Editor's Note: This article has been contributed by RobbyeMohn, a forensic accountant and partner at RGL Forensics.

Call it global warming. Call it climate change. Call it what youwill, but changes in weather patterns are creating catastrophicevents more frequently in locations unaccustomed to facing these kindsof issues.

Adjusters across the country are still dealing with theaftermath of Superstorm Sandy. As summer approaches, many are readyingthemselves for the upcoming wildfire and storm seasons. These and similar events, in unexpected places,often leave business owners uncertain after property damage occursin their wake. Addressing business interruption (BI) lossesfor these first-time claimants can be challenging for adjustersassigned to manage the claims process.

Emerging Challenges in Claims Management

When a BI loss reaches a certain level in value and/orcomplexity, adjusters turn to forensic accountants to clarify thefinancial picture and assist in evaluating a fair outcome for theinsured and their insurance company. Once it is determined theclaim requires this type of expertise, it is optimal to bring in aforensic accountant to join the insurance team as early as possibleto consider the financial implications within the claim. Theforensic accountant will work with both the adjuster and theinsured to assess the claim, evaluate all of the businessfactors that will have an impact on the financial picture, and helpset the direction for the ultimate resolution.

As the severity of weather systems and subsequent damage hasincreased, claims management is frequently further hampered by theloss or destruction of financial and business records needed todocument a claim. Missing financial data is a key indicator that aforensic accountant should be brought in to identify otherprocesses for determining a business' financial information,communicate with the appropriate parties within the insured'sorganization to understand its business and build reliableprojections to evaluatethe loss.

Looking at both the facts and the context of the business thathas been interrupted, forensic accountants will establish adefensible and accurate calculation of the financial impact for theadjuster and the insured.

Easing the Process

As nearly every adjuster knows too well, many business ownersstruggle to understand what insurance coverage they have and need, what is covered whenthey make a claim resulting from a catastrophe, or how to documenta business interruption claim. Following a few simple but strategicsteps can smooth the claims process for all partiesinvolved.

1. Set clear expectations.

What many business owners and operators do not necessarilyrecognize is that filing a business interruption claim under theirpolicy is not as simple as they may have thought. Business ownersinexperienced in the claims process often believe the process to beas simple as, “We were closed, I have insurance, and you need tocompensate me.” Preparing and properly assessing a businessinterruption claim is a much more involved process—one thatadjusters can simplify by helping to educate the insured during aparticularly challenging time.

Documenting a business interruption loss claim is also notmerely an exercise in reviewing the historic financial numbers.It's about getting the full picture and understanding the story ofthe insured and its business. The key is to open a dialogue at thestart of the claims process outlining the procedures and settingexpectations with the insured. They need to understand what theywill be asked to provide, as well as what the timeline for claimresolution will be.

When setting expectations with the insured, be sure theyunderstand the need to provide the “who, what, when, where, how andwhy” of the incident and its financial impact on the insured. Thesequestions will also apply to the business itself. Forensicaccountants will use this information to articulate the storybehind the numbers. Using accepted methodologies coupled withindustry knowledge and understanding of the insured business, anexperienced forensic accountant will calculate a reasonablebusiness interruption loss for each claim.

2. Bring financial experts in early.

Having forensic accountants involved early will help the claimsprocess run more smoothly. Every claim is unique and distinctiveand a standardized approach may not be sufficient. As they assessthe claim, forensic accountants will develop a detaileddocumentation and information request list to provide the insuredwith an understanding of what they need to provide and the level ofdetail. This will prevent fewer surprises (and less frustration)down the road. Having a full game plan from the start whereeveryone on the team knows what to expect is key to a successfulrelationship and prompt resolution.

3. Prepare your insured with the bigpicture.

There are some basic items an insured will likely need toprovide for an effective claim review by a forensic accountant,including:

1. Revenue or sales documents (typically 2 years)
2. Expense documents (typically 2 years)
3. Profit & Loss statements (typically 2 years)
4. Inventory reports (if applicable) (typically 2 years)
5. Business plans, budgets, and/or forecasts
6. Business history, changes and milestone events
7. Business environment and community factors
8. Any other extenuating circumstances that affect the insured'sbusiness

Many of the financial reports may need to be provided indifferent formats and increments, depending on the duration andcomplexity of the business interruption loss being claimed. Forinstance, if the business interruption loss is for two days, thenthe forensic accountants will require some basic financialdocumentation, as well as a breakdown of that information by day orweek. Every situation and claim has unique elements and willrequire a specific list of documents for review. Your selectedforensic accountant will provide you and the insured with such alist once they obtain an understanding of the business and itsclaim.

4. Understand the context.

It is important the insured understand that the mostrecent data and documents may not tell the full story of thebusiness, the incident or its impact on the company. There canoften be distinctive or extenuating circumstances that affect thebusiness interruption loss being claimed.

