Spotting Fraudulent Business Interruption Claims

Insurance – in any form, whether business, medical, workers’ compensation or auto – is the “safety net” that protects individuals and companies in case of damage, theft, injury, illness or loss. Fire, floods, earthquakes, tornadoes – even unanticipated freak accidents – can decimate a thriving business in short order. When disaster strikes, business owners turn to their insurance agent or broker to help pick up the pieces. While the majority of business interruption claims are paid on legitimate loss, it’s an unfortunate fact that, according to the Coalition Against Insurance Fraud, an estimated $80 billion in fraudulent claims are made every year in the U.S. When a business experiences a loss that temporarily disrupts their operations, they can file a business interruption claim, also known as a business income loss claim. The claim will compensate business owners for the lost revenue and property damage sustained during the company’s closure.

Every business interruption claim should be approached with a degree of caution. Even the most seasoned agent or adjuster 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 typical examples of business interruption claim fraud are:

Padding the claim with extra expenses. A 2013 survey by the Insurance Research Council (IRC) showed 24 percent of respondents believed it to be acceptable to pad a claim to make up for deductibles. Although overstating expenses may seem like an easy way to increase the payout, it is still fraud.

Overstating revenues. Falsifying revenues, blaming reduced revenues on non-event factors, or exaggerating legitimate revenues result in the overpayment of claims.

Understating direct or variable costs. Incorrectly categorizing or deferring expenses associated with sales (i.e., costs of goods sold and variable costs) show increased lost profits and result in the overpayment of claims. 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. It only takes one false claim to defraud an insurance company of thousands of dollars in fraudulent payouts.

Here are seven “red flags” of fraudulent business interruption claims:

1. The policyholder is overly aggressive about settling the claim quickly.
2. The insured’s federal tax returns show the company had been suffering financial loss or generating very little revenue, yet the claim reports an excessive loss.
3. The claim’s losses included large, expensive items, yet the insured cannot produce credit card statements, canceled checks or receipts, or produces receipts with no store logo, no sales tax figures or no date.
4. 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.
5. The policyholder previously posed hypothetical questions to the agent about losses similar to the one being investigated.
6. The claimant’s financial records contain irregular or questionable information, such as out-of-sequence receipts and checks and no source documents.
7. The claimant refuses to provide substantive and relevant evidence to support their claim (e.g., copies of their accounting software, bank statements, customer invoices, or vendor bills).

Many insurance carriers have Special Investigation Units or outsource forensic accounting services to analyze business interruption claims. These experts have unique skills to take the investigation to the next level.

The 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.

Tiffany Couch is CEO and founder of Acuity Forensics, a nationally recognized 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. She can be reached at tcouch@acuityforensics.com or (360) 573-5158.