Business Interruption! Best Practice:! A Forensic Accounting Perspective!

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1 Business Interruption Best Practice: A Forensic Accounting Perspective Daniel Thorpe, Director MDD Dubai 5 March 2014 Agenda Firm Overview and Area of Expertise Business Interruption Best Practice Scenario Gross Profit Wording Simplified Best Practice in Dealing with BI Claims Common Pitfalls Sales Projection Rate of Gross Profit Increase in Cost of Working Average/Underinsurance Other Measurement Issues to Consider Q&A

2 Firm Overview & Areas of Expertise World-class experts with a global reach We have 39 office on 4 continents. We speak 28 languages and hold 23 distinct professional designations. Our work spans more than 130 countries and 800 industries.

3 Over 8 decades of excellence Since 1933, we have performed economic damage quantification assessments that stand up to scrutiny. The forensic accounting firm of choice We frequently work with law firms, government entities, multi-national corporations, small businesses, insurance companies and independent adjustment firms.

4 Independent We work as an integral part of the adjusting team while maintaining our impartiality. As a result, all involved parties have complete faith in our unbiased findings, and in the event a case doesn t settle we re able to serve as credible expert witnesses. Experienced We have highly qualified resources available at all levels. Our experts boast numerous accounting designations, with many possessing additional credentials in valuation and fraud detection. We hire forensic accountants who speak the language of the region where we re operating. This allows for increased trust and minimal time wasted on translation.

5 Business Interruption Best Practice Business Interruption Scenario In the event of Policy covers Physical damage to dependent property (supplier, customer or attraction) By an insured peril Causing a necessary interruption of operations of the insured Actual loss sustained as defined in policy (A) for the defined indemnity period (reasonable time to repair or replace dependent property) Had No Loss Occurred (HNLO) Note: Net of policy deductibles, waiting periods and/or sub-limits

6 Gross Profit Form Simplified 1. Calculation of Standard Turnover (or projected turnover) 2. Deduction of Actual Turnover to arrive at Reduction in Turnover 3. Application of a Rate of Gross Profit to arrive at Loss of Gross Profit due to Reduction in Turnover Gross Profit Form Simplified 4. Deduct any other Savings that have arisen as a result of the damage; 5. Add Increase in Cost of Working ( ICW ) that meet the tests defined; 6. Application of the Average clause to reduce the indemnity if the sum insured is inadequate in comparison with the sum at risk; and 7. Add any Additional Increase in Cost of Working ( AICW ) that meet the tests defined.

7 Business Interruption Best Practice Early Involvement of Experts by Adjuster: Forensic Accountant, Lawyer, Forensic Investigator etc. Early discussions with Insured to understand impact on its business and potential mitigation options Set Accurate Reserves and Facilitate Interim Payment Business Interruption Best Practice Work with Insured to manage expectations Obtain appropriate support for the claim Determine Actual Loss Sustained Avoid Common Measurement Pitfalls Produce a report and analysis that stands up to scrutiny

8 Common Pitfalls Standard Turnover Other Circumstances Clause Rate of Gross Profit Insurance vs. Accounting Definition Gross Profit vs. Net Profit Loss Making Company Common Pitfalls ICW Criteria for Consideration Economic Limit ICW Incurred During Waiting Period Average/Underinsurance

9 Other Circumstances Clause Standard Turnover: The Turnover during the period corresponding with the Indemnity Period in the twelve months immediately before the date of the Damage appropriately adjusted to which such adjustments shall be made as may be necessary to provide for the trend of the Business and for variations in or special circumstances affecting the Business either before or after the Damage or which would have affected the Business had the Damage not occurred, so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the Damage would have been obtained during the relative period after the Damage. COMMON PITFALL USE OF 12 MONTH PRE-LOSS TURNOVER Other Circumstances Clause This clause allows us to base the loss calculation on expected results instead of historic results. Allows us to consider: Sales By Product or By Client Market Share, Industry Statistics Order Book Analysis Budget Adjusted for Variations Forecasts/Rolling Forecasts Strategic Plans Commodity Pricing

10 Rate of Gross Profit Policy: Gross Profit is the amount by which the sum of the Turnover and the amount of the Closing Stock shall exceed the sum of the amount of the Opening Stock and the amount of the Uninsured Working Expenses. Rate of Gross Profit is the Rate of Gross Profit earned on the Turnover during the financial year immediately before the date of the Damage BUT the Special Circumstances Clause also applies to the Rate of Gross Profit. Should Consider Uninsured Working Expenses OR Specified Working Expenses Rate of Gross Profit Company Accountant View Insurance Gross Profit Turnover Opening Stock Purchases Wages 21 Fixed Manufacturing O/Head 18 Variable Manufacturing O/Head Closing Stock (12) (12) Gross Profit Rate of Gross Profit 20% 46%

11 Increased Cost of Working (ICW) Policy: The additional expenditure [subject to provisions of the uninsured standing charges clause] necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in turnover which but for that expenditure would have taken place during the Indemnity Period in consequence of the Damage, but not exceeding the sum produced by applying the Rate of Gross Profit to the amount of the reduction thereby avoided. Criteria: Additional i.e. above normal levels Reasonable and Necessary Sole Purpose of Avoiding or Diminishing the Reduction in Turnover Benefit During the Indemnity Period Not Exceeding the Economic Limit Average/Underinsurance Policy: If the Sum Insured by this item be less than the sum produced by applying the Rate of Gross Profit to the Annual Turnover (or to a proportionately increased multiple thereof where the Maximum Indemnity Period exceeds twelve months) the amount payable shall be proportionately reduced. Criteria: Must be consistent in assumptions adopted between loss measurement and assessment of adequacy of sum insured Adopt same Standard Turnover and Rate of Gross Profit Significant Issue in BI Claims in Asia

12 Other Measurement Issues Production vs. Sales Deductible/Waiting Period Accumulated Stocks Make-Up Savings Duplication BI/PD Depreciation as a Saving Maintenance Brought Forwards or Saved Questions?

13 Daniel Thorpe, ACMA Industry Experience Food & Beverage Automotive Hotels & Resorts Retailers & Wholesalers Manufacturing Petrochemical Power generation Practice Areas Loss of Profits Extra Expense Contingent Business Interruption Product Liability & Product Recall Litigation Support Property Damage & Stock Claims