners can take to mitigate damage. “From an insurance perspective, sealing the roof deck is a great way to save on additional living expense claims and business income claims. If you keep the water out, the building remains functional. Sealing your roof deck for a house, the average house is about $500,” Rochman said. Safer and stronger building is more

likely to happen where there is community appreciation and involvement, according to these veterans. “We always talk about hardening individual structures as part of community resilience. If the houses are gone and the businesses survive, the workers aren’t going to be showing up for work, they’re going to be concerned about getting their own lives back on track, and rightly so. If the businesses are gone… then there’s no job, there’s no tax base, so the community can die from that as well,” Rochman said. The IBHS president said it’s easier for a community to embrace retrofitting changes as opposed to new construction. A homeowner’s association or a mayor could make that decision. Some insurers offer premium discounts or provide other incentives for building stronger, as well. “You don’t have to tear down everybody’s houses and start over,” Rochman said. As an example, Rochman cited the 13 FORTIFIED homes that stood directly in the path of Hurricane Ike in 2008. Ten of the 13 homes sustained only minor damage. According to IBHS, the three homes that were destroyed were damaged by the debris from the other destroyed homes. “The most effective implementation of better construction is when whole communities embrace the idea,” Rochman said. CJ

Hazard-Specific Disaster-Resistant Measures

ccording to industry experts, there are differences in the ways that structures can be made disasterresistant, depending on the hazard. Hurricane: The key to storm-resistant construction is keeping connections in place, roof to wall, floor to floor, and floor to foundation. The roof is the first line of defense in a storm. It’s also important to keep windows in place. Hurricane clips, straps and anchor bolts are often used in disaster-resistant structures. Tornado: Storm basements and safe rooms are often used in the area of the United States known as Tornado Alley. Safe rooms, which can be built to withstand winds up to 200 mph, are constructed out of concrete and can be built inside pre-existing rooms or outside.

Wildfires: The replacement of wood decks and wood shake roofs with fireresistant materials can help a structure in a wildfire. The use of fire-resistant siding, dual glaze or tempered glass windows, fire-rated doors as entry doors, screening on all vents and vegetation management is also helpful. Earthquakes: Buildings need to be made with lightweight material that can sway and move. Reinforced floor to foundation connections also help. Generally, low-level buildings do better than tall buildings. Experts emphasize a system-based approach to retrofitting an existing structure. “The roof is a system. It’s not just shingles. It’s what’s underneath the shingles and how the roof is attached at the house, everything,” Rochman of IBHS said. CJ Spring 2013 | Claims Journal 21

IDEA EXCHANGE | COVERAGE CORNER

s more carriers begin to adopt the new American Association of Insurance Services (AAIS) and ISO endorsements governing the cosmetic damage exclusion due to wind and hail, one certainty is that these exclusions will surely result in a series of new lawsuits. What Constitutes Cosmetic Damage? The exclusion, available as an optional policy endorsement, will likely exclude coverage for exterior surfacing of most of the structure, including walls, roofs, doors and windows, provided that the wind and hail damage to the surfaces impacts appearance but does not impair those barriers’ ability to prevent weather elements from creating havoc. The obvious question is what constitutes cosmetic damage? It is easy to envision a situation in which a vandal tosses a can of paint onto a house’s exterior wall. This is cosmetic damage, and if the insured with the vandalized wall has a cosmetic damage exBy Jason Wolf clusion in his policy, there would be little debate over whether it should be covered. However, the likelihood that there will be far more nuanced debates over what does and doesn’t constitute cosmetic damage seems very high. Think of roofing shingles being discolored, which some engineers determine constitutes structural damage because the shingles are no longer fully functioning, as the discoloration portends a weakening of the actual shingles. Or, what about a chip in a home’s stucco that does not immediately impact the wall’s ability to keep out rain, but over time, is arguably (from an insured’s perspective) likely to

