Utilizing forensic accounting in claims

Forensic accounting is often perceived as a well-known quantity in the realm of complex claims evaluation. And while not all insureds know what forensic accounting is, many insurers have guidelines in place that dictate when a forensic accountant is to be brought in on a claim. But as the supply chain expands and insurance products continue to evolve, so too do the areas where forensic accounting can assist both the insured and the insurer.

What we know now

Involving a forensic accountant in the claims review is often dictated by one several factors: the size or scope of the claim, the complexity of the loss, or the resources and experience available to the affected party. In many cases, an insured may experience a loss-triggering event, but may not clearly understand how to link the event and the financial damages it may have caused. The claim presented may not appropriately reflect the actual financial impact of the loss event.

A specific dollar threshold can sometimes dictate when a forensic accountant is used for a claim review. When the value of the potential damages is significant, the loss measurement becomes more complicated given that misunderstanding the impact of the loss event and its impact on the business could lead to a significant over or undervaluation of the claim.

The complexity of the claim can also be a common trigger for calling a forensic accountant. Complexity may arise from the number of locations involved in the loss, the duration of the loss and partial recovery periods, the number of claimants involved (such as a product recall), overlapping policy coverage, or the impact of other market forces unrelated to the loss event which will need to be isolated in the loss analysis. Certain types of claims are also notorious for requiring advanced modeling, projections and judgment on the loss.

In more and more losses, it also seems that there are elements of the loss, which cannot be easily supported from a document standpoint, while the financial damages make sense. This is common where third-party damages are claimed under a first-party loss. In many such cases, information may simply not be made available by the affected third party. However, the first party seeking a response from the policy to the losses suffered bears the financial impact. Such claims often require experience and judgment as to what might seem reasonable.

At other times, a forensic accountant may be brought in when the adjuster just feels that something is not quite right with the claim. Perhaps the sales loss forecast does not make sense when considered in the context of the production interruption. Or the loss of sales appears to have ended and sales levels recovered, but then further losses beyond this period are included in the claim. When things look normal on the surface but, upon further examination, something perhaps looks not quite right, a forensic accountant can be brought in to assist in the financial investigation.

As the risk landscape changes, organizations should continue to consider and review where they may be at risk. Part of this ongoing review should include their ability to survive a situation which leads to financial stress, such as a supply chain disruption. The increased reliance on technology (think the Internet of Things and cyber risk) within finely tuned production processes, along with an ever-changing global supply chain (i.e., food processing, auto and consumer goods), are opening new areas of exposure and potential risk for both insured and insurers alike.

Where things are evolving

In many newer areas of insurance cover, or where policy language is changing to meet market demands, the risk evaluation may have more uncertainty. These areas, including cyber, product recall and other crisis management lines, are taking proactive steps to provide policyholders and potential policyholders with access to professionals who can assist with different levels of risk evaluation and loss measurement. These services provide added value beyond what is normally found with a standard property loss claim.

In turn, we are seeing the role of the forensic accountant expanding to assist at different points in the insurance lifecycle, before, during and after an insured handles a crisis event. This expanded role now includes measuring potential exposure in a pre-loss consultation to post-loss review — working with the adjuster, insurer, broker and insured.

Forensic accountants are being asked to look back at what they have experienced in the past, and apply that to future potential problems to better prepare organizations. The forensic accountant’s role is to provide an independent, unbiased evaluation of the financial impact of a loss or potential loss.

In these specialty lines, forensic accounting and consulting services can be brought in before a loss occurs to help evaluate the potential risks for an insured, as well as educate on how to handle the claim process, and what to expect. Discussions with insureds in the pre-loss period, and establishing a better risk profile can greatly aid insurers in identifying potential loss areas. It can also allow the insured to better prepare for supporting any damages claims that may be presented. Additionally, this discussion can help guide applicable coverage levels.

After a loss, the forensic accountant will continue to provide more traditional services to the quantification of the loss, as they have always done.

From a risk management perspective, there are enormous benefits to starting the conversation about potential damages and submitting a damage claim early. In crisis management losses, cash flow and financial stress can make the ability to recover challenging, so anything that can be done to ensure the claims process runs smoothly and efficiently, the quicker the ability for the insured to recover financially.

As the pressure to create a more efficient claims process continues to have an impact on the reputation of insurers, focusing on steps to take during the relative serenity of the pre-loss period will become more and more important. Granted, not all steps in the process can be accelerated, but it would make sense to identify those that can be. Getting your financial ducks in a row and adequately evaluating potential risk, and then being ready to present a supportable claim can be key to successful claims handling.

Simon Oddy (Simon.oddy@bakertilly.com) is a partner in the New York office of Baker Tilly Virchow Krause, LLP.

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