Identifying fraud

There often are red flags that help identify potential fraud in business interruption claims. While not all are sure signs of intentional fraud, some factors should be investigated:

Claims history — Has the insured had multiple or suspicious losses in the past?
Does the business or owner(s) have financial issues? Bankruptcy, foreclosure, divorce, etc.
Were there recent policy revisions or limit increases?
Quality of sourced documents — Evidence of being altered or questionable information?
Financial statement review — Do financial statements reconcile to the tax returns?
Does the business have significant uncollected account receivables or a high rate of receivables significantly past due? This could indicate an attempt to overstate pre-loss revenues by posting fictitious sales to account receivables.
Do the company's revenues reconcile to the cash ledgers? If the company is recording significantly more revenues than cash collections, this could signal the presence of fictitious revenues.
Are the expense ratios in line with the industry? A helpful resource to verify the cost of goods sold and expense ratios (variable costs) are BizMiner Industry Financial reports. These reports provide comparisons of over 5000 industry classifications broken out in specific market areas.
Are there other locations from where the business may be operating? Did other locations experience an increase in sales while the loss location was not operational?
Is the business open and operating? A quick internet search may tell us if the business is open and operating. Typically, a business interruption claim is handled virtually as the forensic accountant rarely visits the loss location and relies on the adjusters and business owners for information about potentially resumed sales. It is not uncommon for a business to reopen sooner than the estimated period of restoration, either fully or partially, which may not be conveyed to the forensic accountant. A close eye should be kept on the status of the reopen date as repairs near completion. It is helpful when the field adjuster closely monitors the repair status and communicates to the forensic accountant so additional days are not paid in error.

The business owner's demeanor is also noteworthy. When policyholders are overly aggressive in settling the claim quickly, it may not be because they just want to move on and reopen. It may indicate they don't want too much time spent in the evaluation process as the financials may not hold up to close scrutiny. The business owners may even refuse to provide substantive documentation to support their claim and insist that the demanded amount be paid without quality sources.

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Identifying fraud in business interruption claims

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