GPSolo December 2006
Disaster Advice from an Insurer
Shortly before midnight on September 13, 2000, attorney Larry Lucht received a call that left him numb. It was a police officer from the city of Worthington, Minnesota, informing him that the building that housed his law firm was on fire and he should come downtown to take a look.
Worthington, a farming town of just under 10,000 inhabitants located in the far southwest corner of Minnesota, had been home to the law firm where Lucht and his partners, Joel Wiltrout and Todd Ahlquist, had been in general law practice for 13 years.
After arriving on the scene, Lucht spent the next several hours watching the single-story building burn to the ground as the Worthington Volunteer Fire Department worked to keep the blaze from spreading to the surrounding buildings. Lucht, who owned the building, rented space to his firm and a small family-owned bakery that shared a common wall in the building. It would later be determined that faulty wiring in the bakery started the blaze. For both businesses, it would be a total loss.
“We had a four-drawer fireproof file cabinet, but I knew that all the files we were working on at the time were out in the open in our offices,” recalled Lucht. “The irony is—everything that was in the fireproof cabinet related to old matters that weren’t very important to us anymore.”
Examining the contents of his burned-out law firm gave Lucht a perspective on a scale of damage that he never thought he would see. “Smoke impregnates everything,” he noted. “You could tell which computers were turned on at the time of the fire because they were caked with brownish, black soot that had been sucked inside the boxes by the fans. . . . In an ordinary file cabinet, where the drawers were full, only the center two-thirds of the files were left. Anything near the outer edges was destroyed.”
Lucht saw that “anything on the desks was totally gone,” which, unfortunately, included almost every one of the firm’s open, active files. Actually, the desks were pretty much gone, too—pulverized into a charred heap after the building’s roof fell on them.
Lucht’s worries focused on many things. How would he rebuild the files in his law practice? Would the insurance proceeds be sufficient to cover the cost of replacing the contents of his law firm? Was there sufficient coverage for valuable papers within the files? How would he begin to recover the data on his soot-covered hard drives?
If Lucht wondered how his clients would react to his loss, he didn’t have to wait long to find out. By 6:00 AM the following day, the same police officer called again and asked him to come back to the site—some individuals had been seen milling about amid the ruins of his building. When Lucht returned to the site, he was astonished to find that the people seen sorting through the destroyed contents of his building were his clients.
“They were looking for their files,” said Lucht.
Fortunately, Lucht and his partners had taken precautions against just such a disaster. Above all else, they maintained their commercial property insurance policy on an annual basis.
Are We Insured?
There are several insurance products a lawyer should consider purchasing in order to be well protected from all varieties of law office disasters:
- General liability insurance, to cover personal injury that may be the fault of the firm.
- Professional liability insurance, to cover errors or omissions by the firm’s attorneys while in the practice of law.
- Commercial property coverage (first party), to cover replacement cost of a building the firm owns, equipment, computers, etc.
- Employment practices insurance, including wrongful termination insurance.
- Fidelity bond insurance, to cover employee theft.
- Flood insurance, necessary if the firm is in a flood plain.
Setting limits. In order to have coverage for the replacement cost of the physical contents of your practice, it is important that you already have in place a commercial property insurance policy. The limits you will want to carry depend on many factors, including whether or not you own the building where you practice law. Setting these policy limits is perhaps the most difficult aspect of initiating coverage. It is crucial that you consult a well-qualified agent who can accurately determine your firm’s replacement cost.
Unfortunately, most lawyers are like all other consumers when it comes to understanding what is covered under the insuring agreement they receive when binding coverage. They tend not to read the policy until after they have been affected by a disaster; too frequently, the coverage is insufficient to replace all the contents that have been destroyed.
“Rarely did they have enough coverage for valuable papers,” reports Don Gerten, a chartered property casualty underwriter, referring to the lawyers who have reported claims to him during his 31 years as supervisor for the Commercial Property Unit of St. Paul Companies and St. Paul Travelers. “If they [had] purchased extra for valuable papers coverage, they might have had enough limits to cover the remaining contents of the building.”
“Valuable papers” coverage and “loss of earnings” coverage are often the provisions in a commercial property insuring agreement that create the most fertile battle-grounds for disputes between attorneys making insurance claims and the adjusters who examine them.
