Why Timing Matters in Business Interruption Claims

When a restaurant in a hotel closed for a year, the owners filed a business interruption insurance claim for $240,000 to recover their losses. Unfortunately, they provided no supporting documentation for their claim, creating uncertainty for the insurance company, which subsequently appointed a forensic accounting firm to investigate. What followed is a cautionary tale about the importance of professionally preparing business interruption claims from the outset.

The Initial Investigation The insurance company expressed doubts about the claim, asserting that there was no decline in hotel traffic during the restaurant’s closure. They instructed the appointed forensic accountants to limit their analysis to point-of-sale (POS) transactions and exclude sales made on account. This narrow approach severely underestimated the restaurant's true losses. The resulting report concluded that the claim was worth only $20,000—a far cry from the original $240,000 submitted by the restaurant.

The Real Loss: A Missed Opportunity Recognizing the inaccuracy of the initial findings, the restaurant owners engaged our forensic accounting firm to reassess the claim. Through a thorough analysis, including:

1. Reconstruction of the restaurant’s financial records,
2. Review of historical sales data,
3. Consideration of sales on account and other overlooked revenue streams,

we calculated the actual loss at $220,000.

However, despite the strong case we built, the insurance company remained steadfast in its reliance on the initial report and maintained their offer of $20,000, forcing the matter toward litigation.

Lessons Learned This case highlights the critical importance of engaging the right experts at the very start of a business interruption claim. Here’s why:

• Accurate Claim Preparation Avoids Disputes If our team had been engaged initially, the claim would have been calculated correctly from the beginning, leaving no room for misinterpretation or underestimation. Proper documentation and analysis would have ensured the restaurant’s losses were acknowledged and fairly compensated.
• Comprehensive Analysis Matters Limiting an investigation to POS sales ignored a significant portion of the restaurant’s revenue, leading to an undervalued claim. Forensic accountants consider all revenue streams, including historical sales patterns and external factors, to ensure an accurate and defensible claim.
• The Insurance Company Covers the Cost Many business owners don’t realize that insurance policies often cover the cost of hiring a forensic accountant to prepare and support a claim. This service not only ensures the claim is accurate but also provides professional documentation that can withstand scrutiny.
• Prolonged Disputes Are Avoidable Professional claim preparation minimizes the risk of disputes and costly litigation. In this case, the insurance company could have avoided prolonged contention and the associated legal costs by relying on a thorough and accurate claim from the start. ?

Why Professional Forensic Accounting is Essential Business interruption claims are inherently complex, involving detailed financial analysis and careful reconstruction of lost revenue. Without the expertise of forensic accountants:

1. Key revenue sources can be overlooked,
2. Claims may lack the necessary documentation to withstand scrutiny,
3. Business owners may face unnecessary delays and underpayment.

By engaging forensic experts early, businesses ensure their claims are accurate, robust, and fully supported, allowing insurers to make informed decisions and facilitating quicker resolutions.

A Final Thought This case underscores the need for business owners and insurers alike to prioritize professional claim preparation. By doing so, disputes like this one can be avoided entirely, saving time, resources, and frustration for all parties involved. In the end, an accurately prepared claim benefits not only the insured but also the insurer, as it enables a fair and efficient claims process.

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