Alyssa Lane
Insurance recoveries refer to the insured's right to pursue a claim against a wrongdoer in the event of property damage or other losses. The process involves accounting for the property damage and any related insurance recoveries, which can be complex due to the timing and amount of potential recoveries. Insurance recoveries include proceeds from insurance policies or other sources that cover losses or replace damaged assets, but exclude recoveries from reinsurance contracts. The recovery of a loss is generally probable if there is a legally enforceable contract stipulating the terms of insurance coverage. The role of a surveyor involves investigating, managing, quantifying, and validating losses, while third-party administrators (TPA) and in-house claims processors settle insurance claims.
| Characteristics | Values |
|---|---|
| Definition | Insurance recoveries refer to the insured's right to pursue a claim against a wrongdoer and receive compensation for property damage or other losses. |
| Accounting | Accounting for insurance recoveries can be complex, especially when the recovery occurs in a different fiscal period than the loss. The recovery should be evaluated and accounted for separately from the loss, and may involve gain contingencies. |
| Timing | Insurance recoveries may take time, and the timing can vary depending on the specific circumstances and the entity's obligations. |
| Legal Entitlement | Insurance recoveries entitle the policyholder to all proceeds, incomes, and results from insurance claims, settlements, and policies, excluding reinsurance contracts. |
| Funds Recovery | Insurance recoveries involve funds recovered by the insurance trust or litigation, including cash from settlement agreements, insurance actions, and proceeds used to mitigate losses or replace assets. |
| Exclusions | Insurance recoveries do not include defence cost recoveries, amounts payable under certain insurance policies, or recoveries by the insurer from reinsurance contracts. |
| Role of Surveyors | Surveyors and loss assessors play a key role in investigating, managing, and quantifying losses, adhering to codes of conduct and making recommendations for repairs or salvage. |
| Claims Settlement | Insurance claims can be settled through third-party administrators (TPA) or the insurer's in-house claims processing department. |
| Policyholder Responsibilities | Policyholders must promptly notify the insurer, involve emergency services, prevent further damage, and provide written proof and details of the loss within a specified timeframe. |
| Insolvent Companies | In cases of insolvent insurance companies, significant recoveries may still be received through schemes of arrangement, with FSCS participation to protect policyholders. |
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What You'll Learn
Property damage
In the case of property damage, companies should carefully consider non-monetary asset conversion and related insurance accounting. Organizations should not automatically record the property's full book value as a loss or an amount determined by an insurance adjuster. The loss should take into account salvage or resale value and follow the guidance in ASC 360, Property, Plant, and Equipment, for computing impairment losses. A gain or loss should be recognized when a non-monetary asset is involuntarily converted to a monetary asset, even if the entity reinvests or is obligated to reinvest the monetary assets to replace the non-monetary assets.
Insurance proceeds refer to the cash payment received by an insured party from its insurer in response to a claim. The amount received is usually less than the loss suffered, as the insurer will typically require the insured party to bear a portion of the risk. When a business suffers a loss covered by an insurance policy, it recognizes a gain in the amount of the insurance proceeds received. The most reasonable approach is to wait until the proceeds have been received by the company before recording the gain. Alternatively, the gain can be recorded when the payment is probable, and the amount can be determined, but this is a form of accrued revenue and is discouraged unless there is a high degree of certainty regarding the payment.
When it comes to property damage and insurance recoveries, there are a few key considerations. Firstly, the timing of the loss and the insurance recovery may not always align. For example, a loss may be sustained in one fiscal period, but the related insurance recovery may not be received until the next fiscal period. In such cases, a potential insurance recovery should be evaluated and accounted for separately from the related loss and should not affect the recorded amount of the loss. An asset relating to an insurance recovery should only be recognized when the realization of the claim is deemed probable and only to the extent of the related loss recognized. Secondly, the recovery amount may be subject to negotiation between the insured and the insurance company. Finally, the accounting treatment of insurance recoveries can be complex, especially in the case of business interruption insurance, as the loss of expected revenue may not be deemed a loss in the financial statements.
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Litigation and settlement
Firms such as Covington & Burling LLP have a long history of handling insurance recovery litigation and arbitration worldwide. They have a team of over 100 coverage lawyers, including more than 20 partners, operating from six offices in the United States and London. Covington & Burling LLP has a successful track record of defeating insurers in courts, arbitration tribunals, and negotiations. Their expertise has resulted in successful settlements for their clients without the need for court or arbitration.
McGuireWoods is another firm with extensive experience in insurance recovery. They represent corporate policyholders across various industries, including healthcare, energy, financial services, and manufacturing. McGuireWoods aims to maximize recoveries while resolving disputes out of court to maintain their clients' relationships with insurance companies. Their team has significant experience in international arbitrations and litigation involving policies under both English and US law.
Foley Hoag LLP is a law firm based in Boston, Massachusetts, that provides legal counsel and litigation for insurance recovery law. Their attorneys have extensive experience in asbestos and pollution insurance coverage. They are skilled in using summary judgment procedures to win coverage or set up favourable settlements. Additionally, Foley Hoag LLP has successfully represented policyholders in connection with "first-party" losses under various policies.