22 Claims Journal | Spring 2013

result in more serious, and permanent damage that could cause structural damage? Even a crack in foundation can be considered simply cosmetic, causing no unsafe or unsanitary conditions. But if the crack ultimately creates a sloping floor, which has happened in the past, it’s a different issue. In that case, the insured and insurer would probably disagree over whether the crack is cosmetic or not. The Sinkhole Precedent The state of Florida has already enacted a statute that addresses cosmetic versus structural damage, although it focuses on sinkholes and has no impact on windstorm and daily damage claims. Analyzing the sinkhole statute gives us an apt analogy, because Florida’s efforts to limit payments was seen by the policyholder bar as an effort to limit claims and lawsuits over sinkholes. In 1981, the Florida Legislature enacted Fla. Stat. 627.706, which required insurers to provide coverage for sinkhole losses, which were defined as “structural damage to the building.” The statute was revised several times over the years, then in 2011, the legislature included a restrictive and specific definition of “structural damage.” I believe, as do many property insurance lawyers, that the state Legislature was compelled to act because of the increase in litigation over what constituted structural damage. Before the statute was amended to add the full definition of structural damage, Florida courts determined “structural damage” to constitute “damage to the structure.” This often resulted in the opposite impact of the exclusion, because harm to any property is thus damage to the property’s structure. This subverted the process of the cosmetic damage exclusion; even

a can of paint splashed on a wall would be included under this broad definition, because the colored paint causes “damage to the structure,” although the property is not “structurally damaged.” (Can you see why the statute needed to be clarified and amended?) When a sinkhole claim is made, sinkhole engineers evaluate the situation by assessing construction defects, thermal expansion, differential settlements, organics, date of loss and an array of other factors to determine whether there is true structural damage. There are also specially trained adjusters who assess structural impairment or loss caused by sinkholes. With the new wind and hail damage and the cosmetic exclusion for non-sinkhole claims, a similar scenario may ensue. Will we see engineers who solely assess wind and others that develop expertise in ice damage as occurs in Montana, New Hampshire and Idaho? These engineers will be tasked to determine whether the damage is cosmetic

— rusty eaves, cracked sidewalks — or of situations that cause property damage. more serious — snow weight beyond Property damage is often weather-related the load-bearing capacity of the roof that but can ensue for a number of reasons — invades the home. vandalism, pure accident, as well as age A Pandora’s box of conflicting percepand neglect. The current cosmetic exclutions will occur when cosmetic damage sion is geared toward damage from wind is excluded, as policy and hail — all owners will be eager A Pandora’s box of conflicting climate issues. to over-dramatize perceptions will occur when That, too could the impact to collect. change. This conflict naturally cosmetic damage is excluded. The endorseleads to more lawments from suits. the AAIS and ISO governing the cosmetic Recently, the first District Court of damage exclusion are still considered Appeal in Florida ruled on a sinkhole case optional, so the full picture has yet to be stating that property insurers cannot limit seen. sinkhole loss coverage to less than the The resulting situation is ripe for the dwelling coverage limit set by the Office discussion and certainly provides a wide of Insurance Regulation. Where does “loss” opening to see a rise in first-party propenter into the debate between “cosmetic” erty lawsuits. CJ and “structural?” The Concept Is Clearly Unclear Sinkholes are not solely a Florida problem — nor are hurricanes or the myriad

Wolf is a shareholder at the Fla.-based firm of Koch Parafinczuk & Wolf. His practice focuses on first-party property insurance defense, and he is the firm’s partner overseeing all lawsuits against property insurers.

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Spring 2013 | Claims Journal 23

CLAIMS REVIEW | Snapshot

Before and After: Riverside, Calif.

s first responders, Allied Restoration is often called upon by insurance companies to evaluate a loss and determine the safest and best method for repair. The accident shown here caused almost $80,000 worth of damage and threatened the structural stability of an entire wing of the building. Allied worked with city officials and structural engineers in order to secure the second story of the building, so the vehicle could be removed. CJ

