The Insurance Claims Process
Article, CPA Insider – November 2008
Insurance / Property
When devastating events take place and property is damaged, business owners file claims with their insurance companies. Tim Voncina explains how a forensic accountant's technical knowledge and experience can assist in the measurement of certain claim components such as building and equipment damage, inventory losses, business interruption losses and extra expenses.
Over the past few years, we have been witness to several significant natural disasters; from the fires that burned out of control in the hills of California, to the extensive flooding that occured in the Midwest, to the hurricanes that affected the coastal states from Florida to Texas, there has been no shortage of devasting events. These events have resulted in billions of dollars in property damage, with business owners filing claims with their insurance companies to obtain reimbursement of insured damages. These claims often involved components for building and equipment damage, inventory losses, business interruption losses and extra expenses incurred.
When a claim is submitted to an insurance company, the matter is assigned to a claims adjuster. The adjuster is responsible for corresponding with the policyholder, interpreting coverage, and for the overall handling of the claim. In the case of large scale catastrophes like Katrina in 2005, insurance carriers often pull together teams of adjusters to respond to policyholder claims. In most cases, the policyholder will represent himself in resolving the claim, while in more complex circumstances, the insured will retain a public adjuster or accounting firm to represent them and prepare a claim on their behalf. Given that most policyholders are not too familiar with the claims process, or more importantly, the terms and conditions outlined in their insurance policy, the amounts submitted are often inadvertently misstated. The misstatement may either be to the benefit or detriment of the policyholder and is usually not discovered until a thorough review of the claim by the insurer is performed. When reviewing a submitted claim, the insurance adjuster may seek specialized assistance from various consultants including structural engineers, equipment specialists, salvors and forensic accountants.
Role of Forensic Accountants
For years, insurers have come to rely on the technical knowledge and experience of forensic accountants to assist them in the measurement of certain claim components. Whether a claim involves components for business interruption, extra expense, damaged inventory or contents, the forensic accountant can be a valuable resource available to both adjuster and insured and can play a crucial role in the overall claims process. Some of the potential benefits to retaining the services of a qualified forensic accountant early in the review of a claimed matter are noted as follows.
First, the forensic accountant can be a great time saver to both the adjuster and policyholder. Having previous experience with the claims process and being familiar with some of the common policy terms and conditions, the forensic accountant, while not providing coverage interpretation, can facilitate claim resolution by providing quantification on various aspects of the claim. For example, insurance policies require insured businesses to prove their losses through use of their financial books and records. An experienced forensic accountant can identify the specific records that may be required to support a loss, correspond directly with the policyholder to obtain the needed information, analyze the financial documentation, and present a calculation summarizing their findings. By having the policyholder interact directly with the insurer’s accountant, the time that may otherwise be spent by the policyholder learning about the basics of claims processing or recasting financial data into the format required by policy language, the insured can focus on maintaining supporting documentation and getting the business up and running all allowing for a quicker resolution of the claim. For the adjuster, having a resource to provide assistance with these tasks can free up valuable time to perform the many other responsibilities awaiting them.
Another example of how an accountant can save time on a claimed matter is through proper segregation of submitted charges. Most policyholders may not understand the manner in which insurers require information to be presented; they only want the amount submitted to be considered for reimbursement. By working with experienced claims professionals, claims can be properly submitted with segregation of property damage, extra expense, and expediting costs. Insurers are required to distinguish property damage related items from time element items or other categories of loss to establish and monitor reserve amounts and apply sub-limits or co-insurance provisions, when applicable. Rather than spending hours thumbing through volumes of invoice support themselves, the adjuster can engage the services of a consultant who can analyze and properly organize these costs for review and approval, while allowing more time to be devoted to other important decisions. This also benefits the policyholder by reducing the amount of time that would normally be spent by the adjuster separating costs.
Finally, measurements of business interruption losses are confusing to many adjusters and policyholders alike, especially those not encountering the topic on a regular basis. While experienced in business interruption policy and coverage issues, involving the services of an experienced forensic accountant can prove to be an efficient tool for the adjuster in getting the claim resolved. As an added benefit, the forensic accountant, through previous experience, may have significant knowledge of the industry at hand. In some cases, the accountant may have previous experience dealing with the same insured business, therefore, knowing exactly what records are available for review and how costs are tracked in the insured’s accounting system. With claims involving manufacturing business interruption losses, having an experienced consultant who understands the manufacturing process and how costs are accumulated and tracked can be crucial to obtaining a proper measurement of loss. Involvement of a forensic accountant experienced in first party insurance claims will provide assurance that the loss is measured accurately and pursuant to the insuring agreement. For the policyholder, it provides assurance that items covered by the policy were not left out.
In conclusion, the accountant can provide a great benefit to the adjuster and policyholder. Some advantages to involving the services of an accountant on claims are the building of better relationships between insurers and their customers due to the reduction in the amount of time it takes to resolve claims, assuring that proper measurements of insured losses are calculated, and that the time saved allows the adjuster and policyholder to perform those tasks that will ultimately get the business up and running.
As appeared in CPA Insider, November 2008.