Filed Under:Claims, Catastrophe & Restoration

A Forensic Accountant’s View of Business Interruption

Catastrophes and Expeditious Claims Evaluation

The Association of Certified Fraud Examiners (ACFE) explains that, “forensic accounting is the use of professional accounting skills in matters involving potential or actual civil litigation.” The word “forensic” is defined by Black’s Law Dictionary as “used in or suitable to courts of law or public debate.”

In the insurance claims world, a forensic accountant is typically engaged by an adjuster, or an attorney, to provide an understanding of an insured’s books and records, and to determine through an analysis of those books and records whether the policyholder has sustained a loss, as defined in the insurance policy.

The insurer’s “team” may include a field adjuster, claims manager, underwriting department, in-house legal staff, and other experts such as engineers, salvors, outside legal resources, and forensic accountants. The policyholder’s “team” may include a public adjuster, in-house accounting department, external CPA/accounting firm, production managers, sales and marketing departments, and in-house legal department. It may also employ outside consultants, including engineers, salvors, outside legal counsel, and forensic accountants.

Many adjusters do not have the time or expertise to both properly and expeditiously evaluate a business interruption (BI) claim, especially in a catastrophic environment. A competent forensic accountant will provide an adjuster, policyholder, or legal counsel with his or her knowledge and experience in matters including (but not limited to): technical aspects of accounting rules and procedures and other related data; and, the ability to translate accounting data to conform to insurance policy coverage language. (Please note, a forensic accountant does not provide coverage interpretation, as this is the responsibility of an adjuster and or legal counsel.)

Once the time element is established, it is then forwarded to the forensic accountant to include in his/her computation. The time element is typically referred to as the Period of Restoration, and may include an Extended Period of Indemnity. ISO coverage form CP00 32 04 02 - Business Income (Without Extra Expense) Cover Form, defines the Period of Restoration as the period of time that: (a) Begins 72 hours after the direct physical loss or damage caused by or resulting from a Covered Cause of Loss at the described premises; and (b) Ends on the earlier of: (1) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or (2) The date when business is resumed at a new permanent location…” The extended period of indemnity is defined as: (1a.) Begins on the date property (except finished stock) is actually repaired rebuilt or replaced and “operations” are resumed; and (1b.) Ended on the earlier of: The date operations could be restored with reasonable speed to the level which would generate the business income amount that would have existed if no direct loss or damage had occurred; or (ii) 30 days after the date determined in (1a.) above. Even with this succinct measurement period language, the time element component of the claim calculation is one of the most disputed areas of business interruption claims.

BI Claim Calculation

Variable/non-continuing expenses include: bad debt, sales discounts, merchant credit card fees, shipping and freight, raw materials, ordinary payroll expense and supplies. An example of an expense that has both a fixed and variable component is a telephone expense, where there is a base/fixed monthly charge with additional charges based on usage.

Once the period of restoration is determined, the sales trend established, and pre- and post-loss costs and expenses analyzed, a business interruption calculation is prepared. In a simple scenario, the difference between the insured’s expected revenue and expenses and its actual revenue earned and expenses incurred during the measurement period, results in the BI loss.

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