Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Forensic accountants can learn a few tricks from Johnny Cochran. It is very easy for scientists to give an opinion by applying the same set of rules to produce an “either, or” outcome. But without departing from the generally accepted principles in their field, forensic experts should strive to employ more holistic approaches that can put the facts in perspective, numerically speaking.

In Bemo USA Corp. v. Jake's Crane, Rigging & Transp. Int'l, Inc., 10-16663, 2011 WL 5438584 (9th Cir. Nov. 10, 2011), the trial court relied on the opinions of the plaintiff’s three experts, including one forensic accountant, in granting summary judgment in favor of Bemo USA for property damage, business income losses and extra expenses in the amount of $2,996,611.00.

Bemo is an Arizona corporation in the business of manufacturing taper mills, which are portable machines used to install metal roofs. Taper mills are approximately 40 feet long and weigh approximately 48,000 pounds. Jake’s Crane is in the business of rigging and heavy transportation. Bemo hired Jake’s Crane to mount a taper mill on a structure, but on September 7, 2005, the crane operator dropped the taper mill and destroyed the sophisticated machine.

Bemo ordered a replacement taper mill on an expedited basis to mitigate its losses, but it takes 12-15 months to manufacture and deliver. As a result, Bemo sustained more losses than Jake’s Crane was willing to pay and litigation ensued.

During the lawsuit, Jake’s Crane admitted liability. In support of its Motion for Summary Judgment, Bemo presented the Affidavit of Martha Zehnder, CPA. The trial court entertained written and oral arguments from both sides and ruled in favor of Bemo. Jake’s Crane appealed, alleging that the trial court abused its discretion when it accepted Marthan Zehnder’s Affidavit to support the summary judgment ruling.

Without entertaining oral arguments, the Ninth Circuit Court of Appeals affirmed the lower court’s ruling and stated in an unpublished opinion:

The contention that the district court erred because the report failed to affirm explicitly that it was based on generally accepted accounting principles (“GAAP”) fails for at least two reasons. First, the district court could reasonably conclude from the phrasing of Zehnder’s disclaimer that she did use GAAP except to the extent that she capped damages according to the requirements of the insurance policy. See Fed.R.Evid. 104(a). Second, there was no evidence that GAAP even addresses the question how damages for business interruption should be computed, much less that Ms. Zehnder failed to adhere to GAAP.

While the opinion does not have any precedential value, it certainly should give forensic accountants courage to test the parameters calculating business interruption losses.

J&K Body Shop, Inc. v. Zurich American Insurance, et al., Civ-11-0077-HE (W.D. Oklahoma, 2011), illustrates the importance of submitting a well-documented business income claim.

The loss in question was a burglary where the perpetrators vandalized the insured’s office and stole several items. The insured reopened for business shortly after the burglary. The insured, however, spent three or four days seeking bids to have the office repainted. Repainting took most of a week, and it took several days to install carpet in the office, several hours to compile the list of damaged and stolen items, 16 and 24 hours contacting, or trying to contact, the insurance adjuster, and at least three days shopping to replace the computer and other electronic equipment.

The carrier adjusted the loss and paid $2,871.94 for damage to the building, $2,733.20 to repair and replace the business property that was damaged or stolen inside the office. Six months after the loss and after a series of carrier delays, the carrier offered $2,231 for the business income claim. The insured did not dispute the adjustment of the property claim, but it disagreed with the adjustment of the business income loss. After the insured objected, the carrier doubled its offer to $4,462, but the insured refused and filed a suit. The carrier filed a motion for summary judgment, arguing that $4,462 was more than enough to meet its contractual obligation under the policy.

The insurance policy contained a business recovery expense endorsement which obligated the carrier to pay “the extra expenses and reduction of business income” as a result of a covered loss. The policy stated that the carrier would pay those expenses “for as long as it reasonably takes to restore the damaged or destroyed building or contents, and to resume operations with the same quality of service which existed immediately before [the burglary], regardless of the expiration date of this policy.”

The only evidence relating to the adequacy of the lost business income was a letter from the business’ accountant describing a year-to-year reduction in gross income figures for the indicated six month period. That letter stated that the insured’s gross was $121,360.79 less than its gross income during the same six month period the year prior to the loss. The letter, however, made no effort to address the insured’s net income during the period of restoration, and failed to rebut or contradict the carrier’s contention that it had adequately adjusted the business income claim.

