Detecting and preventing fraudulent business interruption claims

All forms of insurance — from health to workers’ compensation to homeowners — provide security and protection to individuals and companies in case of injury, illness, theft or damage. Most businesses carry several types of insurance to protect their assets and their people. One of the most common types of coverage is business interruption insurance, which provides compensation to an insured if its operations are interrupted due to damage or theft. Fire, floods, earthquakes and other unanticipated natural disasters can quickly destroy thriving companies and having business interruption insurance can help cover costs during a period of rebuilding.

While most business interruption claims are paid on legitimate loss, unfortunately, an estimated $80 billion in fraudulent insurance claims (across all lines) are made every year in the U.S. And fraudulent business interruption claims are no exception. Agents, brokers, insurers and claims professionals should scrutinize every business interruption claim cautiously. Even the most experienced professional may not recognize potentially fraudulent information if the claim appears straightforward and seemingly complete. For this reason, it’s essential to examine every claim thoroughly to make sure it’s legitimate. Insureds who intentionally manipulate their company’s financials to create a false picture of the business’s profitability are committing fraud.

Related: Investigating fraudulent claims: Keep detailed records to recover costs

Three common business interruption claim fraud schemes

Overstating sales: Inflating the amount of lost revenue means increased insurance payouts.

For example, if a claimant’s sales were strong for five years before the loss as per the tax returns or financial statements, but the financial records show a decrease in revenue in the months prior to the date of the claim for reasons other than the loss event (e.g. the loss of a major customer due to competition), that detailed analysis can significantly reduce claimed losses.

Understating expenses: Minimizing costs is a common way to manipulate financial documents to make a business appear more profitable. Understating expenses can come in the form of delaying their entry in the books and records or not recording them at all. Another example of this scheme is companies that intentionally capitalize expenses (i.e. record them as an asset on the balance sheet) instead of recording them on the income statement.

Inflating extra costs: Embellishing a claim with additional expenses — either by claiming the lost or damaged items were more expensive than they were or attaching completely unrelated costs to the claim (such as regular ongoing expenditures) — is fraud.

Related: Using technology to improve the claims process

Keep an eye out for red flags

It may seem like filing a bogus insurance claim is a victimless crime but it hurts everyone —driving up the cost to the insurance companies who in turn must raise policyholder rates.

Fortunately, knowing what to look for can help detect and deter a fraudulent business interruption claim before it is paid out. Here are five “red flags” that can help agents, insurers, brokers and claims examiners identify fraud.

1. The claim was filed shortly after the policy was activated, or after the coverage amount was raised.
2. The business has a track record of reporting losses to the IRS, yet the claimant is seeking significant lost profits.
3. The insured is overly assertive in pushing for a quick settlement.
4. The insured’s financial documents include questionable, irregular information, such as out-of-sequence checks, altered or photocopied documents, or receipts, invoices and shipping labels that do not show a paid stamp.
5. The policyholder refuses to provide concrete financial source documents to substantiate the claim, such as a copy of their accounting software, bank statements, vendor agreements, and invoices.

Related: 7 ways to protect your business from insider fraud

How can a forensic accountant help investigate a business interruption claim?

While the presence of one or more red flags does not singularly constitute fraud, it may indicate that the claim requires further investigation. If so, it’s never too early to bring a forensic accountant into the claims process. Their technical knowledge of accounting and expertise in fraud investigation can help expedite resolution of a business interruption claim. Put simply: if the claim looks suspicious, don’t hesitate to step up the investigation to ensure the loss is legitimate.

Related: Fraud of the month: Skydiving trip leads to attempted-murder

Tiffany Couch is CEO and founder of Acuity Forensics, a nationally recognized forensic accounting firm. She can be reached at tcouch@acuityforensics.com.