The floods that swamped parts of South West England in 2014 have put extreme weather conditions high on the agenda in the UK. The situation is, of course, nowhere near as devastating as other recent natural disasters – like the tsunamis that in Asia in 2004 and Japan in 2011 – but hundreds of thousands of British victims will make insurance claims, running into millions of pounds.
The volume of people affected, however, can make processing claims individually an arduous task, for both claimants and insurers. Costs can spiral due to the lengthy time it takes to assess claims, confounded by insurance investigations, levels and scope of cover, costs of insurance premiums and arguments over the amount of damages. With hundreds of people homeless, political pressure growing and the threat of substantial losses for insurers, it is no wonder that mediation is increasingly seen as a solution.
Mediation has been actively deployed in the US for many years in relation to natural disasters, where the effects are admittedly more severe. A number of leading ADR providers offer Disaster Claims Mediation Procedures, where insurers and policyholders mediate disputes to avoid lengthy delays in claims settlement. The insurance company usually pays the mediation costs unless a policyholder did not appear, in which case the costs were split.
Such mediations were used after Hurricane Katrina and Rita in 2005, for instance, by the Louisiana Department of Insurance. There were 15,000 claims lodged, with 74 per cent reaching settlement. A more recent example was the New Jersey Department of Banking and Insurance’s programme for disputed claims of $1,000 or more relating to Hurricane Sandy.
John T. Pardun, National Business Development Director at JAMS, recently discussed his experiences of the mediation after the wildfires in San Diego County in 2007 with the Daily Journal. The success rate was impressive; more than 2,000 suits were filed with 98 per cent of them reaching settlement, recovering more than $800 million in the process.
The benefits of mediation in this context are that claims can be paid faster and insurers can clear claims sooner too. With the estimated insurance bill for UK flood damage approaching £1 billion, the mediation model could be well-suited on this side of the Atlantic too.
Charles Gordon from JAMS International, who was recently interviewed on Sky New s and the LBC 97.3 radio station about insurance and flooding, thinks one issue is that the UK is less familiar with natural disasters. “For floods, homeowners are either covered or not and we don't tend to see issues as to whether damage was caused by storm or flood, for example.”
The US model is more sophisticated as it tends to have a larger volume of commercial claims by dint of the fact that many energy and industrial companies are based in risky areas. In the UK, especially in the West Country, heavy industry is less prevalent so claims are likely to be property-related from individuals or from small commercial businesses, such as farms. Even so, mediation may be considered more closely if claims based on extreme weather persist.
Colin Edelman QC, from Devereux Chambers, says the advantage for insurers in the UK context of mediation to assist in disposing of storm and flood claims would be the saving on loss adjuster fees and management time, the avoidance of exposure to legal action or references to the Financial Ombudsman and the improvement to customer relations that a mediated settlement would achieve.
“As long as insurers remain alert to exaggerated claims, they can approach mediation on the basis that a settlement can be reached within the range of potential values for a claim” he adds. “However, insurers would need to be careful that they did not, through their participation in mediations, end up paying materially more in total for the storm and flood claims than they ought to have done as this could affect their ‘bottom line’ results and/or their reinsurance programme, which could in turn impact on their reinsurance renewal costs and their competitiveness in the market.”
Jacqueline Perry QC, a barrister and mediator at 2 Temple Gardens, says that one model that has worked efficiently in many of her multi-party actions is the possibility of creating some sort of bespoke fund, which enters mediation with claimants rather than dealing with claims on an individual basis.
“The fund would have a blanket approach so there would be no arguments over insurance premiums or being underinsured,” she adds. “It is more than likely to be cheaper for insurers to deal with multi-party actions than countless individual claims.”
Such a mediation fund may not be limited to insurers either. The government, perhaps wary of some of the shortcomings of the Environmental Agency over flood defences, may wish to contribute.
Whatever the preference, as extreme weather damage increases so too will related insurance claims. Collective schemes for redress have usually focused on liability classes, such as PPI mis-selling or asbestos poisoning, but there is no reason why mediation for insurance claims would not only help large groups of people affected by a natural event but also the insurance companies.