Supporting and documenting business income claims is never an easy feat.
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)
Recently, in La Louisiane Bakery v. Lafayette Insurance Company, No. 09-825, 2011 WL 445857 (La.App. 5 Cir., February 8, 2011), Louisiana’s Fifth Circuit Court of Appeals resolved an issue regarding the proof required to establish continuing expenses. La Lousiane Bakery is one of those cases where the insurance carrier raised every possible defense available to avoid recovery. The case was ultimately tried, and the bakery prevailed on every count. The insurer appealed and argued that the loss figures presented were not covered because they were not incurred. Lafayette also argued that the bakery inflated its business income claim and that its accountant did not submit bills, invoices or payroll journals to substantiate the officers’ salaries.
The Court of Appeals explained:
The Lafayette policy does not mandate the use of payroll journals. Moreover, financial records and accounting procedures are included among the relevant sources of information used to calculate business loss. Mr. Kase and Ms. Mitchell used relevant sources of financial information from profit and loss statements. In addition, Ms. Mitchell reviewed Mr. Kase’s reports. According to Mr. Kase, he also used tax returns. Mr. Kase explained that while he did not base his determination on payroll records, he did consider the profit and loss statements and tax returns. He explained that because there were cash flow problems, La Louisiane could not pay any expenses until it received the funds. The officers, however, were paid after the hurricane. Salaries were paid in December 2005.
The insurance policy does not require a specific type of documentation, such as payroll records. The general purpose of business interruption insurance is to protect the earnings which the insured would have enjoyed had no interruption or suspension occurred. Yount v. Lafayette Ins. Co., 08-0380, p. 14 (La.App. 4 Cir. 1/28/09), 4 So.3d 162, 171. Mr. Fernandez testified that sales figures vary each month, with August and September being peak times. Therefore, the jury could have reasonably determined that Mr. Kase’s use of profit and loss statements and tax returns and consideration of the entire 2004 12-month period was appropriate to demonstrate the continuing expenses that would have occurred had there been no interruption of the business. Thus, we find no manifest error in the jury’s finding in that regard. Rosell v. ESCO, 549 So.2d 840 (La.1989).
Moreover, as a general rule damages for loss of profits may not be based on speculation and conjecture; however, such damages need be proven only within reasonable certainty. Cox Communications v. Tommy Bowman Roofing, LLC, 04-1666, p. 8 (La.App. 4 Cir. 3/15/06), 929 So.2d 161, 166-67, citing Lavigne v. J. Hofert Co., 431 So.2d 74, 77 (La.App. 1 Cir.1983). Broad latitude is given in proving lost profits because this element of damages is often difficult to prove and mathematical certainty or precision is not required. Id., citing Louisiana Farms v. Louisiana Department of Wildlife and Fisheries, 95-845, p. 36 (La.App. 3 Cir. 10/9/96), 685 So.2d 1086, 1105.
In order for a court of appeals to overturn a jury verdict, it must find that the verdict was manifestly erroneous or clearly wrong or that the jury abused its discretion in awarding that amount. An appellate court must not re-weigh the evidence or substitute its own factual findings because it would have decided the case differently. Since the jury weighed the credibility of the all the experts and considered any alleged bias before rendering its verdict, the court of appeals affirmed the judgment in favor of the bakery and awarded appellate attorney’s fees to it as well.
I hope this case makes forensic accounting of business income losses a little less arduous.