Forensic Focus newsletter May 2011Welcome >Business Interruption Cutting through the smoke and mirrorsinsurance claims –getting it right >Solid state disks – theyare fast – but is yourdata safe? >Mediation to settle Forensic Focuscommercial disputes >Contacts > Welcome to the Autumn edition of Forensic Focus. In this issue we are focusing on three very topical and busy areas of our practice. Prior to the 22nd of February 2011, business interruption claims and the assessment of financial aspects of claims only arose irregularly usually relating to contentious issues (typically allegations of fraud). Many of our Christchurch clients had never made a claim under their business interruption policy and many were unfamiliar with what they were covered for. Jason Weir reflects on the key financial issues that may come across at claim time. Jon Pearse reviews new ways to secure and protect electronic data in businesses and finally, I look at current trends in alternative dispute resolution of commercial problems when things go wrong and you are headed for court. We hope you enjoy the read. Barry Jordan and team
Business Interruption insurance claimsgetting it rightWelcome > Business Interruption (“BI”) insurance should Importantly, BI insurance does not normally cover the play an important role in funding the recovery financial loss arising from any general decline in demandBusiness Interruption of many businesses affected by the Christchurch following the earthquake.insurance claims – earthquakes. This article explains what BIgetting it right > insurance typically covers and what business How are Business Interruption insurance claimsSolid state disks – they owners and their advisers can do to ensure calculated?are fast – but is your payment is obtained quickly. The intention of business interruption insurance is todata safe? > put you back into the same financial position you would What does Business Interruption insurance have been had the damage and consequential inter-Mediation to settle typically cover? ruption not occurred. Normally, business interruptioncommercial disputes > The BI coverage will depend on the policy wording, but insurance covers four key aspects: typically it covers the short term financial loss arising as aContacts > • Loss of gross profit / rent; result of the business’ operations being interrupted as a result of damage to the business premises or equipment. • Additional expenses incurred (e.g. hire of portable The cover is often extended to include prevention of building for temporary premises); access to the premises (e.g. premises in the cordon) and • Savings in expenses; sometimes includes loss caused by interruption to supply of goods and services. • Reasonable claim preparation costs; (e.g. accountant’s costs). It is also important to check the BI insurance is not subject to any exclusions detailed in the insurance policy. The approach to calculating your claim will depend onJason Weir For example some BI insurance policies will not cover your BI policy, your business and the records available.+64 (0) 9 303 0966 the loss arising from property damage caused by natural An example business interruption claim calculation email@example.com disasters including earthquakes. shown below: Example BI calculation $ + Expected sales (i.e. if the premises had not suffered damage) 100,000 - Actual sales (20,000) Reduction in sales 80,000Grant Jarrold - Cost of sales (applying normal gross profit of say 30%) (24,000)+64 (0) 3 363 firstname.lastname@example.org = Reduction in gross profit 56,000 + Additional expenses (e.g. rental of temporary premises) 10,000 - Cost savings (e.g. lease of damaged premises) (20,000) + Claim preparation costs (e.g. accountant’s costs) 5,000 = Total BI Claim $51,000 The calculation is conceptually straight forward. However applying it in practise can quickly become very challenging when faced with the realities of: • Incomplete records; • Seasonality and trends; • Determining the level of sales that would have occurred had the premises not been damaged given the change in demand following the earthquake; • Determining the level of business successfully transferred to other branches. Continued >>
