Natural disaster – drought: why the nature of the determining cause is crucial for loss adjustment

Omnichannel and adaptive drought risk management.

These issues have been talked about in the media so insured parties are increasingly aware of them – and increasingly concerned. However, they lack the information required to introduce mitigating measures (installation of geomembranes or contour terraces to reduce the effects of evapotranspiration from soils, for example).

New players offering remedial solutions, geotechnical and technical studies or loss adjustment services are emerging. Meanwhile, the long-standing operators continue to develop and reinforce their resources and expertise while improving the performance of their systems.

The same is true of loss adjusters. They draw on their experience to adapt the services they offer to manage cases of drought and are introducing “augmented” responses.  While each firm of loss assessors has their own response, the most effective are based on solutions that combine a digital response, self-care, or predictive algorithmic tools that complete the specialist assessors’ work, on the ground or remotely.

The Stelliant group has a special drought unit made up of 120 experts trained in this area. This unit takes care of the client, handling their case from start to end. During a short initial discussion, the loss adjuster’s role is explained, then the case is fed into an algorithmic tool known as “Predict+” which identifies “Case 1” examples with 97% reliability. Depending on the nature of the case, it will then be processed via the most suitable channel – either video conference or on site.

This enables us to handle peaks in activity when natural disaster declarations are published in France’s Official Journal (JO). Deadlines can thus be met and, depending on its nature and specific requirements, each case benefits from the right technical and instructive expertise. Stelliant also offers a range of related modular and personalised services covering claims management, soil tests and in-kind repair via its specialist subsidiaries or partners.

Emotional aspects must be taken into consideration

Aside from the processing method, drought cases are marked by two particularities:

• First and foremost, we can assimilate these claims to asset losses because they often concern family property, making up a significant share of the assets owned. If the property is still encumbered by a mortgage, this recurring expense quite understandably renders the associated damage and disruption even more critical.  This first point means that the loss adjuster needs to play a strong educational role and remain extremely professional.
• Secondly, determining the cause of damage is a highly technical affair, subject to a complex and comprehensive process.

It must be far-reaching: analytical, contextual, looking at the construction methods applied to the property in question, its environment, the nature of the load-bearing soils, and at any modifications made exogenously and endogenously to them. However, it also implies a study of the environment and of the run-off of water from the dominant estate, leaks, the presence of any root systems in the foundation pressure bulb, and compliance with the various – and numerous – unified codes of practice (DTU) where their non-compliance may be invoked in the appearance of the damage. This list is, of course, far from exhaustive.

The complexity in determining a cause results in a binary conclusion where the drought may or may not be determinant in the differential soil settlement.

The damage must obviously coincide with the period covered by a natural disaster declaration but that alone does not suffice. Otherwise, the multi-risk property insurer would serve as a kind of “Drought structural damage” insurer after expiry of the decennial insurance and ad vitam, which is evidently not their role.

Yet we all have a cognitive tendency ^[3] to believe that this coincidence in time is a sign, or indeed proof, of a causal link.

Investigating the operative – causal – event of drought is therefore entirely justified and highly significant in the loss adjuster’s process.

The causes – or the chain of causes – that are revealed during these episodes but that turn out not to be determinant within the meaning of the drought approach mentioned above, will lead to classification as Case 1 (non-consecutive) with the ensuing consequences: damage repair will not be covered by the insurer. Hence, the loss adjuster must remain highly methodical and thorough in their analysis and investigations, never losing sight of the determining aspect of the cause of the damage.

Put more simply, at the end of their investigations, the loss adjuster will determine either:

• the determinant nature of the drought, even where external factors have been revealed but which are not exoneratory in the occurrence of the damage. In this case, they will lead a study to assess the cost of the damage.
• a situation where certain damage was caused by the drought, but other damage not. Where the drought has been identified as the cause, the damage will be covered, but not the rest.
• the non-determinant nature of the drought. The drought “reveals” the damage but is not the cause of it. This can potentially be the case, even when the soil is sensitive.

When these conclusions result in Case 1 classification, they may surprise the insured party acting in good faith. Where there is a chronological link between the appearance of damage, as observed by the insured party, and the period covered by a drought natural disaster declaration, the loss adjuster needs to carefully formulate their explanations if the insured party is to comprehend and accept them, or indeed to consent to them.