Given the lack of evidence presented by the insured, the court ruled in favor of the carrier and stated:

The letter offers no support for plaintiffs’ assertion that the reduction during this six month period was attributable to the burglary. Plaintiffs’ submissions are insufficient to show a justiciable question as to the contract claim. The $2,231 originally offered by Universal was based on J&K’s total sales for May, 2009—the month of the burglary. See Def. Fact 16. It calculated J&K’s average daily sales by assuming that all its May sales were generated before the burglary and then used that average to calculate estimated lost income for the remaining eleven days of the month.

Because J&K was open for business and in fact had sales in May after the burglary, that calculation plainly overstated the daily loss to J&K. Further, the calculation was based on gross profit (i.e. gross sales less cost of goods sold) rather than net profit, the standard under the policy provision, and therefore overstated the loss on that basis. For those reasons, defendant reduced the calculation by half to reach the $2,231 figure. Plaintiff offers no evidence or argument which undercuts defendant calculation of the daily loss or the loss figure based on that. Moreover, defendant’s doubling of the amount to $4,432 eliminates any conceivable question as to accuracy of the loss calculation unless some basis is shown for concluding J&K was entitled to be paid for more than the liberally calculated losses estimated for roughly two weeks of operation.

Without more details about the claim or the policyholder attorney’s decision to submit a three (3) page response that relied solely on a letter from an accountant, I cannot disagree with the outcome in this case.

In a previous blog entry – The Speculative Card - Understanding Business Interruption Claims, Part 68, I discussed the fine line that practitioners must walk to avoid this type of situation.

As a matter of Florida law, business interruption losses should be determined in a practical way, having regard for nature of business and methods employed in its operation, in order to give practical effect to intentions of parties and purpose of insurance as evidenced by terms, conditions, and provisions of policy. See, Travelers Indem. Co. v. Kassner, 322 So.2d 80 (Fla. 3rd DCA 1975).

The holding in Travelers does not mean that “anything goes” in business interruption claims. A speculative claim will never be covered by a policy and it is always the insured’s burden to provide competent proof of an actual monetary loss as a result of the suspensions of its operations.

It is always prudent to consider retaining forensic accountants to help a business review its financial statements and prepare reports in support of its claim, especially if the claim is on the way to litigation.

Dan Torpey, CPA, CFF, CITP, a leading authority in business income theories, also agrees that some coverage forms allow recovery of consulting fees in connection with the presentation of a business income claim.

In the new 2nd edition of Business Interruption, Coverage, Claims and Recovery, Torpey explains,

There is nothing in the wording of the ISO business income form that obligates the insurance company to pay the insured’s accounting costs to determine the extent of the business income loss. However, the form (CP 00 30) also provides extra expense coverage. Extra expense is defined as “necessary expenses you incur during the period of restoration that you would not have incurred if there had been no direct physical loss”

The policy also requires that the extra expense be incurred to “avoid or minimize the suspension of business and to continue operations.” A case may be made for extra expense payments for the accounting costs. A policyholder could argue that the assistance of outside experts decreased the length of suspension and allowed the company to restore operations more quickly by freeing key management to focus of loss recover rather than data gathering and loss development activities.

Every policy and factual scenario is different and careful consideration should be given to the policy language in question to determine if accounting/consulting fees should be reimbursed.

I have previously explained that Accountants and Business Interruption Experts Will Play an Important Role Recovering BP Oil Spill Income Loss Claims because the analysis is not as simple as looking at past years tax based income and then averaging them for expected future income. Some claimants have told us that this is the method BP is using to determine their lost profit claims. Given the people BP has hired to determine what it owes -- as criticized in Is BP Hiring Ignorant Claims Handlers with Little Dollar Authority to Pay Claims? -- this methodology and result is not surprising. In How to Value an Oil Spill Claim--Not an Easy Task, I warned that these accounting and business calculations are not easy.

Merlin Law Group attorney Kristin Demers Crowell was recently published in a treatise, CAT Claims: Insurance Coverage for Natural and Man-Made Disasters, which has four important chapters concerning the handling of business loss of profit claims following a catastrophe. While I could make fun of BP and suggest that it purchase rights to the treatise and start teaching its claims adjusters some basic accounting and loss of earning concepts in a post catastrophe economy, this treatise notes the importance of a "team" and how consultants help determine the theoretical accounting calculation determining the loss to the business and needs for reasonable mitigation actions and expenses:

...the team members will need to determine the immediate and longer term steps that will have to take place.
...

...claims are based on theoretical calculations of what the business would have made as income had the event not occurred.
..

The team...should develop the initial strategy for the handling of the claim...
...