Valuable papers. For coverage applying to the replacement of valuable papers, the disputes often arise because of a difference in understanding of how the policy defines “valuable.” In theory, all papers relating to client files are valuable, even those from closed files, but certain papers—such as abstracts and original documents—simply cost more to replace.
“There must be some reason why they had to hold” the document, said Gerten, who acknowledges that some value can be placed on most every file within a firm. He points out that even a document from a closed file that was used by a firm as a form template has replacement value if it was a key part of the firm’s document-producing process.
In his own experience after fire had destroyed his office, Larry Lucht was surprised to find out that coverage for his valuable papers came out of the overall coverage for the contents of his firm. He now insists on excess coverage for valuable papers when shopping for his firm’s commercial property insurance.
Loss of earnings. A claim for a loss in earnings can be much more difficult for a lawyer to prove. Claim adjusters assume that lawyers lose no billable time as a result of the interruption to their business. After all, many lawyers can set up a temporary office and continue working on client matters immediately after the damage has occurred. Also, because most lawyers do not typically receive their business via walk-in traffic, it is difficult for them to claim that they have suffered a decrease in business because of the temporary change in location.
“I’ve been grilled on [loss of earnings claims] a lot in depositions,” said Gerten. “Ninety-nine percent of the time, this is grounds for a dispute.”
For Lucht, making a successful claim for loss of earnings meant working with a good accountant. “We did some calculations based upon our past few years in our building,” he remembers. The insurer balked. The firm then hired its own accountant out of Minneapolis, and “that guy gave us about $10,000 more.”
Gerten agrees, saying, “You need a good accountant. No adjuster would not get an accountant on a business income loss.”
Mixing Client Files with Lots of Water
Patrick Maddock, a principle of the firm Camrud, Maddock, Olson & Larson, thought he had witnessed many heavy winters in a lifetime growing up in North Dakota’s Red River Valley. After counting seven blizzards during the winter of 1996-1997, however, he had seen enough to purchase flood insurance and a portable generator. It would be a difficult spring.
As the snow from the long winter melted, the Red River that separates North Dakota and Minnesota began to rise, and residents in Fargo and Grand Forks, where Maddock’s firm is located, wisely went about protecting their property from the anticipated flood.
For Maddock, the flood and how it would affect his family was mostly a personal concern. His firm was safely located on floors four and five of an old and prestigious bank building in downtown Grand Forks.
At the peak of the flood, however, a fire broke out in downtown Grand Forks. Only after fire trucks were hoisted onto large flatbed trucks could the rescue vehicles make it into the flooded downtown area to put down the blaze that tore through Maddock’s building. It would be two years before Maddock and his partners could return to their downtown location.
“I liked to say at the time that we were ‘now serving clients in four convenient locations,’” said Maddock, referring to the disjointed nature of his law practice in the days subsequent to the fire. For Maddock, a litigator who specializes in insurance defense matters, his life’s focus became an uphill battle to piece together the fragments of his firm, while remaining sufficiently productive to continue paying employees who were dealing with their own personal disasters.
As with Lucht, rebuilding client files became job one for Maddock. Aided by a document service company and the goodwill of just about every attorney who had a matter pending against his firm, Maddock learned first-hand the difficulties of dealing with important papers that are very wet.
“Water is the worst thing that can happen to files. It ruins everything,” said Maddock. “You want to restore the file before it grows mold, or there is nothing you can do.”
The document service company that Maddock’s firm hired to save the files set about on the elaborate task of freezing the client files that had been doused by the fire rescue vehicles, then drying the files in a controlled environment. After that, the severely wrinkled but dry and somewhat readable documents could be copied and replaced with clean document images.
Maddock, like most other lawyers who have experienced a significant loss, was heartened by the overwhelming response from the legal community. Most lawyers involved in litigation with Maddock saw it as their duty to return to him full copies of files that Maddock and his firm were involved with at the time. Many lawyers, without ever having received a request for a copy, walked over to their file cabinets and started reproducing their files for Maddock and his firm.
“God help the lawyer who has to appear in front of a judge and explain why they wouldn’t produce a copy of the file,” said Maddock, “but I know most of them were sincere in trying to help us get back on our feet as quickly as possible.”