24 Claims Journal | Spring 2013

IDEA EXCHANGE | ESSENTIALS

Direct Physical Loss in All-Risk Policies: The Modern Trend Does Not Require Specific Physical Damage, Alteration

ll-risk policies insure fortuitous losses that are not excluded by the policy. The use of the phrase “allrisk,” however, is somewhat of a misnomer because the policy itself contains numerous specific exclusions. In that regard, “all risks” does not mean “every risk.” A question arises as to what direct physical loss means against the backdrop of such a broad-based coverage. The modern interpretive trend is liberalizing the meaning of direct physical loss to focus upon loss of use as opposed to direct physical loss involving By Steven Plitt physical alteration. “Physical damage,” in ordinary parlance has a widely accepted definition. It means “a distinct, demonstrable, and physical alteration” of its structure or appearance. Port Authority of New York and New Jersey v. Affiliated FM, 311 F.3d 226 (3rd Cir. 2002). Fire, water, smoke and impact from another object are typical examples of physical damage from an outside source that may demonstrably alter the components of a building and trigger coverage. However, proof of physical damage to a building as an entity by sources unnoticeable to the naked eye may need to meet a higher threshold.

Relying upon the Colorado Supreme Court in Western Fire, the court in Port Authority found that the insurance policy not only covers physical damage, but also “physical loss.” Thus, when there was the “presence of large quantities of asbestos in the air of a building, such that the presence of the asbestos in the air made the structure uninhabitable and unusable, then there [was] a direct loss to [the] owner.” However, in those situations where the asbestos was not in a form or quantity to make the building unusable, the owner would not suffer a covered loss because

the structure continued to function and it had not lost its utility. Thus, according to the Port Authority Court, it is appropriate to consider in the coverage analysis whether the presence of a contaminant or substance which does not cause direct continued on page 26

Higher Threshold The court in Port Authority of New York and New Jersey v. Affiliated FM, observed that physical damage to a building as an entity by sources unnoticeable to the naked eye was required to meet a higher threshold. The court cited to the Colorado Supreme Court in Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (Colo. 1968), where the court concluded that “coverage was triggered when authorities ordered a building closed after gasoline fumes seeped into a building structure and made its use unsafe. Although neither the building nor its elements were demonstrably altered, its function was eliminated.” ad.indd 1

8:44 AM Spring 2013 | Claims4/1/13 Journal 25

IDEA EXCHANGE | ESSENTIALS Absence of Structural Damage also found that a covered loss included The court in Murray v. State Farm, 203 situations that rendered the insured W.Va. 477, 509 S.E.2d 1 (W. Va. 1998) property unsafe or uninhabitable that found that direct physical loss may may exist in the absence of structural exist if the property is injured with an damage to the insured property. absence of structural damage as opposed In American Guar. & Liab. Ins. v. to destroyed. In Murray, the policyIngram Micro, 2000 WL 726789 (D. Ariz. holder’s home was damaged by rocks 2000), the court found that physical falling from a high wall of a 40-year-old damage is not restricted to the physical abandoned rock quarry situated next to destruction or harm of computer circuitthe home. The insurry, but included loss of ance company denied The modern trend access, use and functioncoverage arguing the ality. In a technological policy excluded losses signals that courts age, the definition of caused by “landslides” are not looking for physical damage when or “erosion.” The home it comes to cyber issues physical alteration, must be more expansive. was not damaged by the rocks. However, but for loss of use. This creates an inherent firemen who respondtension between the ed to the loss compelled the insured to concepts of traditional physical damage leave the home because additional rocks and loss of use of functionality. Accordcould fall, and an engineer who later ing to the Ingram Micro court, when the examined the high wall concluded that computer data was unavailable, the infurther rock falls would continue, some terruption of services would constitute potentially producing disastrous results. damage or where the computer software The Supreme Court of West Viror network was altered in some form. ginia addressed whether covered losses Ingram Micro court’s holding was broad could exist in the absence of structural regarding the business interruption loss damage. The court in Murray held that because the data was restored upon bebecause the home became unsafe for ing reloaded. habitation, it suffered real damage when Similarly, the court in Farmers Ins. Co. it became clear that rocks and boulder of Oregon v. Trutanich, 123 Or.App. 6, 858 could come crashing down. The court P.2d 1332 (Or. App. 1993), used a broad and expansive analysis of physical damage. In Trutanich, the claim involved a house with methamphetamine ordor. The court found persuasive that the persistence of the odor itself was physical. As to the second argument that even if the odor was physical, the defendant “ ” was not entitled to recover the cost of removing it. The court found that the U.S. Forensic has built a strong reputation for providing concise, property was physically damaged. The accurate answers to complex questions involving building failures, cost of removing the odor was a direct product failures, fires and automobile accidents. Our staff of over rectification of the problem. Removal 50 professionals have assisted insurance companies, manufacturers, cost was a direct physical loss itself. government entities and the legal community in evaluating the The modern trend signals that courts cause, extent and legitimacy of various claims, incidents and injuries. are not looking for physical alteration, but for loss of use. This is the trend of where the law is going. CJ

