July/August 2006

During the aftermath of a major property loss, it is often realized that the reported property and business interruption insurance values are inaccurate. This realization often surfaces when the insurance company adjuster provides an initial loss estimate for reserve purposes that makes it apparent that total insurable values are incorrect. Typically, the problem occurs not out of an intent to defraud, but simply because of a disconnect in the process of converting current accounting information into the reported values submitted to the insurance carriers by the risk management department. In fact, the cause may be due to something as simple as a lack of knowledge by internal accounting personnel about the difference between accounting valuations versus insurance valuations.

Reported property insurance values typically consist of replacement costs for buildings, machinery and equipment, replacement cost or selling price less unincurred expenses for stock as well as twelve months of business interruption value.

When bringing in a forensic accounting firm to get to the core of the reported values issue, it’s important that the professionals engaged have:

A strong understanding of the basis of valuation in the insurance policy
Experience interviewing risk management, operations and corporate accounting personnel
Knowledge of the process utilized in determining the reported values.
These professionals will be called on to analyze all documentation used to verify the values and may even be asked to work with other consultants regarding building and equipment replacement values as well as the computation of values that should be reported.

With agreed value policies being universally utilized, it causes co-insurance to rarely be applied in large property insurance programs. As such, it becomes even more important to insurance companies that the values upon which the insurance premiums are based are properly reported. It is also imperative that insurance underwriters and corporate management have an accurate picture of values at risk of loss at all locations.

Though it seems to be a basic insurance concept, it can become complex when dealing with multi-national businesses that have multiple locations, a lack of understanding of asset insurable value compared to recorded book values at original cost, failure to update asset values for new construction, assets placed into or taken out of service, price inflation and/or changes in foreign exchange rates, and, most importantly, business interruption values at risk along with any interdependencies between locations.

William J. Bradshaw is a partner in Matson, Driscoll & Damico’s Chicago office. Bill has more than 30 years experience in forensic accounting. For more information, please contact him at wbradshaw@mdd.com.