Successful BI claim Review Presentation (Cover letter, robust and logical calculation supported by documents)Welcome > Damage Free from Financial Extensions to property exclusions lossBusiness Interruptioninsurance claims – When putting togethergetting it right > the BI claim it will be important to consider:Solid state disks – they Policyare fast – but is yourdata safe? > PolicyMediation to settle The BI insurance policy underpins the claim. It sets out what is and isn’t covered andcommercial disputes > the definitions to be applied in your situation.Contacts > Damage to the property, extensions, exclusions and financial loss Damage to the property to the premises at suppliers and The BI insurance policy normally requires customers.What is the indemnity period and why does it there to be damage to the business Sometimes the cover under extensionsmatter? premises or other property, although the is limited to a percentage of the sumThe indemnity period is the period of insurance protec- business interruption may be covered by insured (e.g. 10% of the sum insured).tion. It normally commences from the date of the event extension. Exclusionsor damage and normally ends when your business is Extensions The BI policy will include a list offully operational again or when the specified indemnity Your BI policy (or schedule) may include exclusions or items that are not coveredperiod has expired, whichever occurs first. extensions or items that are covered in by the BI policy. Some BI policies addition to loss arising from damage to specifically exclude the loss arising from the premises. Extensions may include: damage caused by natural disastersReferring to the example above, if this loss of $51,000 • Prevention of access to the premises including earthquakes.occurred over a six month period, but the indemnity (e.g. premises in the cordon); Financial lossperiod is for three months, then some of the loss • Interruption to the supply of goods The financial loss suffered will normallysuffered will not be covered by the BI insurance policy. and services (e.g. loss of electricity need to be as a result of damage toThe indemnity period should be defined in your policy and water); the business premises (or covered byor schedule. • Interruption caused by damage extension and not excluded).What is the sum insured and why does it matter? PresentationThe sum insured is the level of insurance cover in place. The presentation of your claim is critical. interrupted supplies/utilities;It is the maximum amount of BI cover you have for The insurer processing your claim is likely • Current operations (e.g. are youyour business. Referring to the example above, if the to be dealing with thousands of claims and have limited knowledge of your trading from new premises or aresum insured is $40,000, the last $11,000 of the loss you looking for new premises, etc); business. It is important that you providewill not be covered by the BI insurance policy, leaving your insurer with all of the relevant • Impact on trading (i.e. did youraside any excess. background and financial information business completely shut down or needed to process the claim. We were you able to partially trade);What can I do to ensure my Business Interruption recommend you provide your insurer with the following: • A timeline of key events;insurance claim is accepted and payment isreceived quickly? a. A brief covering letter setting out: b. Your calculation including anyInsurers have been inundated with insurance claims assumptions made (this should • An overview of your business be cross referenced to (c));following the Christchurch earthquakes. Having a including the location(s) ofrobust well presented claim that the insurers can quickly your business; c. Supporting documentation for yourunderstand will maximise the chances of the claim being claim. • Details of the damaged premises,accepted and payment being received quickly. details of prevention of access to the premises or details ofWhere can I get further information on preparingmy Business Interruption claim? ReviewPlease also refer to our Business Interruption Self Subjecting your claim to independent review by experienced forensic accountants willAssessment Tool www.deloitte.com/nz/bitool, which ensure it is robust and easy to understand, enabling your insurer to process your claimprovides guidance on preparing a BI claim. efficiently, maximising the chance of timely payment of your claim for the right amount. The independent review should also provide the insurer with additional comfort that the claim is robust.Alternatively, contact Jason Weir or Grant Jarrold.