The legal representative should advise the team...

One of the basic questions all business loss of profits and oil spill clients should be asking when considering the important decision of a hiring an attorney is what kind of team will help determine the amount of the loss and help the client through the catastrophe. Claimants should understand that their accountants are not lawyers and may be unintentionally damaging a client by wrongly representing a claimant in a legal proceeding and by not properly presenting the claim. ("Consultants" and other non-lawyers filing legal tort claims for others are wrongfully practicing law and will probably be hearing from state attorneys who have made a point of prosecuting these individuals.) I usually request at least two accountants help determine the amount of the loss, understanding from experience the importance of having specialized forensic accountants work with a client's regular tax accounting firm. The role of such an accountant was noted in The Forensic Accountant's Role In Business Interruption And Business Income Claims.

MBAs, various economists, brand marketing specialists, disaster recovery specialists, supply chain specialists, restoration specialists, market experts, industry consultants, public relation experts, advertising experts, and various scientific experts may all have to be considered and part of a "team" just to determine what to do and how to value a loss. Based on my experience, my bet is that most of the BP attorneys and their liability claims adjusters who will review the larger and more complex claims, which are accurately prepared, will be lost and in need of help from accountants as soon as the discussion gets to the point of explaining an "accrual basis" of past and future performance in lieu of previously prepared tax or cash basis records. Retaining specialists who can communicate clearly and explain to BP's claims consultants how the amount of loss was determined is an important consideration in hiring the particular specialists by or for the client. Simply having claims denied and litigation needlessly initiated because the claim valuations are not understood by the opponent can be devastating to a client who needs money now.

I suggest that those involved in these cases and those that may not have previous business loss of profits experience attend Oil in the Gulf: Litigation & Insurance Coverage on June 24-25 in Atlanta where I and others will discuss these issues in much greater detail.

The post, Public Adjusters Arrested in Broken Tile Insurance Fraud Scheme, set records for “hits” on this site. I also received all kinds of emails and discussion from others. At lunch with six attorneys in our firm, I mentioned that I have been doing this line of work since 1983 and have never handled a broken tile claim. Four others had the same experience, one attorney had a couple, and only Michelle Claverol, in our Coral Gables office, had more than a few.

I learned that some experts conducted tests regarding the breaking of tile. They found that breaking tile is not as easy at it may seem. A pot, shoe, or falling object has got to hit a tile just right or the tile has to be loose or set improperly for breakage to occur. They are not fragile. The back side of a hammer is sharp enough to cause the breakage quite easily with a strong strike.

I was reminded that an attorney friend of mine advertised for broken tile claims at the Windstorm Conference several years ago. Apparently, he had a fake million dollar check with his firm and that of a public adjuster as payees. The space in the bottom left had “one cracked tile’ written on the explanation line. The Florida Bar certainly would not have approved of such an advertisement. Indeed, it is quite unprofessional. To imply to public adjusters and the public that attorneys can help obtain large recoveries for a small cracked tile loss begs for the type of conduct that happened as indicated in the post. This past legislative session, some in the Florida Legislature mentioned this type of conduct as a reason to change longstanding consumer protections regarding insurance. If public adjusters and policyholder attorneys want a bad reputation can be developed, all we need is for some to continue this type of conduct. Insurance adjusters and insurance company management are rightfully upset, and so are the rest of us. A few bad apples are harming legitimate and law abiding public adjusters and consumers.

Finally, the oil spill issues are dynamic. Following my post, Accountants and Business Interruption Experts Will Play an Important Role Recovering BP Oil Spill Income Loss Claims, a dozen or so accountants have offered their services for lost income and earning capacity oil spill claims. Two weeks ago, I was in Steve Riggs’ office at Carr, Riggs & Ingram when I appeared on Fox News in the following interview regarding the oil spill:
 

I suggest that businesses consult with their accountants regarding these lost income claims. On anything more than a simple loss, I encourage businesses impacted by the oil spill to at least discuss the matter with qualified counsel. Proof and presentation of these claims and proving the full impact of the loss of earning capacity are what business interruption attorneys do all the time. Whether counsel should be retained should be determined on an individual basis. Often, no attorneys will be needed.

As noted by Bruce Smith:

...In my experience, I have found that the earlier the forensic accountant is involved in the claim process, the more value he/she typically provides. The value derived from the forensic accountant is his/her technical knowledge of accounting and familiarity with the claims process, which may result in a more expeditious resolution to the Business Income claim.

...