continued from page 25

physical damage can still constitute a property loss if the contaminant/substance renders the building uninhabitable and unusable. The analysis will focus on the quantity of the offending item because that item must reach a significant level to warrant coverage, i.e., such quantity to make it comparable to a direct loss like fire, water or smoke on the structure’s use and function. Anything less would create a standard requiring compensation for repairs caused by the inevitable deterioration of materials used in the construction of the building. That type of result would not comport with the intent of a first party all-risk policy and would transform the policy into a maintenance contract. Under the analytic construct of Port Authority, “physical loss or damage” occurs only if: 1. The actual presence of offending contaminants or odors results in contamination to a level that the property’s function is nearly eliminated or destroyed; 2. The structure is made useless or uninhabitable, or; 3. There exists an imminent threat of the release of any contaminant that would cause such loss of utility.

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26 Claims Journal | Spring 2013

2/19/13 9:16 AM

Plitt is a nationally recognized expert in insurance law. He has authored numerous insurance treatises and articles. He has a national expert witness practice. Email: SP@kunzlegal.com

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4/6/13 9:19 AM

Spring 2013 | Claims Journal 27

Be There When iT CounTs

2013 Claims Journal guide to

Property Restoration Disaster Recovery

+ C

laims Journal is pleased to publish the 2013 Guide to Property Restoration and Disaster Recovery. This exclusive directory resource has been designed to help claims professionals find partners and services to enhance their ability to respond to disasters and better assist their clients. Property restoration and disaster recovery companies specializing in aerial imagery, carpet cleaning, contracting, emergency mitigation, fire damage, mold removal, storm damage, temporary housing, and/or water damage submitted their information directly to Claims Journal for inclusion in this directory. Providers were allowed to list up to three categories. While this directory is only a snapshot of the vast array of restoration and recovery services available to the claims industry, we hope you find it helpful. We look forward to expanding and enhancing this directory in the future and welcome your feedback on how we might improve it. Please send comments or suggestions to editorial@claimsjournal.com.

IDEA EXCHANGE | Property Restoration & Disaster Recovery Guide

Property Restoration & Disaster Recovery Guide 2013 C

Aerial Imagery Aerial Imagery EagleView Technologies, Inc. www.eagleview.com InsuranceSales@eagleview.com (866) 659-8439 Service Area: Nationwide EagleView Technologies invented the concept of 3D aerial roof measurements with proprietary patented software providing detailed, accurate roof measurement reports substantially reducing claim cycle time. EagleView continues to provide a means to increase productivity while minimizing claims discrepancies with the most accurate guaranteed roofing reports.

Contractors American Fire & Water Restoration www.americanfire-water.com wmaier@americanfire-water.com (513) 779-4357 Service Area: Indiana, Kentucky, Ohio

American Technologies, Inc. www.ATIrestoration.com jeff.moore@amer-tech.com (800) 400-9353 Service Area: Nationwide

Bay Metro Corporation www.baymetrocorp.com (415) 626-4067 Service Area: California

Clean Environments, Inc.

