Article
Effective evaluation of business interruption claims
March 13, 2020 · Authored by Timothy J. Voncina
By definition, the word “forensic” refers to the use of methods of science to provide information. When you combine the terms “forensic” and “expert,” many immediately think of a crime-scene investigator. And while they are not wrong, the term “forensic expert” can be applied to any number of industry experts, ranging from engineers to medical professionals to accountants.
The forensic accountant is the investigator of the financial world; they look at the financial implications of a given situation. In the context of the insurance industry, forensic accountants often are brought in to provide an independent, objective evaluation of a claim. Without advocating for either side, the forensic accountant assesses the facts and context surrounding a loss event in order to provide an analysis and opinion on the quantification of losses incurred. Claims often involve property damage, inventory losses, business interruption losses, and extra expenses.
When a business interruption claim is filed, depending upon the size and complexity of the claim, an adjuster may bring in a forensic accountant to evaluate the financial aspects of the loss. Taking little at face value, and combining accounting principles with economics and statistics, a forensic accountant looks at the business and the loss from multiple angles and perspectives.
CONTEXTUAL UNDERSTANDING
In order to accurately evaluate a loss, a forensic accountant looks at the facts and context of that business and the effects of the loss event. Using many avenues to gather information, he then compiles a full picture of the business, the interruption event, and the losses incurred. He looks at the contextual setting of the financial data and other factors that are—or could be—affecting the business. A forensic accountant often examines documentation and records, interviews the people involved, and looks at business cycles and market conditions in the process of understanding the claim and formulating an opinion.
Understanding the nature of the business and the environment within which that business operates are important pieces in assessing the loss, and it can greatly influence what information and documentation is needed to evaluate the claim. For example, with seasonal businesses, comparing records immediately before and after the loss event may not be sufficient to demonstrate the extent of a business interruption loss. The forensic accountant will look at operating records and financials from the corresponding periods in the previous year rather than just the months preceding the loss event.
