In the Wake of a Catastrophe: Navigating Business Income Losses
With the heart of the hurricane season upon us—and the devastation caused by Hurricanes Harvey and Irma in full view—forensic accountants are again reminded of the very important role they play in the wake of these catastrophes. What’s that role? Helping fellow Americans regain normalcy in their lives and businesses. In many instances, for a business to regain normalcy following a catastrophic event, i.e., hurricane, tornado, fire, etc., it must file a claim with its insurance carrier, provided there’s coverage that's triggered.
Forensic accountants can assist with portions of the coverages within the triggered insurance policy, including business income coverage, which can include coverage for extra expenses. Business income coverage also can be referred to as time element coverage, depending on the insurance carrier and/or policy. Assessing the loss associated with business income coverage involves comparing the financial projection of operations in a but-for scenario to the actual financial operations following the loss event. The difference between the two typically makes up the loss sustained as a result of the insurable event.
Forensic accountants also can be involved with inventory losses, often referred to as business personal property (BPP), especially when records are destroyed and/or inventory is tracked using a periodic inventory system rather than a perpetual inventory system. Forensic accountants can help reconstruct inventory balances as of the date of loss through analysis of normal sales, purchases and physical inventory counts.
Because policies can vary among insurance carriers, it’s important for business owners to consult with carriers on the coverages afforded by their policies due to the contractual nature of the policy. While interpreting the policy isn’t a role forensic accountants play in the claim process, it’s important to work with forensic accountants who understand the accounting implications of the coverage and have experience with insurance loss calculations and the claims process in general. BKD’s Forensics & Valuation Services (FVS) professionals have very specific experience in this regard, having worked with both insurance carriers and business owners.
Based on our experience working with carriers, we understand one of the most important aspects of a claim for carriers is the business’s ability to document its loss. Thus, it’s critical all supporting documentation related to the loss, as well as pre-loss financial documentation, is provided to the carrier for consideration in determining the coverage related to the costs and losses incurred as a result of the loss event.
The pre-loss financial documentation requested by the carrier may include:
- Profit and loss statements
- Tax returns
- Sales reports
- Payroll reports
- Invoices/expense documentation
- Inventory reports and documentation
- Asset ledgers
- Lease/rental agreements
The period of time in which many of these reports will be requested depends on the length of the measurement period, or period of restoration.
While navigating a business income loss can appear daunting at first, it’s important to keep in mind that all parties want to have business operations restored as soon as possible. This allows the business owner to regain normalcy and typically reduces the costs paid by the insurance carrier related to the loss event. It’s our experience that when both the carrier and business owner work toward this goal together, the insurance claim process has much better outcomes. BKD’s FVS division can assist in keeping both parties working toward this goal because of our ability to be an objective, unbiased voice in these difficult times.