Carpet Cleaning / Upholstery / Household Goods Esporta Wash Systems www.esporta.ca sales@esporta.ca (800) 881-7781 Service Area: Nationwide

Rainbow International Restoration and Cleaning www.rainbowintl.com (800) 583-9100 Service Area: Nationwide

ServiceMaster by ARTec www.svmartec.com info@svmarteccom (610) 626-9002 Service Areas: Delaware, Pennsylvania

30 Claims Journal | Spring 2013

www.cleanenvironments.com gregs@cleanenvironments.com (210) 349-7242 Service Area: Alabama, Florida, Georgia, Louisiana, Mississippi, New Mexico, South Carolina, Texas

Contractor Connection www.contractorconnection.com sales@contractorconnection.com (800) 690-0174 Service Area: Nationwide We are the largest, fully-independent network of managed contractors for commercial/residential property restorations for insurance companies and consumers. More than 4500 highlycredentialed contractors in the U.S. and Canada provide expert services in: General contracting, remodeling, special-needs modification, roofing, flooring and emergency services; plumbing, board up, water mitigation and more. 24/7

KbH Consulting, Inc. www.kbhconsultants.com (727) 422-5025 Service Area: Florida

Electronics Restoration Zodiac Equipment Restoration www.zodiacrestoration.com jseter@zodiacrestoration.com (888) 982-6738 Service Area: Nationwide Specialty restoration services for electronics, electro-mechanical equipment, and machinery that have been exposed to smoke, water, or other contaminants. Zodiac also provides data recovery services, document drying and cleaning, dehumidification, corrosion control, inventory analysis services, and storage for evidence and valuable artifacts. Zodiac will facilitate re-calibration and re-certification as needed.

Emergency Mitigation, Fire, Water, Disaster/Catastrophe AdvantaClean www.advantaclean.com (877) 800-2382 Service Area: Nationwide

ARS Restoration Specialists ARS Restoration Specialists www.arsserve.com info@arsserv.com (877) 461-1111 Service Areas: Connecticut, Maine, Massachussetts, North Hampshire, Rhode Island

ASJ Emergency Restoration & Cleaning www.asjimaging.com dbrunkle@asjimaging.com (717) 632-2241 Service Area: Pennslyvania

BELFOR Property Restoration www.belfor.com (800) 853- 3333 Service Area: Nationwide

Oppenheimer Art Recovery

CRC: Disaster Response www.callcrc.com chad@callcrc.com (888) 501-7824 Service Area: Southeast CRC is the nationâ€™s 4th largest turnkey restoration firm. CRC was started in 1969 and has been ranked #1 three years in a row by several national publications. CRC is also an approved vendor for 92 insurance companies. All work completed in-house.

CRDN www.crdn.com contactus@crdn.com (800) 963-2736 Service Area: Nationwide

Disaster Kleenup International www.disasterkleenup.com info@disasterkleenup.com (630) 350-3000 Service Area: Nationwide

FRSTeam, Inc. www.frsteam.com info@frsteam.com (510) 723-1000 Service Area: Nationwide

Flood Masters www.floodmastersd.com (619) 234-2500 Service Area: California

Horticultural Asset Management www.hmiadvantage.com contacthmi@hmiadvantage.com (919) 460-5445 Service Area: Nationwide

National Catastrophe Partners www.ncp-claims.com claims@ncp-claims.com (877) 576-0061 Service Area: Nationwide

www.artrecoveryusa.com jtobits@joirestoration.com (877) 644-9040 Service Area: Nationwide Oppenheimer Art Recovery (OAR) responds within hours to all art-related losses. Our professional staff packs and transports works of art from any location within the U.S. Upon examination, prompt reports are provided. Our staff works to provide superior conservation as well as rapid turnaround times.

R.A. West Associates, Inc. www.rawestassociates.com rawest@rawestassociates.com (215) 860-5026 Service Area: Nationwide

Emergency Mitigation, Fire, Fire Damage Water, Disaster / Catastrophe Alliance Disaster Kleenup www.alliancedk.com info@alliancedk.com (847) 205-2100 Service Area: Nationwide (Focus in Florida, Illinois, Wisconsin)

Best Restoration Services www.bestrestoration.com sales@bestrestoration.com (310) 676-2167 Service Area: California

Reliable Restoration & Recovery www.rrandr.us rachael@csnh.us (877) 986-3777 Service Areas: Maine, Massachusetts, New Hampshire

ServiceMaster Restore www.servicemasterrestore.com (800) 737-7663 Service Area: Nationwide ServiceMaster Restore is the new face of a 60-year heritage of providing comprehensive disaster restoration services to residences and commercial businesses nationwide.

