With the continued leaking of oil in the Gulf of Mexico, violent storms in the Midwest, the beginning of fire season in the west and hurricane season in the east, forensic accountants will have their work cut out for them as they strive to quantify the myriad claims that always arise from such manmade and natural disasters. A variety of claims can typically result from catastrophic events, including the following:
- Loss of Earnings/Loss of Production
- Diminution in Business Value
- Contingent Losses
- Extra Expense/Increased Cost of Working
- Property Damage
- Clean-up Costs
- General Liability including bodily injury, loss of enjoyment
- Subrogation Issues
In catastrophe work, forensic accountants are retained by the insurance company or their representative, whose policy insures the business that sustained a loss resulting from a catastrophe. Our role is to assist the insured and the insurance company in accurately quantifying the extent of damages sustained to the property, as well as to measure any time element (business income and extra expense) losses that may have occurred. We also measure the value of any inventory damaged or destroyed in accordance with the terms and conditions of the insurance policy.
Additionally, we monitor from an accounting perspective the repairs and/or replacement of real and personal property damaged or destroyed by the event and we quantify the economic losses sustained by the insured as a result of the disruption to normal business operations. These losses might include extra expenses incurred to resume operations at the damaged facility or at a temporary location; the loss of profit that would have been earned had the insured event not occurred; and the ongoing, continuing operating expenses incurred during the period of repairs.
In today’s business environment, it is critical to have experienced forensic accountants on the adjustment team to be confident that the measurements of the economic losses claimed by the insured are in line with current economic models.
Initial contact and follow-up with the claimant can be problematic following a catastrophic event. Hurricanes and other such disasters often impact telephone land lines, cell phone towers, e-mail and facsimile service that rely on communication lines and even postal services may be interrupted. Establishing clear lines of communication, either through technological means or in person by sending a dedicated accounting team to the site of the disaster is crucial.
Once communication is established, the forensic accountant will take steps to secure available records and to discuss with the claimant the importance of salvaging and retaining financial documents that provide a historical picture of the business and recording loss period and post loss business activity.
Issues That Arise in Catastrophic Claims
Parties Available for Recovery
Depending on the catastrophe, the claimant may or may not have insurance coverage that is responsive to its losses. In this case, he or she may have to bring a lawsuit to the responsible party. Tort law will likely be the guideline for such a lawsuit. In other cases, such as flood losses where the claimant does not have flood coverage, government agencies may provide some financial support for personal damages. Insurance coverage will have specific terms, causes of loss and methods to compute damages. FEMA and other government agencies will have guidelines that respond to damages.
Evaluating catastrophic claims involves the analyses of both the claimant’s financial records and industry data — both historical and prospective. Consider the claims that will likely arise out of the BP oil leak. The impact to the area and businesses are likely going to be widespread and long term. Given that the entire Gulf Coast region will be affected, it may be difficult to evaluate losses using neighboring businesses as a benchmark to project expected results. Claims might be subject to the guidelines and rules set forth by the party that responds to the claim.
Because of the residual impact of catastrophic claims, it is difficult at the onset to determine the period of time that a business and the surrounding areas are affected by the event. For claims related to the BP oil spill, the length of the affected time period is currently unknown. Because the leak has not been contained, nor have the clean-up efforts been completed and the environmental impact unknown, the projection of loss of earnings is limited to the foreseeable future and will likely need to be reevaluated as the impacted time period is determined at some future date. This unknown factor will need to be defined in loss of earnings and diminution in value claims.
Off-sets to Business Claims
It’s inherent that the claimant mitigates its damages. The claimant should take reasonable and appropriate steps to minimize its losses. This may include temporarily reducing staff, enhanced communication to its customers and means to minimize the reduction in sales. Following catastrophes, it is not unusual for impacted individuals and businesses to temporarily benefit by assisting in clean-up efforts and other funded benefits that would not have been available to them but-for the catastrophic event. These benefits may be potential offsets to wage losses, loss of earnings and diminution in value claims.
From contacting the client and the claimant, to obtaining and analyzing information to compute a claim, the forensic accountant’s role following a catastrophic event is particularly complex given the unique challenges encountered following such an event. Pre-planning and understanding the possible remedies for financial compensation in the event of a loss are key factors.
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Mary Furst, CPA, ABV, CFF, CFE, is a partner and director of Catastrophe Services at the international forensic accounting firm, RGL Forensics.