Editor’s Note: This article has been contributed by Robbye Mohn, a forensic accountant and partner at RGL Forensics.
Call it global warming. Call it climate change. Call it what you will, but changes in weather patterns are creating catastrophic events more frequently in locations unaccustomed to facing these kinds of issues.
Adjusters across the country are still dealing with the aftermath of Superstorm Sandy. As summer approaches, many are readying themselves for the upcoming wildfire and storm seasons. These and similar events, in unexpected places, often leave business owners uncertain after property damage occurs in their wake. Addressing business interruption (BI) losses for these first-time claimants can be challenging for adjusters assigned to manage the claims process.
Emerging Challenges in Claims Management
When a BI loss reaches a certain level in value and/or complexity, adjusters turn to forensic accountants to clarify the financial picture and assist in evaluating a fair outcome for the insured and their insurance company. Once it is determined the claim requires this type of expertise, it is optimal to bring in a forensic accountant to join the insurance team as early as possible to consider the financial implications within the claim. The forensic accountant will work with both the adjuster and the insured to assess the claim, evaluate all of the business factors that will have an impact on the financial picture, and help set the direction for the ultimate resolution.
As the severity of weather systems and subsequent damage has increased, claims management is frequently further hampered by the loss or destruction of financial and business records needed to document a claim. Missing financial data is a key indicator that a forensic accountant should be brought in to identify other processes for determining a business’ financial information, communicate with the appropriate parties within the insured’s organization to understand its business and build reliable projections to evaluate the loss.
Looking at both the facts and the context of the business that has been interrupted, forensic accountants will establish a defensible and accurate calculation of the financial impact for the adjuster and the insured.
Easing the Process
As nearly every adjuster knows too well, many business owners struggle to understand what insurance coverage they have and need, what is covered when they make a claim resulting from a catastrophe, or how to document a business interruption claim. Following a few simple but strategic steps can smooth the claims process for all parties involved.
1. Set clear expectations.
What many business owners and operators do not necessarily recognize is that filing a business interruption claim under their policy is not as simple as they may have thought. Business owners inexperienced in the claims process often believe the process to be as simple as, “We were closed, I have insurance, and you need to compensate me.” Preparing and properly assessing a business interruption claim is a much more involved process—one that adjusters can simplify by helping to educate the insured during a particularly challenging time.
Documenting a business interruption loss claim is also not merely an exercise in reviewing the historic financial numbers. It’s about getting the full picture and understanding the story of the insured and its business. The key is to open a dialogue at the start of the claims process outlining the procedures and setting expectations with the insured. They need to understand what they will be asked to provide, as well as what the timeline for claim resolution will be.
When setting expectations with the insured, be sure they understand the need to provide the “who, what, when, where, how and why” of the incident and its financial impact on the insured. These questions will also apply to the business itself. Forensic accountants will use this information to articulate the story behind the numbers. Using accepted methodologies coupled with industry knowledge and understanding of the insured business, an experienced forensic accountant will calculate a reasonable business interruption loss for each claim.
2. Bring financial experts in early.
Having forensic accountants involved early will help the claims process run more smoothly. Every claim is unique and distinctive and a standardized approach may not be sufficient. As they assess the claim, forensic accountants will develop a detailed documentation and information request list to provide the insured with an understanding of what they need to provide and the level of detail. This will prevent fewer surprises (and less frustration) down the road. Having a full game plan from the start where everyone on the team knows what to expect is key to a successful relationship and prompt resolution.
3. Prepare your insured with the big picture.
There are some basic items an insured will likely need to provide for an effective claim review by a forensic accountant, including:
- Revenue or sales documents (typically 2 years)
- Expense documents (typically 2 years)
- Profit & Loss statements (typically 2 years)
- Inventory reports (if applicable) (typically 2 years)
- Business plans, budgets, and/or forecasts
- Business history, changes and milestone events
- Business environment and community factors
- Any other extenuating circumstances that affect the insured’s business
Many of the financial reports may need to be provided in different formats and increments, depending on the duration and complexity of the business interruption loss being claimed. For instance, if the business interruption loss is for two days, then the forensic accountants will require some basic financial documentation, as well as a breakdown of that information by day or week. Every situation and claim has unique elements and will require a specific list of documents for review. Your selected forensic accountant will provide you and the insured with such a list once they obtain an understanding of the business and its claim.