Servrpo of NE Waukesha County www.servpromilwaukeenorth.com chad@servpromn.com (262) 250-1101 Service Area: Wisconsin

Zodiac Equipment Restoration www.zodiacrestoration.com jseter@zodiacrestoration.com (888) 982-6738 Service Area: Nationwide Specialty restoration services for electronics, electro-mechanical equipment, and machinery that have been exposed to smoke, water, or other contaminants. Zodiac also provides data recovery services, document drying and cleaning, dehumidification, corrosion control, inventory analysis services, and storage for evidence and valuable artifacts. Zodiac will facilitate re-calibration and re-certification as needed.

National Restorations, LLC www.nationalrestore.com info@nationalrestore.com (877) 884-9446 Service Area: Nationwide

Spring 2013 | Claims Journal 31

IDEA EXCHANGE | Property Restoration & Disaster Recovery Guide

RestoreCore

Corporate Living Solutions, Inc.

www.restorecore.com (800) 231-1281 Service Areas: Delaware, Maryland, New Jersey, Pennslyvania

www.corporatelivingsolutions.com sales@corporatelivingsolutions.com (804) 264-8350 Service Area: Nationwide

CRS Temporary Housing

Salvage Callan Salvage & Appraisal Company www.callansalvage.com rcallansr@callansalvage.com (901) 867-3300 Service Area: Nationwide

AirSpec, Inc.

www.zodiacrestoration.com jseter@zodiacrestoration.com (888) 982-6738 Service Area: Nationwide Specialty restoration services for electronics, electro-mechanical equipment, and machinery that have been exposed to smoke, water, or other contaminants. Zodiac also provides data recovery services, document drying and cleaning, dehumidification, corrosion control, inventory analysis services, and storage for evidence and valuable artifacts. Zodiac will facilitate re-calibration and re-certification as needed.

www.airspeciaq.com info@airspeciaq.com (321) 251-6656 Service Area: Nationwide

Mold Removal

ServiceMaster Restore

CRC: Disaster Response www.callcrc.com chad@callcrc.com (888) 501-7824 Service Area: Southeast CRC is the nation’s 4th largest turnkey restoration firm. CRC was started in 1969 and has been ranked #1 three years in a row by several national publications. CRC is also an approved vendor for 92 insurance companies. All work completed in-house.

Custom Restoration, Inc. www.customrestore.com info@customrestore.com (707) 428-1232 Service Area: California

DryMaster Restoration www.drymaster.us (323) 522-6691 Service Area: California

Elite Consulting Services www.elitesvcs.com akeen@elitesvcs.com (317) 769-7999 Service Area: Nationwide 32 Claims Journal | Spring 2013

Furnished Quarters www.furnishedquarters.com maureen.caracci@furnishedquarters.com (212) 367-9400 Service Area: Nationwide

Homelink Corporation

Storm Zodiac Equipment Restoration

www.crstemphousing.com smoore@crstemphousing.com (800) 968-0848 Service Area: Nationwide

Reynolds Restoration Services www.reynoldsrestoration.com (888) 277-8280 Service Area: Pennsylvania

www.homelinkcorp.com claims@homelinkcorp.com (866) 731-9700 Service Area: Nationwide

Housing Headquarters www.housingheadquarters.com info@housingheadquarters.com (866) 918-7356 Service Area: Nationwide

Key Housing Connections, Inc. www.keyhousing.com info@keyhousing.com (800) 989-0410 Service Area: California

National Insurance Housing www.servicemasterrestore.com (800) 737-7663 Service Area: Nationwide Service Master Restore is the new face of a 60-year heritage of providing comprehensive disaster restoration services to residences and commercial businesses nationwide.