Perkins Coie is another firm with a strong presence in insurance recovery law. They have experience in litigating claims under kidnap and ransom policies, which are becoming standard for major multinational corporations. Perkins Coie also assists clients in pursuing coverage for malpractice claims and securing property insurance coverage after disasters. The firm has a successful track record of recovering billions of dollars in insurance proceeds for their clients from major insurers worldwide.
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Timing of recognition
The timing of recognition of an insurance recovery asset depends on assessing the enforceability of the claim being covered by the insurance policy and whether the expected proceeds would result in a recovery of a recognised loss or represent a gain contingency. A gain contingency exists when the insured entity expects to recover a loss not yet recognised in the financial statements or when the insured entity expects to recover an amount in excess of a loss recognised in the financial statements.
A gain is realised when cash or other assets have been received or is contractually due without the expectation of repayment. A single expected insurance recovery may represent both a recovery of a loss and a gain contingency. Each component should be analysed separately for recognition purposes. A gain related to an insurance recovery is not realised until all contingencies relating to the insurance claim have been resolved. For example, a gain could be recorded at the balance sheet date if it is acknowledged that the loss event is covered, information is received prior to the release of the financial statements that will confirm the amount to be received, and collection is probable.
However, if the existence of the claim or the applicability of coverage is being disputed by the insurance company or the amount of the claim has not been finalised, the gain would not be considered realised and should not be recognised until final settlement. The recovery of a loss is generally probable if there is a legally enforceable contract that stipulates the terms of the insurance coverage and the terms are not in dispute. If the claim is the subject of litigation, a rebuttable presumption exists that realisation is not probable. For certain claims, it may be necessary to obtain written confirmation from legal counsel that the claim is actually covered by the insurance policy.
The expected gain portion can be recognised prior to the receipt of cash when it is no longer contingent. This might occur when the insurance company acknowledges that a specified payment is due, at which time the recovery would be represented by a valid receivable, rather than a contingent asset.
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Loss assessment
A loss assessment is the policyholder's share of a fee that may be charged for loss or damage to property owned in common by the members of a condo or homeowners association (HOA). If the association's insurance policy has a deductible that is higher than the cost of the damage, or if the damage exceeds the policy limit, the association may divide the remaining cost among its residents. Loss assessment coverage can help cover this fee, up to the policy's limit.
The amount of coverage provided by loss assessment coverage varies. Some standard condo insurance policies provide up to $1,000 in loss assessment coverage, while additional coverage can be purchased ranging from $10,000 to $100,000, depending on the insurer.
The cost of loss assessment coverage also varies by insurer and the amount of coverage purchased. It typically has a low annual cost, but it is important for policyholders to consider the number of common areas or amenities maintained by their condo association or HOA, as well as the number of people in their building or neighbourhood who would be sharing the cost of a special assessment.
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Insolvency
When an insurance company enters insolvency, multiple stakeholders are involved, each with their own interests and objectives. The primary goal is to protect the interests of policyholders, creditors, and other claimants. Policyholders are typically given priority status within the class of unsecured creditors, and they must file a proof of claim by a specified deadline. To ensure continuity of cover for policyholders, the FSCS (Financial Services Compensation Scheme) works to secure arrangements with another authorised insurer.
In the case of reinsurance, where an insurer writes both direct and reinsurance business, the claims of direct policyholders take precedence over those of reinsurance creditors. Reinsurance recoverables paid under the insolvency clause become assets of the insolvent reinsured's estate. However, if the insured has negotiated a cut-through arrangement, they may be able to seek recovery directly from the reinsurer, bypassing the estate. Guaranty funds or associations are also in place to protect smaller insureds and take over claim payment responsibilities for insolvent insurance companies.
Despite the complex nature of insurance insolvencies, recovery remains possible even in the worst-case scenarios. The Conservation and Liquidation Office (CLO), comprised of insurance professionals, assists the Commissioner in fulfilling their duties as a court-appointed conservator and liquidator. The CLO oversees the operations and liquidation of insurance companies, aiming to conserve assets and protect the interests of all involved parties. The CLO's duties include examining the insurance company's financial records, determining the validity and valuation of claims, and facilitating the distribution of assets to policyholder creditors.
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Frequently asked questions
Insurance recoveries refer to the entitlement to all proceeds, including interest or income, from insurance claims. This includes all amounts payable by an insurer under a settlement agreement and all proceeds of an insurance policy paid in relation to the claim.
Insurance recoveries include any funds recovered by the insurance litigation trust or insurance actions, proceeds of insurance policies, and the right to receive benefits of insurance policies for claims.
Recoveries from reinsurance contracts or agreements providing reinsurance to the insurer are typically excluded from insurance recoveries. Defence cost recoveries are also usually excluded.
Insurance recoveries should be recognised when realisation of the claim is deemed probable and only to the extent of the related loss recognised. This can be more complex when the loss occurs in one fiscal period but the recovery is not received until the next.
A surveyor investigates, manages, quantifies, validates, and deals with losses, adhering to a strict code of conduct. They also make recommendations for repairs or salvage based on their knowledge and experience.
