By : James Bishop

When a loss occurs, most businesses focus on the obvious: repairing damage, replacing assets and getting back to full operation. What often gets overlooked is the cost of proving the loss to the insurer – and these costs can be significant.

That’s where Claims Preparation Costs (CPC) come in.

What are Claims Preparation Costs?

Claims preparation costs are the reasonable expenses incurred by the insured to prepare, present and substantiate an insurance claim. These costs can include, for example, fees for consultants and advisers, such as engineers, quantity surveyors, forensic accountants and legal professionals, as well as other reasonable expenses required to determine, document and support the amount of the claim.

This cover is in addition to the actual material damage or business interruption loss and is often capped at a specific limit stated in the policy.

How is CPC Provided?Ho

Claims preparation costs are usually provided as a policy extension. Broadly, this extension covers costs reasonably incurred by the insured - often with the prior consent of the insurer - to:

• Investigate the loss
• Produce information, calculations and supporting documents
• Certify any particulars or details required by the insurer
• Substantiate the amount of any claim

The limit for this extension can vary significantly, typically from R10 000 up to several million rand, depending on the nature and size of the risk insured.

Why are Claims Preparation Costs Important?

Claims preparation costs are often overlooked under material damage, business interruption or engineering policies, but they can be extremely valuable in the event of a large or complex loss, where professional input is required to correctly quantify or substantiate the claim.

Preparing a major claim can be time-consuming, technically complex and resource-intensive. In such cases, the insured may need to appoint specialists and professionals such as:

• Forensic accounting professionals
• Quantity surveyors
• Engineers and other technical experts

However, the appointment of these professionals helps ensure that the claim is carefully calculated, well-supported and presented in a way that aligns with policy wording.

It is important to note:

• The appointment of specialists and the fees incurred must be reasonable.
• Where high limits for CPC are provided, the insurer’s prior written consent is often required before appointing specialists.
• The insured cannot automatically claim any professional fee; the entitlement depends on how the claims preparation clause is drafted in that particular policy.

Example Policy Wordings

Below are three examples of typical claims preparation costs clauses. The exact wording and limits will vary between insurers and classes of business.

Example A

The Policy is extended to provide indemnity for costs and expenses necessarily and reasonably incurred in producing and certifying any particulars or details required by the Company in connection with an indemnifiable event but limited to:

a. Additional costs incurred by the Insured’s employees.

b. Additional fees incurred by the Insured’s usual auditors.

 c. Costs of materials used in furnishing the Company’s requirements.

d. R2 000 or 10% (ten percent) of the claim up to a maximum of R20 000.

Example B

The insurance by each section of this policy is extended to include costs reasonably incurred by the Insured in producing and certifying any particulars or details required by the Company in terms of General Condition X or to substantiate the amount of any claim, provided that the liability of the Company for such costs in respect of any one claim shall not exceed, in respect of a particular section, R1 000 or 10% of the Sum Insured or Limit of Indemnity on the item affected (whichever is the lesser amount), plus any amount stated in the Schedule to each section against an item for additional claim preparation costs.

Example C

It is hereby agreed that this insurance is extended to cover costs reasonably incurred by the Insured, with the prior consent of the Insurers, in investigating, producing or certifying any particulars or details required by the Insurers or to investigate or substantiate any claim hereunder.

The liability of the Insurers for such costs in respect of any one claim shall not exceed the Limit of Indemnity stated in the Schedule.

Important Limitation

It is important to note that claims preparation costs do not provide cover for expenses incurred in connection with a claim that is ultimately rejected by the insurer.

In other words, claims preparation costs only apply to claims that are admitted by the insurer. If a claim falls outside the scope of cover or is repudiated, the insured generally cannot claim back the professional or internal costs incurred to try to prove that claim.

Key Takeaways for Policyholders

• Don’t overlook CPC: Check whether your current policies include cover for claims preparation costs, and at what limit.
• Match the limit to your risk: For complex operations or high-value assets, a low CPC limit may be inadequate.
• Check consent requirements: Understand when you need the insurer’s prior written consent before appointing professionals.
• Know that it follows an admitted claim: CPC is designed to assist with preparing and quantifying valid, covered claims, not disputes on rejected ones.

If you’re unsure whether your current policies provide adequate cover for claims preparation costs, it may be worthwhile to review your policy wording and speak to your broker or adviser.

Consort Technical Underwriting Managers