Against Their Better Judgement

Relying on an insured’s accountant to prepare an Income Replacement Benefit (IRB) report? That’s like letting the fox guard the henhouse, isn’t it? Yet what initially looks like just another expense for insurers to cover, may turn out to be a quicker, easier and more comprehensive way to obtain the information necessary to determine an entitlement to and calculation of an IRB.

This is not your standard accounting article. Only two years after the new SABS was introduced, there are no current decisions on which to base this article. Instead we give you our thoughts on what we are doing, seeing and responding to what we call the Accounting Report Benefit (ARB), and how we believe insurers can best utilize this section.

The Accounting Report Benefit is named for its value to insurers, as much as for insureds.

In September 2010, the new SABS introduced the ARB, subsections 7(4) and (5). The ARB requires an insurer to pay for an incurred expense for the preparation of a report calculating the insured’s income from either employment or self-employment. However, there are conditions. 1) The insured is applying for an IRB that is based on the employment considered in the report. 2) A licensed accountant has prepared the report. 3) The expense is reasonable and necessary. And, 4) the insurer is not required to pay in excess of $2,500.

For the insured, this coverage is a great addition. We often hear grumblings about underpaid or unpaid IRBs, or the length of time required to perform the calculation. While the dissatisfaction is sometimes justified, the insureds’ complaints often really stem from their mistaken notion that IRBs are intended to fully cover lost income or lost opportunity. Those in the industry know this is not the case. But whether a payment to assist with the insured’s tax preparation when funds are low or having an IRB calculated with their consultation and involvement, the ARB gives insureds a voice and a central role that they may not have otherwise felt they had.

Four Key ARB Benefits

Our understanding that the ARB is a benefit to insurers is predicated on the fact that an insurer’s goal, when calculating the IRB, is to achieve the correct calculation at a reasonable cost with the greatest efficiency and without undue animosity.

The following are 4 key reasons the insurer should love the ARB for self-employed insureds – the group for which we are seeing this benefit most often used. 

Access to the insured

One of the biggest problems when dealing with represented insureds is the lack of access often afforded the insurer. Addressing this point, although in an indirect manner, is likely the biggest advantage of the ARB for insurers.

The ARB provides for a licensed accountant to access the insured in a way that often isn’t otherwise available early in the claims process. Now, before requesting a single document, the insurer has answers that otherwise could have required months and many exchanges to obtain. This leaves the insurer in a position to focus on the issues, rather than the minutiae.

Co-operative approach

In an ideal world, the insurer and insured can work together to find the correct solution when funds are most urgently needed. But this ideal is not achieved as often as we would all hope. We are now experiencing an increased level of co-operation when working directly with insureds, which we rarely saw during the many years we worked solely on behalf of insurers. Not only do we get direct access, but we get assistance, guidance, background, and follow-up. The insured feels a part of the process, and this feeling shows itself in how the insured interacts with us.

This increased sense of involvement and collaboration is most certainly carrying forward to the adjuster’s desk, at least until the focus of issues begins to narrow.

Reduced Turnaround time

The accountant working on behalf of the insured has a distinct advantage in moving the IRB process ahead at a much quicker pace than the insurer. The points above – access and a co-operative approach – both play a role, in addition to documentation requests that are limited to only what is truly necessary because the facts are better understood from the outset. The result: a quicker and accurate payment to the insured, and less back and forth for the adjuster. 

Cost saving

You are probably chuckling now. Okay, maybe you will buy all the previous points we’ve made, but cost saving? Not likely. Bear with us.

Let’s start with “time is money.” An unhappy insured and rep can absorb a lot of time, as can dealing with multiple exchanges of requests. But the ARB shifts much of this work to the insured’s accountant, who is working collaboratively with the insured and under a fee cap. And while there are still steps the adjuster has to take, the file can progress without the early hiring of an accountant by the insurer just to chase documentation that is already being collected. Of course, this cost saving, both adjusters time and insurer’s accounting fees, are offset by the fee for the ARB, but here “reasonable and necessary” plays a role.

That brings up our last point about cost savings. We continue to see reports being prepared from scratch by insurer’s accountants, after the insured has presented a report. The result: an insurer pays for two calculations. We are suggesting to our insurer clients that a review or critique would suffice. The documentation has been collected, the back story provided, the calculations laid out. You’re in a position to focus on the issues and discuss the impact, and these reports should cost substantially less.

Getting the Most out of the ARB

We believe that the starting point for an insurer is to outline their expectations at the outset, when notified that the insured has retained an accountant. The following are our suggestions, based on what we have seen. Established up front, these could arguably be the basis for “reasonable and necessary.”

The Reports

Similar to the expectations of an insurer’s accountant, reports outlining the IRB should be written in accordance with the SABS and current decisions. The reports need to be clear, concise and easy to read, as all parties, including the insured, should be able to understand them.

Of course, not all interpretations will be the same, so transparency is critical. The insurer should expect that the key points and issues are clearly laid out, and all methodologies supported.

Documentation

The documentation collected by the insured’s accountant should be made available to the insurer. Without this key evidence, the main benefits of the ARB to the insurer no longer exist. While it is unlikely that the documentation will always be as comprehensive as the insurer may wish, with more background available, it is now appropriate to determine whether the calculation presented is reasonable (McLellan and Aviva, FSCO A06 B001263).

Collaboration

Differences in interpretation do occur. While this process can become adversarial, it is not intended to be so when dealing with one’s own insurer or insured. So, here’s one final and important recommendation – request that communication takes place between the opposing accountants.

While clearly not common practice within this industry, in most situations when we have been requested to meet or discuss with the opposing accountant, it is our experience that the two parties are able to close the gaps considerably on the issues. Take advantage of this great opportunity made available by the ARB.

The ARB can open up possibilities to overcome obstacles that have hindered insurers during the early stages of a claim, in what is becoming a more litigious environment. By clearly laying out the expectations when an insured retains an accountant, much the same as would be done for an insurer’s own accountant, the ins
urer can obtain a level of value that may have otherwise been difficult.

So in answer to our initial question about the fox guarding the henhouse – we believe that rather than it being the case of a predator protecting the insurer’s interests, you should harness the adeptness, agility and adaptability of the fox to your advantage.

Michael Sigsworth, CGA, CIP, is a partner with ADS Forensics Inc. Darrell Sherman, CA, CIP and Specialist in Forensic and Investigative Accounting (IFA), is also a partner with ADS Forensics Inc.