Solid state disks – they are fastbut is your data safe?Welcome > Technology advancements in the computer • If you have a SSD drive and don’t have your data industry have seen the arrival of hard drives with backed up, then it would be prudent to back it up asBusiness Interruption data storage volumes of up to three terabytes soon as possible. Why? Data recovery from such a SSDinsurance claims – (or 3000 Gigabytes). Although these large drives failure is much more difficult than that of a conven-getting it right > can store an immense amount of data, they tional hard drive. This increases the time to recoverSolid state disks – they still operate via the mechanical mechanism of the data and drives up the cost to a point where it canare fast – but is your spinning disks which contain the data. These become uneconomical. The difficulties lie in wheredata safe? > mechanics cause limitations in performance. the data is stored and how the data is stored. As mentioned, the data is stored in electronic memoryMediation to settle More recently, Solid State Disk (SSD) drives have become chips. For data recovery, this means that the chipscommercial disputes > popular. Due to their higher performance compared to need to be removed and accessed using specialist conventional hard drives they are starting to flood the equipment and expertise.Contacts > market. SSD use non-volatile electronic memory chips (like a USB thumb drive), meaning there are no moving • Data storage on a SSD is managed by a process called parts. Because there are no arms, heads or spinning wear-levelling. Wear-levelling avoids writing data disks, (like on traditional hard drives) they are faster in continually to the same place and insures that all reading and, in most cases, writing data. Often, they memory locations on the SSD are used evenly. This are up to 10 times faster than conventional hard drives. reduces physical damage to the memory cells and In addition, these drives are reputably more robust extends the operating life of the SSD. Additionally, than their older counterparts, which make them ideal memory locations which are not used are eventually for portable devices such as laptop computers and reset to zero. The processes of wear-levelling and removable storage drives. resetting memory locations causes the original data in those locations to be overwritten. In other words the Although SSD drives may sound like ‘the best thing since data in those locations is effectively erased automati- sliced bread’ we offer a word of caution. The tech- cally as part of the built in maintenance processes of nology is relatively new and several teething problems the drive. have been identified. Here are some things to consider should you feel the need for speed: • If you encounter any data loss with a SSD drive and you don’t have the data backed up, cease use of theJon Pearse system immediately. Don’t even let the IT department+64 (0) 9 303 0838 ‘poke around’ and attempt to copy out data. Anyjpearse@deloitte.co.nz further use of the system will reduce the likelihood of recovering the data. To provide the best chances for data recovery, turn the system off, lock it away or attach a label stating the system should not be turned on and contact a professional for data recovery as soon as possible This article is not intended by any means to put you off SSD drives but rather to inform you of the inherent issues SSD’s possess and the normal data erasing processes SSD’s perform. The potential for data loss due to a SSD failure or a regular process which overwrites data is a reality. Make a back up of your data now, to avoid the heartache of irrecoverable data loss. If you do encounter a problem don’t attempt to recover the data yourself – get help. It is also good practice to ensure your backups are kept up to date by developing a regular backup scheme. Please contact Jon Pearse for more information.
Mediation to settle commercial disputesWelcome > One unexpected side effect of the economic crisis This will include: was a sudden reduction in commercial disputesBusiness Interruption • developing a theory on your client’s case that were litigated through the New Zealandinsurance claims – Courts. While the procession of finance company • assessing the weak pointsgetting it right > litigation is likely to partly fill this void, we have • anticipating what the other side’s accountant isSolid state disks – they seen a growing interest in exploring alternative thinking and evaluatingare fast – but is your ways to resolve commercial disputes. • developing potential settlement options and thendata safe? > Mediation is a confidential dispute resolution thinking through the consequences of any of theseMediation to settle mechanism that provides an opportunity for both parties optionscommercial disputes > to explore the problem on a completely voluntary and Most commercial disputes have complex financial issues. without prejudice basis. The goal of the mediatorContacts > When this occurs it is not uncommon for co-mediators (normally a LEADR Accredited mediator) is to allow the to work together (say one with a legal background and parties to hear each other and to develop a mutual one with a financial background) to help distil the issues solution to the problem. The mediator is not the final and to allow the parties to develop a solution. The decision maker – the parties are. alternative can be years of ongoing worry, potentially months of litigation in open court and a significant Mediation is commonly used in a variety of disputes litigation bill. (family problems, relationship property, leaky homes, and employment) but as you would expect Deloitte’s experi- For more information on commercial mediation please ence sits firmly in the commercial and financial dispute contact Barry Jordan. Barry is a LEADR Accredited Panel arena. The role of a forensic accountant is to guide their Member and specialises in commercial litigation clients and lawyers, anticipating the thinking around the financial elements of the dispute.Barry Jordan+64 (0) 4 470 email@example.com