Temporary Housing Service Bridgeway Temporary Housing Inc. www.bridgewayhousing.com webmaster@bridgewayhousing.com (866) 387-8586 Service Area: Nationwide Bridgeway Temporary Housing provides the insurance industry and corporation a convenient and cost effective way to service their policyholder’s and employee’s housing needs. Since 2005, Bridgeway has placed thousands of contractors, CAT teams, and policyholders, nationwide, in response to the largest natural and man-made disasters in history.

www.nationalinsurancehousing.com wecare@nationalinsurancehousing.com (866) 846-9370 Service Area: Nationwide

Temporary Accomodations www.temporaryaccommodations.net info@ temporaryaccommodations.net (800) 548-5196 Service Area: Nationwide

THD - Temporary Housing www.temporaryhousingdirectory.com request@thdmail.net (800) 817-3220 Service Area: Nationwide

VIP Insurance Housing Options, Inc. www.vip-insurancehousing.com relocation@vip-insurancehousing.com (888) 468-0419 Service Area: Nationwide

Water Damage AAA Flood Drying www.aaaflooddrying.com aaaflood@comcast.net (978) 392-1895 Service Area: Massachusetts, New Hampshire

Able Water Damage Restoration (512) 671-8800 Service Area: Texas

A Q Environmental www.hazwaste.com rz@earthlink.net (800) 606-8077 Service Area: California, Nevada

ServiceMaster Restore

Zodiac Equipment Restoration

www.servicemasterrestore.com (800) 737-7663 Service Area: Nationwide ServiceMaster Restore is the new face of a 60-year heritage of providing comprehensive disaster restoration services to residences and commercial businesses nationwide. Urban Valet Dry Cleaners www.myurbanvalet.com jackie@myurbanvalet.com 716.885.4351 Service Areas: New York, Pennslyvania

Advertisers Index CRC: Disaster Response www.callcrc.com chad@callcrc.com (888) 501-7824 Service Area: Southeast CRC is the nationâ€™s 4th largest turnkey restoration firm. CRC was started in 1969 and has been ranked #1 three years in a row by several national publications. CRC is also an approved vendor for 92 insurance companies. All work completed in-house.

REE-Construction

A.M. Best www.ambest.com www.buildfax.com

City of Hope www.cityofhope.org

ACORD

Crawford Contractor Connection www.contractorconnection.com

Donan Engineering www.donan.com

Donan Engineering

www.the-restorers.com admin@the-restorers.com (855) 733-9111 Service Area: Idaho

www.donan.com

The New Crystal Restoration Enterprises, Inc.

www.donan.com

www.crystalrestoration.com rosemary@crystalrestoration.com (914) 937-0500 Service Area: Connecticut, New Jersey, New York

BuildFax

Donan Engineering www.donan.com

Donan Engineering 17

Donan Engineering www.donan.com

EagleView www.eagleview.com

Engle, Martin, & Associates, Inc. www.englemartin.com

Haag Engineering Company www.haagengineering.com

IICF www.iicf.org

ServiceMaster Clean www.800respond.com

U.S. Forensic www.usforensic.com

Vale Training Solutions www.valetrainingsolutions.com

Spring 2013 | Claims Journal 33

IDEA EXCHANGE | FINAL OFFER

Are Insurers Winning or Losing the Fraud Game?

ave you heard or read lately that the property/casualty insurance industry loses $30 billion each year to insurance fraud? Antifraud agencies, such as Pennsylvania’s Insurance Fraud Prevention Authority (IFPA), often cite that number when responding to media inquiries. It makes for a great headline, but it is an aged and two-edged sword. One side suggests that fraud’s impact on P/C insurers has not been lessened by fraud-fighting efforts over the span of a considerable number of years, and the other raises the question of why more recent research has not been done. As states crack down on insurance fraud, we need P/C insurers’ support in reporting questionable claims to ISO’s AllClaims database and doing new research of those questionable claims. This helps us to know whether our efforts are helping to stop fraud and maintains the affordability of By Ralph Burnham insurance for state residents. The headline grabbing $30 billion number came from 1992 research done by the Battelle Seattle Research Center for the Insurance Information Institute, according to a recent blog posting by National Insurance Crime Bureau’s Public Affairs Director Frank Scafidi. Researchers estimated that fraud accounted for 10 percent of P/C insurers’ incurred losses and loss adjustment expenses. Incurred losses and loss adjustment expenses are variables that flow from factors other than fraud. New and more current research is needed to determine how much fraud exists in P/C insurance today, to gauge the progress of fraud fighting efforts. Is Fraud Declining? Interestingly, while current research of consumers’ attitudes and beliefs regarding insurance and insurance fraud tells us that fraud should be declining, the reporting of suspected insurance fraud in Pennsylvania Is the P/C industry has greatly increased. The Insurance winning or losing the Research Council’s 2013 war on insurance Edition of “Insurance Fraud: A Public View” fraud? reports a countrywide 9 percent decrease in consumers’ acceptance of fraud from 2002 through 2012. Internet polling of 2,005 adults showed that acceptance of claim fraud, via the “padding” of claims, decreased from 2002’s 33 percent of respondents who found claim padding acceptable to 2012’s 24 percent of respondents. That decline tracks with IFPA consumer research, which

