Residents of the state of Florida are no strangers to disaster. From hurricanes to wildfires, unforeseen circumstances can lead to a substantial loss of income for a business. The process is simple enough; a disaster happens, an appraiser decides how much damage was done and how much income the business missed out on, and the business’ insurance company pays for the damage. But what happens when the appraiser and business owner do not agree on how much income was foregone? We will discuss this, as well as the process of a business interruption insurance claim below:

Business Interruption

Estimating the value of lost business for the purpose of a business interruption insurance claim is by nature a long and expensive process. Often the affected business will overestimate the loss of business while the insurance company underestimates the loss. To reach a healthy compromise it is important that both sides understand what goes into a valuation of lost business, the insured company’s financial history, and how the company stands compared to other companies in its industry.

Business interruptions on the surface seem fairly easy to value. Simply estimate how much money you should have made, subtract how much you did make, and then the net amount is your loss. However, market conditions, expenses, and costs are subject to change as well.  As variable costs rise, contribution margins for different products or services fall. For sales themselves, it is also important to make sure that every aspect is taken into account during valuation. Any new sales campaigns, business initiatives, or new products should be valued appropriately.

Understanding the insured company’s financial history is an area where the claimant has a natural advantage. For the insurance company, there must be a period of discovery to determine what sort of shape the business was in at the time of the loss event. Representatives must be sent to the affected site and interview managers and employees at the site to gather information. Financial documents must be requested from the claimant, such as balance sheets, income statements, cash flows statements, financial forecasts, sales ledgers, and any other relevant supporting documents for the past 3 to 5 years. At this point, the insurance company and claimant must both evaluate the change in revenues and expenses compared to what was expected.

Generally speaking, every company is unique with its own internal strengths and weaknesses, and external opportunities and threats. But to a certain extent, companies supplying similar goods or services can be compared when a valuation is being performed since the law of supply and demand forces companies offering similar products to also price them similarly, and they also most likely have similar costs and expenses. As such, doing some research to determine how much business a similar competitor company or overall industry did during the period of business interruption can greatly aid in understanding the insured’s business, their revenue and costs, revenue trends, seasonality of business, and economies of scale.  There are many different tools that can be used for performing industry research.  Forensic accountants often use tools such as IBIS, Pratt’s, U.S. Census data, STAR, or other industry specific reports to assist them in researching how a company stacks up against its competitors.  For example, in evaluating a hotel business interruption claim, as part of the initial information request from the insured, a forensic accountant should request the STAR reports for the immediate 1 to 3 years preceding the loss event and during the period of restoration.  These reports give benchmark revenues, costs, and profit breakdown against a competitor or competitive set.  STAR reports are extremely useful when a loss occurred in a geographic area that has unique qualities.  If a nationwide hotel chain sustained a loss due to fire in Orlando, Florida, the normal revenue pattern would most likely be very different than to a Phoenix, Arizona hotel.  An Orlando location would probably have more seasonality than Phoenix due to tourism.  So while the two hotels are within the same brand, comparing their statistics to one another may not make sense.  In this instance, the forensic accountant would most likely look to the STAR report to compare surrounding geographical competitors to the loss hotel.  Then they would analyze the industry data and present the relevant findings to the parties involved, clarifying issues that both insureds and insurance companies sometimes do not understand.

In an effort to resolve the insurance claim as timely as possible, it is to both the insurance company’s and insured’s advantage to bring the most reasonable, detailed, and well-researched estimate of the business interruption loss to the table. Forensic accountants specialize in financial statement and data analysis. The valuation process is unavoidable and can divert important company personnel and assets away from normal business operations. Hiring a forensic accountant can save these costs as well as give the claimant the peace of mind to know that the best possible solution is being worked toward. Alternatively, a forensic accountant can be hired as a consultant to the insurance company to aid them with the complex financial issues involved in settling a business interruption claim.  In multi-million dollar losses, it is common for both parties to hire their own forensic accountant.  The insured would do so to compile the claim and gather supporting data, and the insurance company to audit the claim compiled by the insured’s forensic accountant.  Generally, the claim is resolved more quickly and efficiently when forensic accountants are involved.

Finally, how does one locate a qualified forensic accountant? Luckily, the American Institute of Certified Public Accountants (AICPA) provides several categories of certification only achievable through extensive education, training, and rigorous examination followed up with lifelong continuing education. If you are in search of a forensic accountant, look for a Certified Public Accountant (CPA) that has one or more of the following distinguished credentials:

Certified in Financial Forensics (CFF)

Certified Fraud Examiner (CFE)

Accredited in Business Valuation (ABV)

Personal Financial Specialist (PFS)

Certified Business Appraiser (CBA)