Applying the 'but for' test to wide-area damage (part 1)

For adjusters working in claims stemming from a wide-area damage event, here are the questions that need to be asked early in the fact-finding stage.

The test asks “but for “X” would “Y” have occurred and can be applied for claims ranging from business interruption to property damage losses. (Credit: Carlos Herrera/Bloomberg)

Editor’s Note: As we kick off our series on wide area damage, it is important to note that the discussion upon which this series is based took place prior to the FCA test case ruling in the U.K. that challenged the Orient Express Hotels v Generali judgment on concurrent causation. With that in mind, viewpoints post-FCA ruling are noted as such. As the appeals process in the FCA test case unfolds, this perspective may prove useful, as will the information presented about the “but for” test from the perspective of measuring indemnifiable business interruption loss.

The “but for” test is a commonly used paradigm to determine the legal or proximate cause of an injury or loss. In cases of wide-area damage caused by hurricanes and other natural disasters, the ‘but for’ test often comes into play as there are often many factors at hand when an insured suffers a loss under these circumstances.

The test goes something like this: But for “X” (the hurricane, the loss of power, the decline in tourism, etc.) would “Y” (property damage, food spoilage, decline in revenue, etc.) have occurred? When determining business interruption and property damage losses in the wake of a hurricane and wide-area damage, the ‘but for’ test can become quite complex.

To illustrate just how complex it can get, Lowers Forensics International’s 2020 CAT Response Insurance Industry Town Hall sessions tackled the issue of wide-area damage and the ‘but for’ test using the fictitious example of a hurricane on Silly Island.

The scenario

This extreme example is only a little bit exaggerated. As it turns out, the world we’re encountering today has provided scenarios not too far off this one in which insurers, adjusters, and forensic accountants are left to scratch their heads.

The story of the hotels on Silly Island highlights the response of an all-risk property policy to business interruption (BI) losses sustained in the circumstances of wide-area damage. It is set against the backdrop of a number of insured events resulting in physical damage and BI losses, as well as the occurrence of BI losses insured under several non-damage BI extensions, all subject to standard T&Cs with the BI section to include, amongst other things, a “business trends and special circumstances” clause.

Here, we highlight the roles of the adjuster in handling wide-area damages, the ‘but for’ test, and questions of causation. Subsequent parts in this series will review the roles played by forensic accountants and attorneys.

The team

For our fictitious example, Adjusteck was retained as the adjuster and Lowers Forensics International as the forensic accountant to investigate a reported loss and claim from the insured that has reported hurricane damage to two hotels on Silly Island.

The adjuster and accountant traveled with the insurance slip, which is an unusual event, and they also had a copy of the summary judgment of Orient Express v Generali, a theme that will play into the scenario at hand.

The slip identifies the wording as an “all risks property damage cover of $5 million with the trigger being an insured peril and a consequential loss extension under Section 2 triggered by damage as insured. It also has the benefit of business interruption extensions of up to $1 million each, and a three month indemnity period for each loss of attraction, denial of access, infectious disease, unspecified suppliers and actions of civil authorities.

These details, along with the situation facing the island, present all sorts of different events, different insurance perils, different limits, and different questions of course action that our panelists unwound during the town hall session.

The adjuster’s role: What, where, when, how and why?

Here’s what David Bosely, managing director of Adjusteck, had to say about the role of the adjuster in a situation like what we’ve presented with Silly Island:

Bearing in mind that we have the opportunity before we get on the plane to go to Silly Island, to watch the news and check out the media, we have a first impression that a lot is going on. As a first position for us, notwithstanding the importance later of the quantum and the measurement of the things that we need to address. We need to start with the first position of what are the facts, how we go about getting those facts, and how also we validate those facts.

When seeking to identify this data, there are several ways of approaching it. Everybody is wired differently, and we all approach things the way we do, triggered by certain things. But typically, we’re all trained as adjusters to ask the what, where, when, and the how and why.

So using that concept, old fashioned common sense and the information we gleaned from going on to a Wiki or wherever we may approach it these days, it can or cannot be excused from not looking online to see what we can find out about the businesses or business that we’re dealing with.

We then proceed with asking our questions, and those questions fundamentally must get to the core of the root cause of the loss, which is the basis on which the insured has presented their notice of loss and potentially a claim estimate.

Secondly, once we have gone about looking at the information in front of us and then validating it as best as we can locally and through other means, we also have the advantage these days of relying upon technology. At Adjusteck, for example, we’ve invested in piloted drones that operate within a 60-mile radius and geospatial glasses, which allow the person wearing them to capture and record what we see and say through a lens and microphone.

The glasses have the capability to stream live information data recordings back to the stakeholders. This information is relevant when we get into the issues of what was and what wasn’t damaged and what did or did not cause the loss.

So from the perspective of the policy, which is triggered property wise by damage and business interruption by damage, we need to separate those two aspects and make sure that we cover both sides of that to put our lawyer for our insurer client into the best possible place to evaluate how the coverage applies to the loss and claim that is put in front of them.

Leading into that, we can obviously use drones to do a 3D measuring and create a 3D profile of the buildings that can be used to take measurements from it. Also, from the standpoint of the business impact which is being claimed, we want to assist our forensic accountant team member by seeking what we can get information-wise to create an impression of what is happening to the business, as well as for the reported hurricane and potentially for any other events that are proceeding the incident date.

So, what I’m addressing here in an abstract way is the thing that we need to consider: How to identify and develop the facts to support the finds by validating information through any means including documentation and statements from other people.

We then take that information to analyze it. We then stress test that analysis, and we will give a report to those that need to see it to take it to the next stage.

Part two of the series will review the roles played by forensic accountants and attorneys.

Warren Marc Johnson is president of Lowers Forensics International. He has more than 30 years of forensic accounting experience and has handled damage valuations, insurance claims analyses, and litigation support throughout the United States and abroad.

Opinions expressed here are the author’s own.

Related:

Recommended Stories