By Josh Shilts, CPA, ASA, ABV/CFF/CGMA, CFE & Melissa Deighan, CFE
October 6, 2021
NACVA’s QuickRead
Natural Disasters and Claims Submission Best Practices
This article’s purpose is to alert practitioners to potential issues that may arise during the claims process as it relates to damages suffered from a catastrophic event, other than COVID-19, during the ‘pandemic economy. Readers need to be aware of and distinguish the two events when filing a claim. Because the influence of the ‘pandemic economy’ on businesses is ongoing, and in many instances specific to industries and geographic locations, practitioners need to be able to isolate the financial components of each and be prepared to articulate if and how the coronavirus impact translates into the impact from another disruptive event.
This article’s purpose is to alert practitioners to potential issues that may arise during the claims process as it relates to damages suffered from a catastrophic event, other than COVID-19, during the ‘pandemic economy’.[1] Readers need to be aware of and distinguish the two events when filing a claim. Because the influence of the pandemic economy on businesses is ongoing, and in many instances specific to industries and geographic locations, practitioners need to be able to isolate the financial components of each and be prepared to articulate if and how the coronavirus impact translates into the impact from another disruptive event.
Over the course of the last 18 months, financial and valuation practitioners have written and spoke on the impact of COVID-19 to businesses. The results have identified businesses and industries who fared better than previously imagined, new businesses being borne from the pandemic and consumer needs, enhancement of traditional business practices and a rethinking of the way businesses serve their customers. Business is and will continue to change at a faster rate because of the constraints and opportunities presented by the pandemic. That is important for practitioners to recognize.
Typically, practitioners would perform a ‘before and after’ analysis or a market share method. However, with the change in business lifecycles, practitioners are left wondering how the prior 18-month period (i.e., pandemic period) impacts their analysis. Questions practitioners may want to consider include:
Distinguishing between permanent and/or temporary changes that resulted from a causality-linked event could considerably affect a practitioner’s analysis. In determining losses, the practitioner should consider what constitutes ‘normal’ operations and finances. A determination needs be made if any divergences from this norm are permanent or temporary to ensure proper accounting of the event. Do these seemingly onetime events require normalization or are they part of a new company norm? Communication with the client throughout the course of the engagement is necessary for a full understanding of past events, current practices, and future business plans.
Historical and possible future transformations in response to the pandemic are key components in quantifying the impact from other business interruptions. A practitioner needs to understand the evolution of an entity and its industry in this new era to isolate its effect from the separate and distinct event being examined. For example, those affected by Hurricane Ida have also had to endure the sudden impact of the pandemic. For the last 18-months, those in Louisiana have had to adapt, grow, and change to a very different economy in which supply and demands shifted in, what seemed like, overnight. Losses from the interruption of normal business operations may be overstated should the impact of COVID-19 not be considered and adjusted accordingly. This ‘double-dip’ results in a misrepresentation of the event which could adversely affect the client.
My concerns and the purpose of this article is to alert fellow practitioners working in this arena to be cognizant of the pandemic impacts when calculating business interruptions for events that have occurred during the pandemic economy. I can foresee an array of issues wherein claims are made that may have a double-dip component in that losses incurred are inclusive of the pandemic economy. This may be troublesome for clients and is something we as a profession should be aware of and prepared to address during analysis. Another scenario is where practitioners include negative pandemic impacts within their historical analysis without addressing if such impacts are permanent or temporary. Get ready for a bumpy ride. I foresee this causing many sleepless nights for practitioners as they deal with business interruption claims moving forward.
[1] I would like to acknowledge Melissa Gragg, CVA, MAFF, CDFA, for informing me of the term ‘pandemic economy’.
The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.
Information contained in this article is provided for informational purposes only. It should not be misconstrued as legal or accounting advice or intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion. It presents matters of general interest relating to business valuation, forensic accounting, and litigation support topics for educational purposes only. Shilts CPA, PLLC disclaims all liability concerning actions taken or not taken based on any or all of the contents of this article.
We would be pleased to perform the requisite research and provide a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation service.