Business interruption (BI) insurance claims are on the rise, and there are “great opportunities” for analysts on both the business owner side as well as the insurance company side, according to Michael Haugen (JS Held), in an article in the April issue of Business Valuation Update. The demand for valuation and forensics experts is partly due to a great deal of misrepresentations in the claims. Haugen stresses that a misrepresentation does not necessarily mean fraud—it can simply mean an honest mistake. But a great deal of real fraud is going on in this area.
In the article, Haugen gives over a dozen ways to “sniff out” misrepresentations. One of them is to look for corroborating evidence to confirm the narrative about the loss with other sources, such as data from accounting records or other documents. In one case, Haugen was measuring the loss at a manufacturer that had two different plants. A fire shut down one of the plants, and the work was shifted to the other plant. The business income loss claim included increased labor expenses due to outsourcing to third-party labor, which was more expensive than in-house labor. To corroborate this, budgets were examined that revealed that outsourcing was planned in the normal course of business. This did not match the narrative told to the analysts about the extra expense due to the damage.
But just how far do you go in trying to detect misrepresentations? After all, it takes time and effort, which means extra costs. Haugen advises that you work with the insurance carrier and business owner when sorting out potential misrepresentations and whether to try to flush out the correct answer.
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