When the conclusion does not acknowledge drought as the determinant factor, the insured party’s good faith is reinforced by the cognitive confirmation bias that we all experience and that, in this case, results from the natural disaster declaration published in the JO^[2]. This bias which, in their view “has legal force” even before the loss adjuster’s intervention, can result in severe disappointment. It is easy enough to understand the insured party’s bafflement and frustration.

The loss adjuster must show empathy and try to educate the insured party when explaining things, particularly where their conclusions are unfavourable.

It is worth remembering here that between 50 and 60-plus percent of cases can be closed with no further action, a proportion that varies depending on year, the areas in question and the number of previous natural disaster declarations within a recent time frame.

All the loss adjuster’s wisdom and educational skills, indeed their added value, lies in their ability to clarify the causal relationship between the appearance of the damage and the identified cause(s), in a comprehensible manner. The exogenous factors will be demonstrated where necessary or, failing that, the lack of characteristic markers indicating the causal nature of the drought will be explained.

These findings come in the context of the JO publication of a new natural disaster declaration on 7 May for the 2020 drought, but before the announced (and much awaited) reform of the natural disaster compensation plan.

A changing regulatory environment with potential impact on the burden of claims borne by insurers.

Hereafter, a reminder of a few key points in the draft law currently going to-and-fro between Parliament, which voted for it on its first reading, and the Senate:

• Putting an end to the opacity surrounding the natural disaster recognition process, decried by local elected representatives and victims for several years now. The procedural and payout deadlines have also been revised and support for victims secured.
• Improving the transparency of the decision-making process for mayors and victims. The ministerial decision in response to a request for State recognition of a natural disaster must be justified and shall mention the appeal procedures and deadlines and how and when the loss adjuster’s reports contributing to the decision are communicated.
• Appointing of a “natural disaster contact” in each prefecture to inform and assist municipalities with their applications via the existing aid and compensation schemes after a natural disaster.
• The deadlines for submitting a claim have been revised:
  • The time frame within which a municipality may submit a request for recognition of a natural disaster has been extended from 18 to 24 months after the event.
  • The insurer has a maximum period of one month from receipt of the claim – or the publication date of the natural disaster declaration – within which to inform the insured party of the implementation of the guarantees and the start, where applicable, of the loss adjustment process.
  • The insurer also benefits from a period of one month, from receipt of the estimate or loss adjuster’s report, within which to propose compensation or repair in kind. They will pay out compensation to the insured party or commission a company to carry out the necessary work within the same time frame. Beyond this one-month deadline, the compensation will bear interest at the legal rate.
• Claims are better compensated. Emergency rehousing costs are included in compensation. The adjustment of the insurance excess applied by insurers, in line with a natural risk prevention plan (PPRN) in the municipalities, has been abolished. There are special measures concerning the drought risk within the context of global warming. Insurers need to provide for adequate compensation when damage “related to differential ground movements following a drought” threaten the building’s solidity.
• Within six months of publication of the law, the government shall submit a report to Parliament on ways of reinforcing existing constructions with a view to preventing damage caused by the shrink and swell of clays and on the possibilities for reform of the insurance excess scheme specific to the drought risk.

While it is premature to try and measure the impact on the burden of claims borne by insurers, the stated intention of requiring “adequate compensation” (a term that appears ambiguous enough to inspire different interpretations) is likely to lay obligations on insurers that go beyond repair with a shift towards the prevention of future episodes of drought. What about the insurance principle of hazard, when it applies? This is clearly a slippery slope.

By these standards, what becomes of the liability of certain construction firms or the promoters who, due to trade-offs when balancing costs, do not always consider the drought risk to protect themselves in the event of damage and, as such, rely on the insurer to bear the cost in the event of damage?

At the same time, wouldn’t it also be wise to include obligations to this effect in the urban planning rules for building land with sensitive soils, even if the surcharge currently exceeds what is permitted by law?

It is too soon to assess the effects of this reform: we need to wait until the final version of the law has been adopted.

Nonetheless, the causal factor will remain the element that determines whether or not damage repair is covered by the insurer. Unless that changes in the final text!

The complexity of identifying the determinant character of a drought therefore remains and forms the very essence of the loss adjuster profession. It forces the loss adjuster to take account of the implications and, when weighing them to determine whether the damage will be covered by an insurer or not, they need to be particularly objective, discerning and educational in their explanations.

Didier Richert

Risk Director for Individuals

[1]  CCR data: Caisse Centrale de Réassurance, a public sector reinsurer

[2] JO: Journal Officiel – Official Journal of the French Republic

[3]  G Bronner, Apocalype cognitive, PUF; or O Syboni