Both first- and third-party claims require accurate evaluation of both causation and the resulting loss. Webster’s New World Dictionary defines “forensic” as being:
- of, characteristic of, or suitable for a law court, public debate, or formal argumentation;
- specializing in or having to do with the application of scientific, especially medical knowledge in legal matters, as in the investigation of crime.
Because of the many CSI-type (crime scene investigation) programs and criminal trials on television, “forensic” is often associated with investigating something illegal.
Use of experts in a variety of fields, engineering, medical specialties, geology and many other professions is a part of the forensic investigation by the adjuster. Adjusters often use accountants familiar with auditing the factors involved in insurance claims, such as in a business income loss. Other uses include hiring a qualified accountant when fraud is suspected, perhaps as an expert court-tested witness. In an employee dishonesty claim, however, the insured must prove the loss, which may require the insured to hire an accountant. If the adjuster is unconvinced, the insurer may hire an accountant, too.
Forensic accounting often becomes necessary in a major environmental disaster, where hundreds or thousands of claimants allege loss of income due to pollution, but must prove their loss in a “forensic” manner. For example, during the 2010 BP oil spill cleanup and aftermath, thousands of claimants alleged loss of income because of the spill and resulting oil-soaked beaches. When claims were submitted, one of the first requests undoubtedly was to review the most recent years’ tax returns. Those who dealt on a cash-only basis or who failed to keep accurate records found that, despite the fact that they might have lost income, the burden of proof was on them, not BP.
Claimants, law firms and adjusters administrating such claims could call upon a forensic accountant to try to reconstruct the individuals’ losses. Those who had not reported income to the IRS obviously had both a legal problem and a more difficult job proving their loss. Yet there are ways. While a claimant might not have records, often those with whom such a person dealt would have records that could be used. A boat owner would have fuel or maintenance costs that could be verified; seafood purchasers would generally keep accounts of what they paid a fisherman, for example. A record proving an alleged loss could be reproduced from data unavailable to the claimant, but obtainable by the accountant.
False or fraudulent claims and financial crimes often call for a forensic accountant. When a bookkeeper “cooks the books” to hide theft until the employer suspects and audits, it may take the insured’s accountant a year or more to figure out how much was stolen. Financial thieves go to great lengths to hide their embezzlements. But when the financial thief is a hacker, perhaps operating from a foreign country, determining the loss amount can be even tougher. In a computer fraud case involving an outside hacker (or a combination of an insider and an outside hacker), a forensic accountant’s audit may be less to detect the criminal hacker’s identity than to determine the stolen amount so that the insured can pursue a claim under various policies. The insured, and not the insurer, must prove the loss.
It is because of claims situation involving a variety of income or crime losses that Crawford & Company®’s Educational Services offers both classroom and KMC on Demand courses that cover the intricacies of insurance coverage, contract and liability issues and an understanding of damages and loss.
This article originally ran in the April 2016 edition of Take Note, Crawford Educational Services’ monthly online newsletter. For a free online subscription, sign up here.