The tragedy of loss of human life and damage to the environment when discussing the BP Oil Spill cannot be overstated. The important role that accountants and business interruption experts will play helping prove financial loss cannot be overstated either. Experienced professionals like Bob Glasser, noted in yesterday’s Are Lawyers Pandering for BP Oil Spill Clients Going to Get Sued for Malpractice in Follow-up Class Actions? A Guest Blog Regarding Business Claims By Bob Glasser Explains and Guest Blogger Bruce Smith, who wrote The Forensic Accountant’s Role In Business Interruption And Business Income Claims, should be in high demand from businesses and entities that lose revenue and income as a result of this oil spill. Attorneys presenting these lost income claims should consider hiring such individuals as consultants and financial expert witnesses.
As noted by Bruce Smith:
…In my experience, I have found that the earlier the forensic accountant is involved in the claim process, the more value he/she typically provides. The value derived from the forensic accountant is his/her technical knowledge of accounting and familiarity with the claims process, which may result in a more expeditious resolution to the Business Income claim.
To quantify a Business Income loss, an analysis of pre- and post-loss revenue, costs and operating expenses is required. A competent forensic accountant will provide…with…knowledge and experience in matters, including, but not limited to: technical aspects of accounting rules and procedures and other related data, familiarity with policy terms and conditions, and establishment of accounting and document control procedures to ensure inclusion of all relevant data into the claim calculation.
The above-mentioned services will result in an expeditious compilation of a Business Income claim that properly indemnifies the policyholder for its Business Income loss in accordance with its coverage(s). Some specific examples of how the forensic accountant can assist:
- Requesting the relevant books and records needed to support a Business Income claim.
- Using his/her general knowledge of coverage to properly analyze, indentify and segregate revenues, costs and expenses to coincide with coverage and facilitate the expeditious preparation of the claim. Please note, a forensic accountant does not provide coverage interpretation, as this is the responsibility of an adjuster and or legal counsel.
- Providing an avenue for communication between the “two sides” on technical accounting and related matters that may be beyond the understanding of the adjuster and or legal counsel.
- Preparing a Business Income analysis…in an expeditious manner. (emphasis added)
Regarding the documentation and financial information needed to support a loss income or earning capacity claim allowed for in the BP Oil Spill claim process, Bob Glasser was completely on point noting:
The ability to submit and ultimately settle a claim for lost revenue with either an insurance carrier, BP, or another entity will be predicated on the culmination of many hours of dedicated recordkeeping and consistent application of data accumulation protocol. The critical lesson learned is that when an organization is able to execute the above steps, the likelihood of proving a loss and recovery is substantially increased. (emphasis added)
Bob Glasser has a specialized understanding of the hospitality industry and has long taught how to calculate lost revenue and account for the expense of mitigation efforts that are unique in that industry, which is being devastated by the significant drop in tourism, even before the oil strikes land. This intimate knowledge was partially demonstrated when he advised:
Quantifying and documenting lost revenue has been a complicated undertaking for the hospitality industry. On one hand, documenting cancellations in connection with booked rooms is relatively straightforward. On the other hand, identifying lost demand prior to a booking can be quite subjective.
Capturing cancellations with appropriate and supportable documentation to withstand future audit can happen only if specific protocols and procedures are put in place now. The process needs to be properly documented and communicated to the relevant employees. Documentation objectives include memorializing discussions and correspondence among hotel sales personnel or reservation agents with guests, potential guests, corporate booking agents and wholesalers, for the purpose of identifying the reason for a cancellation. Loss documentation prepared today should be reviewed by a seasoned financial professional to increase the likelihood it will withstand challenge by an adverse party. Date, time, conversation or action reported contemporaneously, and person making the entry should be made as it is done and collected at least daily.