The assessment of a business interruption loss is affected bythe history, operating procedures, community, and environmentwithin which the company exists. Talking to your insured abouttheir business and understanding the context within which theyoperate will help determine what documentation will be needed for aproper assessment of the loss by your selected forensicaccountant.

Real-World Examples

To see how it all works in the real world, let's look at afew cases—and the lessons gleaned—from Superstorm Sandy,beginning on the next page.

Example #1

A variety store/gift shop in New York files a businessinterruption claim. If this claim is considered as a general retailstore, the assumption would be to look at the financial recordsmentioned above, as well as the previous few months to calculatethe loss. However, the engaged forensic accountants dug deeper andasked additional questions about the nature of the business. Theshop sells/rents Halloween costumes, making the bulk of its annualrevenue during the month of October, specifically leading up to the31st.

Looking at financial records for the previous months, or eventhe previous few weeks, would not accurately quantify the businessinterruption loss when the store was closed from October 26 throughNovember 13. A more complete assessment of the loss might be tolook at financial documents for the past two years during the sametime period with a breakdown for the month of October for eachyear.

Example #2

The land fall of Superstorm Sandy resulted in the destruction ofcoastal amusement parks and piers all along the shores around NewYork and New Jersey. If the owners of shoreline amusement parkswere to make a business interruption claim, then the engagedforensic accountant would consider a variety of unique factors.These amusement parks might earn the majority of their revenue inthe summer months.

A forensic accountant would determine the dates of the normaloperating season for the park and whether they would have been openfor business when the storm occurred. The forensic accountant wouldalso look at how long repairs to the pier and the park would take,consult with the adjuster on the restoration period, and use thisinformation to determine whether any business interruption losswould be incurred. In order to accurately quantify the businessinterruption loss claimed, detailed financial records would need tobe examined on more than just an annual level.

Example #3

Now let's look at a coffee shop in a business district that wasnot devastated by Superstorm Sandy. The coffee shop was closed fora couple of days after the storm made landfall but was able topartially reopen the following week. A success story for the area,the claim appears straightforward. However, as the forensicaccountant asks questions that tell the context of the coffee shop,it turns out that a competitor moved in across the street twomonths before Superstorm Sandy hit. Business may have sufferedrelated to the competitor. Looking at the annual profit & loss(P&L) statements for the last two years would be insufficientto determine the actual current business loss. The forensicaccountant would look closely at statements from the prior fewmonths, weeks and days to establish how much the new coffee shopmight affect the insured's business. Knowing the context of thecoffee shop provides justification for the proper calculation ofthe BI loss.

Example #4

If the insured were a manufacturer with warehouse operations onthe Hudson River, then the BI claim would have a different level ofcomplexity. Power outages, flooding compounded by snow and freezingtemperatures in the days after Superstorm Sandy hit, and gasshortages impeded the owner's ability to get to the warehouse. Oncethe waters subsided, the owner was finally able to get to thewarehouse and survey the damages. However, clean-up was slowed byprolonged power outages and additional inventory was lost.

The insured was delayed in filing a claim. The claim was furtherdelayed by the adjuster's inability to get to the warehouse tosurvey the damage because of these same constraints. Months laterthe insured filed a claim for business interruption loss. Thecomplexity of the claim was increased because the majority of theaccounting and business records of the company were destroyed bythe flooding. The adjuster and insured work together to build areasonable claim. When forensic accountants were brought in toverify the claim, more than five months had passed since the stormhit. The insured is frustrated with the process and does notunderstand why he has not been compensated and the claimsettled.

This is where a complex claim becomes more than a simpleequation. The forensic accountants must build projections from whatlittle documentation was salvaged as well as other availablesources of information in order to provide an accurate losscalculation. Ideally, the accounting records would have been backedup off-site and easily available from previous years, but they werenot in this case. However, retaining forensic accountants earlierto work with the insured and adjustment team on documentation andother issues would have prevented additional issues related to theclaims process and expedited claim resolution.

What We've Learned

There are many lessons to be learned from Superstorm Sandy andother catastrophic natural disasters in recent years. Knowing andunderstanding the context of your insured's business situationplays a vital role in seeing the financial picture behind a claim.As you work with your insureds to educate them throughout theclaims process, make sure to address the financial component sothey are prepared for the request of necessary financialinformation that will be required. Bring in the forensicaccountants early to help set expectations and avoid frustrationsin the process. Discuss the amount of detail and documentation yourinsured will need to provide for a business interruption loss claimwhere forensic accounting is required. Above all, remember thatcommunication (among all parties involved) is the key to making theprocess run smoothly and building a defensible and accuratebusiness interruption loss calculation.