To quantify a Business Income loss, an analysis of pre- and post-loss revenue, costs and operating expenses is required. A competent forensic accountant will provide...with...knowledge and experience in matters, including, but not limited to: technical aspects of accounting rules and procedures and other related data, familiarity with policy terms and conditions, and establishment of accounting and document control procedures to ensure inclusion of all relevant data into the claim calculation.

The above-mentioned services will result in an expeditious compilation of a Business Income claim that properly indemnifies the policyholder for its Business Income loss in accordance with its coverage(s). Some specific examples of how the forensic accountant can assist:

• Requesting the relevant books and records needed to support a Business Income claim.
• Using his/her general knowledge of coverage to properly analyze, indentify and segregate revenues, costs and expenses to coincide with coverage and facilitate the expeditious preparation of the claim. Please note, a forensic accountant does not provide coverage interpretation, as this is the responsibility of an adjuster and or legal counsel.
• Providing an avenue for communication between the “two sides” on technical accounting and related matters that may be beyond the understanding of the adjuster and or legal counsel.
• Preparing a Business Income analysis...in an expeditious manner. (emphasis added)

Regarding the documentation and financial information needed to support a loss income or earning capacity claim allowed for in the BP Oil Spill claim process, Bob Glasser was completely on point noting:

The ability to submit and ultimately settle a claim for lost revenue with either an insurance carrier, BP, or another entity will be predicated on the culmination of many hours of dedicated recordkeeping and consistent application of data accumulation protocol. The critical lesson learned is that when an organization is able to execute the above steps, the likelihood of proving a loss and recovery is substantially increased. (emphasis added)

Bob Glasser has a specialized understanding of the hospitality industry and has long taught how to calculate lost revenue and account for the expense of mitigation efforts that are unique in that industry, which is being devastated by the significant drop in tourism, even before the oil strikes land. This intimate knowledge was partially demonstrated when he advised:

Quantifying and documenting lost revenue has been a complicated undertaking for the hospitality industry. On one hand, documenting cancellations in connection with booked rooms is relatively straightforward. On the other hand, identifying lost demand prior to a booking can be quite subjective.

Capturing cancellations with appropriate and supportable documentation to withstand future audit can happen only if specific protocols and procedures are put in place now. The process needs to be properly documented and communicated to the relevant employees. Documentation objectives include memorializing discussions and correspondence among hotel sales personnel or reservation agents with guests, potential guests, corporate booking agents and wholesalers, for the purpose of identifying the reason for a cancellation. Loss documentation prepared today should be reviewed by a seasoned financial professional to increase the likelihood it will withstand challenge by an adverse party. Date, time, conversation or action reported contemporaneously, and person making the entry should be made as it is done and collected at least daily.

The protocol for associating lost income from cancelled bookings to the oil spill may include refinements to existing sales software or the use of a database/spreadsheet to include the group name, group contact, intended date of stay, number of rooms, F&B revenue, room revenue, ancillary revenue, date of cancellation and reason for cancellation as well re-booking date if any and where the group moved, if known. Additional recommended procedures to be implemented include but are not limited to the following:

1. Reservation call centers should be provided specific instructions on how to document lost demand when guests ask about oil spill conditions.
2. Properties should identify any group discounts they offer to either appease a group with complaints due to the oil spill or to maintain a group reservation that was considering cancelling due to the oil spill. These discounts would be considered a mitigation strategy to curtail future lost revenues.
3. Any extra expenses incurred for marketing promotion or additional advertising over the normal operations to negate a loss of occupancy due to the oil spill should be documented.
4. Subsequent drops in occupancy rates from historical levels attributable to the oil spill should be recorded. Therefore, pre-oil spill occupancy, ADR and RevPar reports must be archived and maintained for future documentary support of decline in revenue.

The Oil Pollution Act of 1990 specifically indicates that those claiming loss income or loss earning capacity do not have to own the property damaged to have a claim for lost income or earning capacity. This is significant because some state laws which apply to the oil spill might be not so broad. "Loss of profits and earning capacity" under the Oil Pollution Act of 1990 means damages equal to the loss of profits or impairment of earning capacity due to the injury, destruction, or loss of real property, personal property, or natural resources.