The community also tends to help as much as they can in restoring a lawyer’s client files. For weeks after the fire that destroyed Lucht’s firm, individuals would stop by the firm’s temporary location, dropping off small pieces of burnt paper, which had been blown all over town. These people generally didn’t even know if any of these documents were of value, but they wanted to help.
You and Your Insurer
Maddock credits much of the success of his firm’s recovery to his insurance agent and also having hired an accountant to assist him in making his insurance claims. “Every year, our agent would visit us and make recommendations for improving our insurance coverage,” said Maddock. “We didn’t always agree with him, but we trusted he was looking out for us—so by the time the flood hit, we were very well insured.”
Gerten agrees, saying that a good agent is invaluable for recovering from a disaster. “You need to have a good agent who can go to bat for you,” he said. “A good agent will be looking at your coverage every year.” For Gerten, the remedy for making sure you have enough insurance is having a good agent who understands your business and can accurately determine your costs for recovery.
“Make sure the agent is at that first meeting [when the claim is presented],” stresses Gerten. A good agent will not pressure the claims adjuster but will work with the adjuster to understand the nature of the firm’s operations and the value of the loss.
Despite the success of having enough insurance, both Maddock and Lucht report experiencing strained relations with their insurers at the start of their claims.
For Lucht, a mistake that listed his firm as the building owner immediately led to a coverage dispute with his insurance carrier. “It was obvious they were looking at how they could get out of coverage,” he said. “We got off to a wrong start.” Lucht no longer insures with the carrier who provided coverage for his fire damage, stating “I was with the bad hands people.”
“Did disputes ultimately get resolved to my satisfaction? Yes,” reports Lucht, but not until he had to threaten to sue his insurer for the initial denial of coverage and the subsequent dispute over loss of earnings.
Gerten reports that adjusters often have a different mind-set when dealing with lawyers who are making claims. Understandably, insurance adjusters brace themselves and anticipate what their defenses should be if they see any part of the loss differently than the lawyer making the claim.
Gerten recommends developing a good working relationship with the adjuster and resisting the urge to badger the individual who may be required by business standards to investigate each claim fully.
Lessons Learned the Hard Way
Experience is not always the kindest of teachers, but surely it is the best. For both lawyers and claim adjusters, the experience of witnessing losses resulting from a disaster has them in agreement over what lawyers should be doing to make sure their insurance needs will be met if they ever have a claim.
- Have a good agent. The agents who visit your office annually are truly looking out for you when they suggest increasing your insurance coverage. They often will recognize changes in your practice and building contents that could affect whether or not your policy limits are high enough to restore the firm should it suffer a major loss.
- Have a good accountant. Insurers and lawyers agree that only claims that are put together with the aid of a good accountant are resolved to the satisfaction of the person making the claim. This is especially true when trying to establish a claim for loss of earnings.
- Understand your policy. Reading the insuring agreement carefully will help you understand subtleties, such as whether valuable papers coverage carries extra limits. Waiting until the disaster strikes is not the time to determine whether you have coverage for water damage from a backed-up sewer main.
- Set proper limits. There is no rule of thumb to assist you in determining proper limits for commercial property coverage. Insurers will refer you to the first words of advice: Have a good agent and reevaluate coverage yearly.
- Consider employees’ personal effects. There never seems to be enough coverage available to replace all lost personal effects. Be aware of what personal articles your employees may lose if left on-site, including books, and consider increasing the basic coverage limits in this area.
- Consider extra expense coverage. The limits of your commercial property insurance policy may be enough to help you pay the rent at your new location, but you may not have enough in coverage to pay for the moving van that will get you there. Extra expense coverage will be necessary if you will have to pay double rent, as well as all the other costs of getting into your new building.
- Back up data correctly. The cost of restoring data backups that have suffered damage from heat, smoke, and water can be reduced significantly if backups are stored in a proper fireproof location or off-site. For Lucht, the cost of restoring the data off his soot-caked hard drives was about $1,500 per unit.
Todd C. Scott is vice president for member services at Minnesota Lawyers Mutual. He can be reached at firstname.lastname@example.org.