March/April 2006

The complex nature of Advanced Loss of Profits (ALOP) claims often creates material differences between the amount of a submitted claim and the indemnifiable loss under policy coverage. 

Advanced loss of profits losses stem from delays in construction projects that push back the anticipated commencement date of commercial operations of an insured property. For example: a simple refinery is being upgraded to a complex refinery; however, construction is delayed by six months because of a fire in the control room.  Because this delay could impact profitability, the business may – depending on the terms and conditions of the insurance policy - file a claim for lost profits.

Often it will be months or years between the actual loss under the property damage portion, giving rise to a covered ALOP loss before the delay of the project is experienced.  Once the insurance company and its advisors, such as loss adjusters and critical path analysts, have determined the length of the delay period due to a covered event, it is optimal to begin working with a forensic accounting firm.  An experienced forensic accountant will provide the expertise needed to analyze financial statements for actual and budgeted results, costing records, payroll, loan agreements and other documentation; he will also review this information as it relates to the policy language.

“In ALOP situations, we are often called in once the delay period has commenced to inspect business records, review financial and operational documents and audit the submitted claim to have a clear picture of the losses sustained and clarify any questions the insurance company or loss adjuster may have,” said Markus Heiss, partner in Matson, Driscoll & Damico’s London office and an ALOP specialist.

The forensic accounting team begins its investigation by discussing the circumstances of the loss with the insured, the loss adjusters and other insurance professionals.

Depending on the volume of information and the complexity of the claim the initial review may take between a few days to several weeks.

“Often we have to wait until the new facility or expansion is complete so we can monitor the actual profitability and offer a more accurate calculation of losses.  We also review all necessary financial and operational documentation, market forecasts, competitor data and other information to verify the insured’s budgets and forecasts,” explained Heiss. “In addition, we work with engineering consultants and critical path specialists to determine the losses and expenses incurred by the delay.”

The greatest challenges with ALOP claims are determining which losses were incurred during the covered delay period, what to use as the base for projection when historic information is unavailable and how to separate covered losses from non-covered losses.

These factors can make the analysis, measurement and documentation process difficult and may require that the forensic accountant present various options for consideration.

After performing a thorough analysis, the forensic accountant will report and present their findings to provide the insurance company and loss adjuster with the information needed to decide on the proper loss measurement.

Whether it’s a delayed power plant opening or the destruction of a construction expansion, it’s important to have a forensic accounting firm on retainer to evaluate the financial impact on the insured’s business and verify the ALOP claims presented.  These professionals have the credentials and knowledge necessary to interpret and understand the data being presented, how it relates to the claim and policy and can paint a clear financial picture in even the most complex claim situations.