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Handling Large, Complex Claims

Large insurance claims are almost always complex, time-consuming and in need of a forensic accountant.

They are complex because of the secondary impact from the misfortune setting off the initial claim. Take, for example, a fire at a ski hill operator’s chalet. Calculating the damage or replacement cost is generally understood by the insured. But what if the ski hill closes for two weeks as a result of the fire and the insured claims lost revenues for the entire period?

Such business interruption claims are generally less well understood. The goal is to indemnify the insured to the level he would have achieved, absent damage-related losses. However, the forensic accountant plays the key role in estimating lost revenues and measuring the impact on the insured’s bottom line.

In the case of the ski hill, the operator might calculate loss based on revenues for the same two-week period the previous year. A forensic accountant can help place a realistic dollar value on the estimated loss, checking out factors like weather conditions for the two-week shut down period and factor in saved expenses as a result of not operating. If there was little or no snow when the hill was out of service, revenues would have been less than the previous year’s.

What if a competitor had recently upgraded his resort, adding new hills, faster lifts and a fancier chalet? Wouldn’t some past customers have gone to the competitor, irrespective of the shut down? How many?

Or take a manufacturer who loses a major piece of industrial equipment through an accident. Figuring out how much money is needed to get the operation up and running again is relatively simple compared to determining how much money was lost in the interim.

In manufacturing there are often several product lines involved. Some parts or even products might not be affected by the damage. Some could be replaced from other operations owned by the same manufacturer. But this might result in additional shipping costs. Parts or products might be bought at a premium from other manufacturers to maintain a supply to existing customers.

A forensic accountant should be involved early in the process to help identify valuable documents such as order forms and work-shift schedules that might otherwise be destroyed innocently in the normal course of events. These documents could be vital to substantiate a claim. The forensic accountant can help all concerned understand what evidence is required to substantiate any claim – an up-front analysis that can save everyone time, money and frustration.

The forensic accountant, typically enlisted by an adjuster, meets as soon as possible with the claimant. A preliminary loss calculation is prepared so the insurer can set up the proper reserves. Subsequently, an interim loss statement could be prepared so the claimant can get partial payment to keep the business going before final settlement.

A forensic accountant can also help the insured determine cost implications of different ways of restoring the damaged business. Again with the ski chalet, should the operator pay overtime to restore his chalet in two weeks when it would otherwise take twice as long at considerably less cost?

From the adjuster’s perspective, the insurer will not compensate the owner for expenses which exceed anticipated gross profit.

The rule of thumb is one can only spend a dollar to save a dollar.

To go the overtime route or not is a business decision for the operator, but the forensic accountant’s cost-benefit analysis can help him decide.

Once the investigation is complete, the forensic accountant works with the claimant to determine whether both sides are relying on the same set of assumptions. If they are, their expectations will be in the same ballpark. If not, trouble looms.

Should the case go to mediation, arbitration or trial, the forensic accountant is available to provide opinion evidence on the loss measurement. This experts participation is critical from shortly after the claim is launched until it is settled.

By Scott Schellenberg

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