The Coast Guard publishes some information describing the business documentation which should be accumulated for an oil spill claim:

You must provide evidence that supports your claim, and you can use whatever documentation you believe best supports that claim. Listed below are examples of documentation often submitted with property damage claims:

• Photographs
• Tax returns for loss year and previous three years,
• Income Statements for loss year and previous three years,
• Balance Sheets for loss year and previous three years,
• Cash Flow Statements for loss year and previous three years,
• Receipts or other proof of revenue combined with proof of expenses
• Reports from the Federal On-Scene Coordinator (FOSC), fire department, police, or other responder
• Information on Coast Guard or EPA notification
• Newspaper reports describing the spill
• Any other documentation you feel supports your claim

A Compliance Guide for submitting claims under the Oil Pollution Act of 1990 has some specific information that BP claims representatives and its lawyers may need before approving business income or earning capacity claims. It provides:

General Information for Claims by Businesses:

• Description and documentation of business losses due to spill
• Copies of letters of business cancellations caused by the spill damage
• Maps or descriptions of the area showing the business location and the spill impact area
• Financial statements for at least two years prior to spill and from the year of the spill
• Signed copies of income tax returns and schedules for at least three years prior to spill
• Details on efforts to mitigate losses or why no efforts were taken
• Statement from you or witnesses on how the spill led to loss of income or earning capacity; explain any earnings anomalies
• For hotels, daily and monthly occupancy information for two years prior to spill and the year of the spill

General Information on Claims by Fishing or Marine Charters:

• Description of business losses caused by the spill
• Evidence that vessel(s) were in the area impacted by the spill and were unable to carry on their business due to the spill
• Maps or descriptions of the area showing business location within spill area
• Statement from you or witnesses on how the spill caused the loss of income; explain any earnings anomalies
• Signed copies of income tax returns and schedules for at least three years prior to spill
• Details on expenses not paid out during period being claimed (e.g., wages)
• Booking records for three years prior to spill and year of spill
• List of charter rates, including any services the business specializes in (e.g., sport fish-ing)
• Copies of any logs relating to boating activities for the year prior to and the year of the spill
• Registration documents for the vessel(s), copies of business license, vessel license, fishing license, captain's license

My advice to all claimants with significant business loss from the BP Oil Spill is to consult with an attorney and retain an expert to prepare a sound and proper explanation of business income loss or loss of earning capacity. Mitigation attempts required under the law can be explored with your counsel and those with experience in disaster recovery. In many instances, the claims may often need no attorney involvement because they are not very complex. The larger and more complex the claim, the greater the need to have a professionally prepared lost income claim with calculations by an experienced expert like Bob Glasser and Bruce Smith.

The Value of Forensic Accountants in a Business Interruption Claim

In today’s economic environment, everyone is looking for value. In my experience. I have found that the earlier the forensic accountant is involved in the claim process, the more value he/she typically provides. The value derived from the forensic accountant is his/her technical knowledge of accounting and familiarity with the claims process, which may result in a more expeditious resolution to the Business Income claim.

In simple terms, the purpose of Business Income coverage is to indemnify the insured for its net income or loss plus continuing operating expenses during a period of interruption (period of restoration), resulting from a covered loss. In addition, the insured may be covered for additional expenses (Extra Expense), which it incurred due to the loss incident.

To quantify a Business Income loss, an analysis of pre- and post-loss revenue, costs and operating expenses is required. A competent forensic accountant will provide an adjuster, policyholder, or legal counsel with his/her knowledge and experience in matters, including, but not limited to: technical aspects of accounting rules and procedures and other related data, familiarity with policy terms and conditions, and establishment of accounting and document control procedures to ensure inclusion of all relevant data into the claim calculation.

The above-mentioned services will result in an expeditious compilation of a Business Income claim that properly indemnifies the policyholder for its Business Income loss in accordance with its coverage(s). Some specific examples of how the forensic accountant can assist:

• Requesting the relevant books and records needed to support a Business Income claim.
• Using his/her general knowledge of coverage to properly analyze, indentify and segregate revenues, costs and expenses to coincide with coverage and facilitate the expeditious preparation of the claim. Please note, a forensic accountant does not provide coverage interpretation, as this is the responsibility of an adjuster and or legal counsel.
• Providing an avenue for communication between the “two sides” on technical accounting and related matters that may be beyond the understanding of the adjuster and or legal counsel.
• Preparing a Business Income analysis, which coincides with the language of the policy coverage and that indemnifies the policyholder for its covered loss in an expeditious manner.

Conclusion

A forensic accountant serves as a resource of technical knowledge in accounting related matters that an adjuster or legal counsel may not feel comfortable with. The early inclusion of a forensic accountant into the team of claim professionals will go a long way in assuring that the policyholder is being properly indemnified for its covered loss under the terms of the policy coverage.

--Bruce Smith