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Beyond Basic BI Loss Scenarios
To fairly value a business income (BI) loss claim, a claims handler must have an understanding of how a policyholder captures economic transac- tions on its financial statements and other relevant operating reports and records. Sometimes the valuation is a relatively simple task, as the claims
professional is familiar with similar businesses and their recordkeeping, the loss period
is short, and revenue and expenses have been stable over a number of years. In other
cases, however, it is the polar opposite, resulting in an extremely challenging task.
To value the BI loss, the forensic accountant compared the projected operating results to the period of restoration
operating results. The difference was considered the BI loss.
A “Simple” Scenario
A fire damaged a restaurant. The policyholder contacted his insurance company’s
claims department to report the incident. The insurer deployed a claims adjuster to the
loss location. The adjuster scoped the damage and reported to the insurer his determination of coverage, initial reserves, and an estimate of the time required to repair or replace
the damaged property. The adjuster then engaged a forensic accountant to assist in the
valuation of the policyholder’s BI loss claim, informing the accountant that the Period
of Restoration1 was two months.
The forensic accountant requested various historical financial documents from the policyholder for the purpose of determining an appropriate base period from which to project
the restaurant’s operating results during the period of restoration. Based on the results of
his review of the records provided, the forensic accountant determined that the appropriate base period would be the two months preceding the date of loss, as historically operating results were similar to those that occurred during the months that encompassed the
Period of Restoration.
1 ISO coverage form CP00 32 04 02—Business Income (without extra expense)—defines
the Period of Restoration as the period of time that: (a) Begins 72 hours after the direct
physical loss or damage caused by or resulting from a Covered Cause of Loss at the
described premises; and (b) ends on the earlier of: (1) The date when the property at the
described premises should be repaired, rebuilt or replaced with reasonable speed and
similar quality; or ( 2) The date when business is resumed at a new permanent location…”
A “Complicated” Scenario
A forensic accountant may discover
during his or her initial review of records
and/or conversations with the policyholder that internal and/or external factors have affected business operations
during the potential base period. Furthermore, these factors would have a direct impact on the policyholder’s BI loss.
Examples would be:
E Limited availability of historical financial and production records.
EPre-loss events that skewed produc-tion/sales trends.
E Changes in operating capability through
the purchase, disposal, or modification
of plant and equipment.
The following scenario incorporates
these complicating factors.
Facts and Background
Saw-Masters Company is a vertically
integrated timber, lumber, and hardwood