September 29, 2010 by Susana Johnson, Vice-President, KPMG Forensic Inc.
Understanding the insurance claims process, what is required under an insurance policy, and how to proceed after a claim can help your clients recover more quickly.
One key to a successful resolution of a claim is to have professionals with the right skills and background assisting with the case. This allows for the best experience to be brought to bear in developing the appropriate quantification strategy, obtaining and reviewing information, and presenting the claim appropriately.
However, much of the language and approaches used in policies will not be familiar to most accountants. It is common for accountants who do not practise in the insurance claims area to make fundamental errors in approaches selected.
An accountant involved with insurance claims should have experience with insurance concepts and policy wordings in particular.
Retaining a Forensic Accountant
This is why brokers should advise their clients to retain a forensic accountant who is well versed in insurance claims, policies and concepts. Though insurers will usually employ a forensic accountant, it’s important for your clients to do the same to ensure a thorough and independent assessment, rather than simply relying on the insurer’s assessment.
Forensic accounting is a rather narrow and specialized subset of accounting. The work of forensic accountants may ultimately be presented to, used in, or relied upon by the courts.
A qualified forensic accountant should be aware of the rules of evidence and the best manner to present his or her findings for the benefit of the court. While few cases will proceed to trial or some form of arbitration or appraisal, the forensic accountant should be prepared in the event that a claim cannot be settled.
Not all forensic accountants are experienced in assisting companies with insurance claims. One should ensure the accountant to be retained has appropriate experience in this even more specific area.
The forensic accountant may provide assistance in areas such as:
The accountant should be retained early in the process if there are significant financial issues flowing from the incident and/or there is likely to be a claim for business interruption. By bringing your expert accountant to the claim early in the process, it is possible to ensure that relevant information is obtained and analyzed so potential problems can be avoided. Some or all of the cost of retaining an accountant to assist with the claim preparation and presentation may be covered under the insurance policy.
The role of an accountant retained in an insurance matter will largely be dependent upon the nature of the claim and the underlying issues. At the outset of a claim, there are various activities that the accountant is often asked to assist with:
The accountant will usually be asked to prepare a report regarding the quantum of loss. Such a report should be carefully drafted as the claim might not settle and the report may then be produced in the course of litigation or another dispute resolution process. If the claim cannot be settled and litigation ensues, the accountant can be useful in the litigation process by assisting legal counsel with document production and examination for discoveries.
If the claim is to be part of a mediation, arbitration, or appraisal process, the accountant can usually provide useful assistance as a witness in the proceeding. If the litigation of the claim proceeds to court, the accountant will be of assistance in preparing for the examination of the opposing expert accountant. The accountant may also be asked to attend court for the evidence of other witnesses critical to the issues addressed by the accountant. Of course, there will likely be a need for the accountant to give expert testimony in support of the loss.
Therefore, the assumptions made should be based upon evidence; the better the supporting evidence, the better the assumption and resulting calculation.
The Theory of Loss
The theory of a business interruption loss focuses on how the insured incident impacted the company and why and how a loss of income resulted. If the theory of loss cannot be supported by the facts, there are likely very legitimate questions about such a theory’s appropriateness. In such cases, it is necessary to revisit the approach to the loss calculation and the fundamental question of why a loss exists as originally conceived.
A loss theory that is not supported by the facts will likely not be sustainable and will provide an easy avenue for an attack on the claim. An experienced accountant should quickly recognize this and evaluate the appropriateness of the calculation approach and/or the fundamental basis for and existence of the claim.
A business interruption claim will ultimately focus on what would have happened at the company had the insured incident not occurred. It clearly will never be possible to know exactly what would have happened in the absence of the loss. It is this uncertainty of future results that will generally become the focus of disputes over business interruption claims.
As a loss of income calculation is dealing with the unknown (e.g. what would actually have been earned in the absence of the incident), there will always be assumptions made by the insured’s accountant. Assumptions are often the weakest part of the accountant’s estimate of loss of income. Therefore, the assumptions made should be based upon evidence; the better the supporting evidence, the better the assumption and resulting calculation.
The accountant should consider whether the calculated loss makes sound business sense. This reality check requires a broad understanding of the business. If at the end of the day, a calculated loss does not make business sense, there is likely something wrong with it. Non-accounting issues, such as production capacity, are often overlooked in loss calculations. The review of business reality should bring these critical issues back to the forefront where they belong.
Frequently, an accountant’s work rests too heavily on intricate and detailed analysis without an overall consideration of the facts of the case. It is important to ensure that the accountant does not create, through financial analysis, a false picture of the likely events and financial results had the insured incident not occurred.
Accountants have been known to prepare reports with comments and conclusions that stray beyond their expertise; for example, an accountant who states they are certain that a newly introduced product would have generated incremental sales of $100,000 had the accident not occurred, will rightly be criticized for making a finding of fact.
There are standards of practice that apply to the accounting report and expectations of what a report should include. These standards form one important tool that will be used to evaluate the review, analysis, and report prepared by accountants in insurance claim situations.
The use of a forensic accountant can be an important tool in assisting with the successful resolution of your insurance claim. The key is to tell your clients to select the right accounting professional, and ensure they are appropriately instructed and in a position to provide the sort of assistance desired.
Where insurance claims are not amicably resolved with the insurer, a forensic accountant can bring an additional skill set to provide advice and analysis throughout the various phases of litigation. n
Susana Johnson is a Vice-President of KPMG Forensic Inc.
© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the July/August 2010 edition of Canadian Insurance Top Broker magazine.
This story was originally published by Canadian Insurance Top Broker.