Effective evaluation of business interruption claims

By definition, the word “forensic” refers to the use of methods of science to provide information. When you combine the terms “forensic” and “expert,” many immediately think of a crime-scene investigator. And while they are not wrong, the term “forensic expert” can be applied to any number of industry experts, ranging from engineers to medical professionals to accountants.

The forensic accountant is the investigator of the financial world; they look at the financial implications of a given situation. In the context of the insurance industry, forensic accountants often are brought in to provide an independent, objective evaluation of a claim. Without advocating for either side, the forensic accountant assesses the facts and context surrounding a loss event in order to provide an analysis and opinion on the quantification of losses incurred. Claims often involve property damage, inventory losses, business interruption losses, and extra expenses.

When a business interruption claim is filed, depending upon the size and complexity of the claim, an adjuster may bring in a forensic accountant to evaluate the financial aspects of the loss. Taking little at face value, and combining accounting principles with economics and statistics, a forensic accountant looks at the business and the loss from multiple angles and perspectives.

CONTEXTUAL UNDERSTANDING

In order to accurately evaluate a loss, a forensic accountant looks at the facts and context of that business and the effects of the loss event. Using many avenues to gather information, he then compiles a full picture of the business, the interruption event, and the losses incurred. He looks at the contextual setting of the financial data and other factors that are—or could be—affecting the business. A forensic accountant often examines documentation and records, interviews the people involved, and looks at business cycles and market conditions in the process of understanding the claim and formulating an opinion.

Understanding the nature of the business and the environment within which that business operates are important pieces in assessing the loss, and it can greatly influence what information and documentation is needed to evaluate the claim. For example, with seasonal businesses, comparing records immediately before and after the loss event may not be sufficient to demonstrate the extent of a business interruption loss. The forensic accountant will look at operating records and financials from the corresponding periods in the previous year rather than just the months preceding the loss event.

SUPPORTING DOCUMENTATION

Typically, there are several basic items that an insured will be asked to provide for an effective claims evaluation by a forensic accountant. In significant losses, depending on the categories involved, the insured should be prepared to provide:

• Monthly sales summaries and detailed cost-of-goods-sold reports.
• Supporting documentation for expenses incurred.
• Profit and loss statements (typically two-to-three years’ worth). 
• Inventory reports.
• Business forecasts or budgets.
• Any other extenuating circumstances that affect the insured’s business.

THE LOSS PERIOD 

The third key to a business interruption loss evaluation relates to matching the loss measurement to the identified period of loss. The interruption period often is dictated by the insurance adjuster, who determines the date that the business should be able to return to normal operations. Oftentimes, the business reopens with partial operations before all aspects of repairs are completed. In these situations, careful consideration must be given to make sure that measured losses align with the specifics of the loss event, the timeline of repairs, and the systematic restoration of operations.

Given that many policyholders are unfamiliar with the claims process, not to mention the terms and conditions of their insurance policy, the loss periods and claimed amounts can be inadvertently misstated. These misstatements typically are not discovered until a thorough review of the claim is performed. The forensic accountant can be a valued adviser for both the adjuster and the insured, providing an assessment of the loss while freeing up the insured to focus on getting the business up and running, which allows for a quicker resolution of the claim. In the end, the goal of the adjuster and the insured are the same: Get back to normal business operations as quickly as possible.

Ultimately, having an independent advisor like a forensic accountant involved in the claims process can help expedite the review and ensure the most accurate evaluation is reached.

As appeared in Claims Management, June 2014 Forensic Guide.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

*Effective December 2018, RGL Forensics joined Baker Tilly US, LLP. This article was published while we were RGL Forensics. The author(s) or team member(s) quoted from RGL are now employees of Baker Tilly.