While the majority of business interruption claims are paid on legitimate loss, an estimated $80 billion in fraudulent claims are made every year in the U.S. When a business experiences a loss that temporarily disrupts its operations, it can file a business interruption claim, also known as a business income loss claim. The claim will compensate business owners for lost revenue and property damage sustained during the company's closure.
Agents and brokers should approach every business interruption claim with a degree of caution. Even the most seasoned agent can be caught off-guard by a well-put-together claim. That's why it is so important to thoroughly investigate every claim to ensure its legitimacy. Claimants who intentionally manipulate their business's financial statements to create a false picture of company health are committing fraud.
Three examples of business interruption claim fraud are:
Padding the claim. A 2013 survey by the Insurance Research Council showed 24 percent of respondents believed it to be acceptable to pad a claim to make up for deductibles. Overstating expenses may seem like an easy way to increase the payout, but it's still fraud.
Overstating revenues. Falsifying revenues, blaming reduced revenues on non-event factors or exaggerating legitimate revenues result in claims overpayment.
Understating direct or variable costs. Incorrectly categorizing or deferring expenses associated with sales, (like costs of goods sold and variable costs) show increased lost profits and result in the overpayment. Expenses should be scrutinized to ensure saved costs are appropriately reduced from lost sales.
Although most policyholders are honest, the fact is fraudulent claims will be submitted to insurers at some point. Here are seven red flags of fraudulent business interruption claims.
- The policyholder is overly aggressive about settling the claim quickly.
- The insured's federal tax returns show the company had been suffering financial loss or generating little revenue, yet the claim reports an excessive loss.
- The claim's losses include large, expensive items, yet the insured cannot produce hard evidence, or produces receipts with no store logo, no sales tax figures or no date.
- The claim was made shortly after the policy was activated, after an increase in the amount of coverage was added or shortly before the policy is to end.
- The policyholder previously posed hypothetical questions to the agent about losses similar to the one being investigated.
- The claimant's financial records contain irregular or questionable information, such as out-of-sequence receipts and checks, and no source documents.
- The claimant refuses to provide substantive evidence to support the claim (copies of their accounting soft ware, bank statements, customer invoices or vendor bills).
Many carriers have special investigation units or outsource forensic accounting services to analyze these claims and can take an investigation to the next level. Bottom line: If a claim has the hallmarks of potential fraud, escalate the investigation. Doing so helps mitigate loss, prosecute fraudsters and disrupt illicit payouts.
About the Author
Couch is CEO and founder of Acuity Forensics, a forensic accounting firm. She is also the author of The Thief in Your Company, a book that explores the financial and emotional impact of fraud on organizations of all sizes. Email: email@example.com. Phone: 360-573-5158.