Assessing COVID-19 Losses

May 28, 2020

Considerations to Establish Business Losses

By John Tira, CPA & Tim Zimmerman
The coronavirus (COVID-19) pandemic has had a profound impact on the global economy. The disease’s impact has been far reaching with many businesses shuttering, while others have significantly reduced operations. After successfully addressing immediate concerns, such as employee safety and short-term liquidity, many companies are evaluating options for recovering financial losses from government agencies and insurance carriers.

If a business is eligible to make a claim for its financial losses, it’s crucial that it accurately assesses the direct impact of the pandemic and provides reasoned and supportable calculations of related losses. This article summarizes some of the key considerations needed to establish business losses, both in claim preparation and claim review. Although our discussion uses concepts associated with an insurance related submission, these same guidelines can apply to other types of recovery mediums—such as submissions for government relief or litigation proceedings.

Understanding the Claims Process
Developing and evaluating a claim for business losses and additional costs goes beyond typical financial and accounting analysis. This exercise requires an accountant familiar with coverage considerations, knowledgeable about the claims process and experienced in effectively measuring and evaluating the support and causal connection of the losses to the peril.

Experienced accountants who have worked on behalf of policyholders, governmental agencies and insurance carriers understand the issues faced by parties on both sides of the table. Those individuals can bring an appreciation of each party’s objectives, as well as a thoughtful, reasoned approach to determining the relevant types of analyses and information necessary for a balanced and objective analysis.

In our experience, the following procedures represent the foundational considerations that an accountant should address when preparing or evaluating a claim:
  • Review the insurance policy form and coverage to determine the appropriate measure of recovery for the claim (profits, earnings, business income) and the relevant definitions of insured perils, exclusions and limits. Note: Opinions regarding coverage (through insurance or otherwise) are typically reserved for attorneys rather than accountants.
  • Identify the appropriate limit of insurance based on the nature of the loss, such as “actual loss sustained” or a “stated amount” of insurance, and understanding when/how co-insurance may apply.
  • Analyze saved expenses, continuing expenses and non-continuing expenses.
  • Evaluate gross profit metrics by analyzing fixed, semi-variable and variable expenses.
  • Consider additional operating expenses that were incurred to mitigate the loss and identifying extra expenses that may be insured by the policy.
  • Review historical financial performance, current business plans and future forecasts to estimate projected sales absent/but for the event.
  • Identify and quantify the actual or expected financial performance during the loss period.

While the basic framework of business loss calculations may be similar, understanding the nuances of measuring sales, production, expenses and profit in conformity with a policy or government relief program is critical to validate an accurate and supportable claim. In a COVID-19 environment, many factors may cause business losses—such as supply chain disruptions, employee availability, orders from civil authorities and the loss of market for a business.

We recognize that many different policies and types of coverage exist, and government recovery programs will have their own evolving requirements. The unique facts and circumstances of each situation will determine what types of supporting documentation, financial and accounting analysis, loss measurements, and reporting structures are needed to prepare a complete and effective claim.

Key Information Sources
To effectively prepare a claim submission, businesses need to compile and analyze key information to document losses stemming from a loss event, including COVID-19. The nature and extent of the documentation needed will depend on the type of claim filed and where it is filed (e.g., in an insurance context, in connection with a government fund, etc.).

An accountant can provide valuable assistance in determining what documents are needed, which questions should be answered and what information will be necessary to support a claim. This process typically involves detailed analyses of the following:
  • Insurance policy in force at the date of the loss—including all extensions, endorsements and declarations pages, and details of government recovery program eligibility and requirements; 
  • Descriptions (in narrative form) of the loss event and how the business has been affected to date, which may include third party reports from claims professionals;
  • Financial, accounting and operational information for two to three years before the loss event, and ongoing for the duration of the loss period including:
  • Organization charts and employee roles and responsibilities;
  • Tax returns, financial statements and internal/management-prepared financial statements;
  • Monthly sales, profit margin reports, payroll data, and expense budgets/details; and
  • Customer and vendor agreements/contracts.
  • Details of any mitigation efforts to reduce losses and supporting documentation for any loss-related expenses.

In addition to the above information, other items may be relevant and necessary to evaluate the business and the industry in which it operates (e.g., production schedules for the manufacturing industry).

The Accountant’s Role in the Claims Process
Based on our experience with claimants and insurers, we suggest the following actions to provide for a successful claims process.

Communication: Frequent and informed communication is important to structure the analysis and to identify and obtain relevant information. Communication should be ongoing and consistent between all parties, including claimants, carriers, accountants, attorneys and brokers.

Collaboration: Accountants should effectively work with their clients to support the claims process, recognizing that not all claimants and carriers operate the same way. In addition, accountants often work collaboratively with other professionals and stakeholders to help complete their clients’ objectives.

Confidentiality and discretion: Client information should be treated confidentially and made available only to those who directly participate in the work, and who need the information to complete required analyses. The claims process may reveal highly sensitive information, and an accountant should be cognizant of the risks of information leakage when working for claimant or carrier.

Information gathering: Firsthand knowledge from written reports is often supplemented through interviews and meetings to fully understand issues, to develop an understanding of facts and timelines, and to gather documentation. In a COVID-19 environment, these interactions may happen over the phone or online rather than in person.

Forensic accounting: Understanding the differences between routine business accounting and accounting used to prepare claims, and applying that knowledge to analyze and present financial information are critically important to successful claims. Accountants can offer relevant analytical approaches, scenario testing and other procedures to measure and quantify losses. An accountant is often required to critically analyze general ledger detail and assess accounting entries and related support.

Documentation and reporting: Accountants can support their clients in identifying, compiling and analyzing comprehensive documentation and the data necessary to support or evaluate claims. Further, communicating findings in concise, yet comprehensive written or oral reports (as required by the type of claim or recovery sought) that focus on the relevant issues and include supporting analysis, opinions and recommendations will be an important component of each engagement.

Concluding Observations
The COVID-19 environment is having a significant economic impact on individuals, companies and industries in the short-term and foreseeable future. Clients across a range of markets, both domestic and international, are likely to experience significant losses. While many insurance policies or government programs may offer potential sources of recovery, the applicability and potential relief associated with these will depend on the situation and the findings of professionals, clients, the coverage providers or even the courts.

A proactive, ongoing dialogue between the client and its financial and legal advisers should facilitate management of the short- and long-term implications of the challenges facing businesses. The most important advice simply may be to approach this entire pandemic period proactively, seeking informed advice and assistance as losses are tracked, documented and submitted for potential recovery.
John Tira, CPA, CFE, CFF (CalCPA Forensic Services Section member) and Tim Zimmerman, CBV, CFE, ABV are forensic accountants at RSM. Joe Decilveo, Rick Contorno and Dave Bart of RSM contributed to this article.

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