The protocol for associating lost income from cancelled bookings to the oil spill may include refinements to existing sales software or the use of a database/spreadsheet to include the group name, group contact, intended date of stay, number of rooms, F&B revenue, room revenue, ancillary revenue, date of cancellation and reason for cancellation as well re-booking date if any and where the group moved, if known. Additional recommended procedures to be implemented include but are not limited to the following:
- Reservation call centers should be provided specific instructions on how to document lost demand when guests ask about oil spill conditions.
- Properties should identify any group discounts they offer to either appease a group with complaints due to the oil spill or to maintain a group reservation that was considering cancelling due to the oil spill. These discounts would be considered a mitigation strategy to curtail future lost revenues.
- Any extra expenses incurred for marketing promotion or additional advertising over the normal operations to negate a loss of occupancy due to the oil spill should be documented.
- Subsequent drops in occupancy rates from historical levels attributable to the oil spill should be recorded. Therefore, pre-oil spill occupancy, ADR and RevPar reports must be archived and maintained for future documentary support of decline in revenue.
The Oil Pollution Act of 1990 specifically indicates that those claiming loss income or loss earning capacity do not have to own the property damaged to have a claim for lost income or earning capacity. This is significant because some state laws which apply to the oil spill might be not so broad. "Loss of profits and earning capacity" under the Oil Pollution Act of 1990 means damages equal to the loss of profits or impairment of earning capacity due to the injury, destruction, or loss of real property, personal property, or natural resources.
The Coast Guard publishes some information describing the business documentation which should be accumulated for an oil spill claim:
You must provide evidence that supports your claim, and you can use whatever documentation you believe best supports that claim. Listed below are examples of documentation often submitted with property damage claims:
- Tax returns for loss year and previous three years,
- Income Statements for loss year and previous three years,
- Balance Sheets for loss year and previous three years,
- Cash Flow Statements for loss year and previous three years,
- Receipts or other proof of revenue combined with proof of expenses
- Reports from the Federal On-Scene Coordinator (FOSC), fire department, police, or other responder
- Information on Coast Guard or EPA notification
- Newspaper reports describing the spill
- Any other documentation you feel supports your claim
A Compliance Guide for submitting claims under the Oil Pollution Act of 1990 has some specific information that BP claims representatives and its lawyers may need before approving business income or earning capacity claims. It provides:
General Information for Claims by Businesses:
- Description and documentation of business losses due to spill
- Copies of letters of business cancellations caused by the spill damage
- Maps or descriptions of the area showing the business location and the spill impact area
- Financial statements for at least two years prior to spill and from the year of the spill
- Signed copies of income tax returns and schedules for at least three years prior to spill
- Details on efforts to mitigate losses or why no efforts were taken
- Statement from you or witnesses on how the spill led to loss of income or earning capacity; explain any earnings anomalies
- For hotels, daily and monthly occupancy information for two years prior to spill and the year of the spill
General Information on Claims by Fishing or Marine Charters:
- Description of business losses caused by the spill
- Evidence that vessel(s) were in the area impacted by the spill and were unable to carry on their business due to the spill
- Maps or descriptions of the area showing business location within spill area
- Statement from you or witnesses on how the spill caused the loss of income; explain any earnings anomalies
- Signed copies of income tax returns and schedules for at least three years prior to spill
- Details on expenses not paid out during period being claimed (e.g., wages)
- Booking records for three years prior to spill and year of spill
- List of charter rates, including any services the business specializes in (e.g., sport fish-ing)
- Copies of any logs relating to boating activities for the year prior to and the year of the spill
- Registration documents for the vessel(s), copies of business license, vessel license, fishing license, captain’s license
My advice to all claimants with significant business loss from the BP Oil Spill is to consult with an attorney and retain an expert to prepare a sound and proper explanation of business income loss or loss of earning capacity. Mitigation attempts required under the law can be explored with your counsel and those with experience in disaster recovery. In many instances, the claims may often need no attorney involvement because they are not very complex. The larger and more complex the claim, the greater the need to have a professionally prepared lost income claim with calculations by an experienced expert like Bob Glasser and Bruce Smith.