34 Claims Journal | Spring 2013

in 2012 found a 4 percent drop since 2008 in likely fraud offenders. Survey respondents who were opposed to personally committing application or claim fraud rose from 69 percent in 2008 to 73 percent in 2012. Yet, insurers’ fraud reporting in Pennsylvania for 2012 saw 2,302 referrals of suspected fraud sent to law enforcement, a level that was more than double that seen in any year prior to 2008. ISO’s AllClaims database system has also seen P/C insurers’ reporting of questionable claims increase, in Pennsylvania and other states, but those questionable claim numbers appear substantially less than would be expected if 10 percent of the total claims reported to ISO contained some element of fraud. Has fraud increased in the P/C insurance industry or are P/C insurers just doing a better job of fraud reporting? Is the financial impact of today’s questionable claims more or less than that of past fraudulent claim estimations? Ensuring that all questionable claims are reported to ISO’s AllClaims database system and commissioning new research of claims data is, indeed, needed, to determine whether we’re winning or losing the war on insurance fraud. CJ Burnham is executive director of the Pennsylvania Insurance Fraud Prevention Authority, a public agency created in 1995 that works independent of the executive, legislative and judicial branches of Pennsylvania government. The IFPA relies entirely upon funds entrusted to Pennsylvania by P/C, life and health insurers to carry out statutory mandates to fund criminal prosecution and public fraud awareness education programs. Website: www.HelpStopFraud.org.

“My daddy makes sure new baby dolls get to the toy store.” Hannah Age 6

Daughter of

Alan Clark, General Adjuster Cargo/Inland Marine

As a 13-year Engle Martin veteran, Alan Clark does more than ensure cargo such as baby dolls get to their final destination. Alan manages claims for a variety of loyal clients and industries as part of the Specialty Marine & Transportation (SM&T) division. Engle Martin’s SM&T division is a national provider of inland marine claims including heavy equipment, commercial auto, motor truck cargo, bus, livery, and special riders ranging from fine arts to wind coverage. For more information about Engle Martin services, please call 800.818.5619 or email us at marketing@englemartin.com.

People You Know. Service You Trust.

Engle Martin & Associates, Inc. is a leading national independent loss adjusting and claims management provider. Privately held and owner operated, Engle Martin is committed to meeting the ever-changing demands of the insurance industry and to delivering consistent and quality claims service. The firm provides a comprehensive line of service offerings including commercial property, casualty, inland marine/cargo, heavy equipment and large loss adjusting, as well as TPA/claims management and subrogation services.

www.englemartin.com www.englemartin.com

800.818.5619 800.818.5619

introducing a new face to an old favorite

ServiceMaster Restore® is the new face of a 60-year heritage of providing comprehensive disaster restoration services to residences and commercial businesses nationwide. The ServiceMaster Restore global network provides a world-class reputation for service, quality, professionalism, and customer satisfaction. If you experience a residential or commercial loss – no matter the size – the professionals from ServiceMaster Restore are ready to provide rapid response 24/7/365, giving you the power to get your home or business back to normal as quickly as possible.

800-737-7663 800RESPOND.com

Insurance Journal

Published on Apr 15, 2013

Claims Journal Magazine - Spring 2013

Published on Apr 15, 2013

Claims Journal Magazine - Spring 2013

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