4. Understand the context.
It is important the insured understand that the most recent data and documents may not tell the full story of the business, the incident or its impact on the company. There can often be distinctive or extenuating circumstances that affect the business interruption loss being claimed.
The assessment of a business interruption loss is affected by the history, operating procedures, community, and environment within which the company exists. Talking to your insured about their business and understanding the context within which they operate will help determine what documentation will be needed for a proper assessment of the loss by your selected forensic accountant.
To see how it all works in the real world, let’s look at a few cases—and the lessons gleaned—from Superstorm Sandy, beginning on the next page.
A variety store/gift shop in New York files a business interruption claim. If this claim is considered as a general retail store, the assumption would be to look at the financial records mentioned above, as well as the previous few months to calculate the loss. However, the engaged forensic accountants dug deeper and asked additional questions about the nature of the business. The shop sells/rents Halloween costumes, making the bulk of its annual revenue during the month of October, specifically leading up to the 31st.
Looking at financial records for the previous months, or even the previous few weeks, would not accurately quantify the business interruption loss when the store was closed from October 26 through November 13. A more complete assessment of the loss might be to look at financial documents for the past two years during the same time period with a breakdown for the month of October for each year.
The land fall of Superstorm Sandy resulted in the destruction of coastal amusement parks and piers all along the shores around New York and New Jersey. If the owners of shoreline amusement parks were to make a business interruption claim, then the engaged forensic accountant would consider a variety of unique factors. These amusement parks might earn the majority of their revenue in the summer months.
A forensic accountant would determine the dates of the normal operating season for the park and whether they would have been open for business when the storm occurred. The forensic accountant would also look at how long repairs to the pier and the park would take, consult with the adjuster on the restoration period, and use this information to determine whether any business interruption loss would be incurred. In order to accurately quantify the business interruption loss claimed, detailed financial records would need to be examined on more than just an annual level.
Now let’s look at a coffee shop in a business district that was not devastated by Superstorm Sandy. The coffee shop was closed for a couple of days after the storm made landfall but was able to partially reopen the following week. A success story for the area, the claim appears straightforward. However, as the forensic accountant asks questions that tell the context of the coffee shop, it turns out that a competitor moved in across the street two months before Superstorm Sandy hit. Business may have suffered related to the competitor. Looking at the annual profit & loss (P&L) statements for the last two years would be insufficient to determine the actual current business loss. The forensic accountant would look closely at statements from the prior few months, weeks and days to establish how much the new coffee shop might affect the insured’s business. Knowing the context of the coffee shop provides justification for the proper calculation of the BI loss.
If the insured were a manufacturer with warehouse operations on the Hudson River, then the BI claim would have a different level of complexity. Power outages, flooding compounded by snow and freezing temperatures in the days after Superstorm Sandy hit, and gas shortages impeded the owner’s ability to get to the warehouse. Once the waters subsided, the owner was finally able to get to the warehouse and survey the damages. However, clean-up was slowed by prolonged power outages and additional inventory was lost.
The insured was delayed in filing a claim. The claim was further delayed by the adjuster’s inability to get to the warehouse to survey the damage because of these same constraints. Months later the insured filed a claim for business interruption loss. The complexity of the claim was increased because the majority of the accounting and business records of the company were destroyed by the flooding. The adjuster and insured work together to build a reasonable claim. When forensic accountants were brought in to verify the claim, more than five months had passed since the storm hit. The insured is frustrated with the process and does not understand why he has not been compensated and the claim settled.
This is where a complex claim becomes more than a simple equation. The forensic accountants must build projections from what little documentation was salvaged as well as other available sources of information in order to provide an accurate loss calculation. Ideally, the accounting records would have been backed up off-site and easily available from previous years, but they were not in this case. However, retaining forensic accountants earlier to work with the insured and adjustment team on documentation and other issues would have prevented additional issues related to the claims process and expedited claim resolution.
What We’ve Learned
There are many lessons to be learned from Superstorm Sandy and other catastrophic natural disasters in recent years. Knowing and understanding the context of your insured’s business situation plays a vital role in seeing the financial picture behind a claim. As you work with your insureds to educate them throughout the claims process, make sure to address the financial component so they are prepared for the request of necessary financial information that will be required. Bring in the forensic accountants early to help set expectations and avoid frustrations in the process. Discuss the amount of detail and documentation your insured will need to provide for a business interruption loss claim where forensic accounting is required. Above all, remember that communication (among all parties involved) is the key to making the process run smoothly and building a defensible and accurate business interruption loss calculation.