by Denise Klika
Post Hurricanes Sandy, Katrina and countless natural and manmade disasters comes the dreaded period of ‘business interruption loss.’ It’s a very challenging time as firms scramble to get back on their feet while engaging their insurance consultants to calculate the losses and costs of recovery. Denise Klika in Smolin Lupin’s Forensic department has worked on Business Interruption cases and was able to share her insight.
Natural disasters such as Hurricane Sandy get the headlines, but what are the most common causes of Business Interruption?
The most common Business Interruption causes include direct flood damage, direct wind damage, loss of electricity, ruptured gas mains, ruptured water mains, fire and smoke damage, IT system crashes, and unauthorized access to business confidential records.
Forensic accountants are frequently called in early in a Business Interruption situation, where do you tend to start?
The first order of business, in most cases, is reviewing the company’s Insurance Policy. We need to accurately understand the language of the policy to plan our forensic work and how a claim should be calculated.
What are some of the documents you and your team look at to calculate loss, etc., in a Business Interruption situation?
Obviously, we start with the insurance policy itself. Some of the common documents needed include: production records for the base period prior to the loss, the period during the loss, and the period after the loss; sales records for the base period prior to the loss, the period during the loss, and the period after the loss; inventory records for the base period immediately prior to the loss, the period during the loss, and the period after the loss; budgets to actual variance reports; tax returns and sales tax returns.
What are five things companies can do to make Business Interruption situations less painful and their recovery from interruption faster?That’s a good question because the preventative measures firms can undertake are generally not terribly expensive, difficult or time consuming. To start, every firm should create a Disaster Recovery action plan (business continuity plan) that is implemented when a loss takes place. The plan must identify Emergency Management employees within the Company and assign to them key Disaster Recovery roles.
When a loss occurs, companies should prepare a brief narrative describing the losses and how the damages have affected business operations. The company should preserve physical evidence by photographing it, tagging, collecting documentary support or otherwise identifying the evidence. If needed, firms should remove and secure critical evidence offsite.
Forensic accountants can be very helpful if they are brought in early in a Business Interruption situation. Once they are engaged, forensic accountants can assist in developing documentary support for the loss. The key in those situations is communication among all parties involved. This is especially important at the start of the claims process to outline procedures, expectations and the timeline for the claim resolution. Having a forensic accountant to facilitate this work takes enormous pressure off a firm.
A company’s accounting system should assign General Ledger account numbers to the loss in order to capture continuing expenses. A continuing expense is fairly self-explanatory: it’s an expense that the company will continue incurring regardless of the business condition. Typical examples of continuing expenses include mortgage payments, rent, property taxes, fixed salaries, equipment leases and insurance contracts.
Finally, companies should document any efforts to mitigate the effects of the loss, e.g. utilization of extra capacity at other owned or operated locations, working extra shifts to make up for lost production, consuming excess inventory and track extra expenses needed to remain in business or shorten down the recovery.
By taking reasonable precautions and preventative measures most firms can mitigate the worst effects of Business Interruption Losses and return to normal operating conditions within a reasonable amount of time.
Denise Klika is a Forensic Accountant with Smolin Lupin. She can be reached at 973-439-7200.