ACC4712

Forensic Accounting
AY 2021/22, Semester 2
Week 12

Adjunct A/P Tay Puay Hui

Adjunct A/P Iain Potter
Content

Personal
Business Reps & Directors & Injury &
Property
Interruption Warranties Officers Fatal
Accident

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Business Interruption

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BI Insurance

1. Provides cover for loss of profits that a business suffers as a result of an insured event

2. Typically sold alongside a policy covering property damage

a) Cover is primarily triggered by damage to insured property
b) May be triggered by other events
i. Denial of access to premises
ii. Interruption to utilities
iii. Damage to property of suppliers / customers
iv. Closure or prevention of work by order of government authorities
v. Cyber

3. Formulaic – not subject to the same general principles as measures of damages

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Illustration

1. BI policy entered into on 20 November 2021, covering losses occurring during the
period 1 January 2022 to 31 December 2022. Policy insures gross profit with a 24-
month maximum indemnity period.

2. Policyholder wants to try and avoid any underinsurance while avoiding paying
excessive premiums. How should it determine the sum insured it requires?

3. Answer:
1. What should the sum insured reflect?
2. Over which period might the sum insured’s adequacy be tested?

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Policy Schedule

Schedule
1. Insured
2. Business
3. Premises
4. Specified items (gross profit / net profits plus insured standing charges / etc)
a) Sum insured for each item (note that this will generally be a different amount to
any sums insured by the associated property damage policy)
b) Maximum indemnity period
5. Period of insurance (not the same as maximum indemnity period)

Specification
1. Explains how the policy operates
2. Explains how indemnity should be calculated
3. Provides definitions for all terms used in the policy
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Indemnity Period

1. Period commencing with the ‘incident’ triggering the policy

2. Continuing for as long as the business’s results are affected by the ‘incident’

3. Ending no later than the duration of the maximum indemnity period

4. MIP - normally 12 months

a) Shorter for businesses expected to adapt or recover quickly
b) Longer for businesses which will take longer to repair / replace / commission
damaged property

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Calculation Process

Reduction in × Average /
+ AICW
Turnover Underinsurance

× Rate of Gross - Deductible /

Apply Sub-limits
Profit Waiting Period

+ ICW - Savings

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Reduction in Turnover and Rate of Gross Profit

[ Standard Turnover – Actual Turnover ] × Rate of Gross Profit

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‘Trends Clause’ Adjustments

1. Can cover almost all changes in circumstances

a) Note reference to ‘but for’ – mirrors measures of damages in this respect
b) Similar approaches taken as with loss of profits / damages exercises generally
(see Week 8 notes on DCF forecasting)
c) Seasonality / historical trends / changes in economic climate / commodity pricing
/ weather / competition / local events / day of the week

2. Does not extend to changes in the definition of gross profit (i.e. reallocation of
expense lines between categories of insured and uninsured standing charges)

3. In practice, much discussion between insurers, adjusters, policyholders and their

advisors around the trends clause in the course of settling claims given the inherent
uncertainty surrounding adjustments – at the same time however, the absence of
strict formulae in this area leaves scope for compromises to be reached
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ICW / AICW

ICW - Increased AICW - Additional

Cost of Working Increased Cost of Working
Additional expenditure necessarily and reasonably
incurred for the sole purpose of avoiding or diminishing
the reduction in turnover which, but for that expenditure,
would have taken place during the Indemnity Period in
 
consequence of the Damage
Not exceeding the sum produced by applying the Rate of
Gross Profit to the amount of the reduction thereby
avoided
 

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Savings

1. Applies only to those fixed costs which were

insured (i.e. not deducted when calculating
‘gross profit’ and the resulting ‘rate of gross
profit’)
Variable Costs

2. If policy insured all gross profit (i.e. net profit

plus all fixed costs / standing charges) then Revenue
policyholder would enjoy a windfall if they Fixed Costs
(Standing
were able to reduce their fixed costs and there charges)
Gross
were no adjustment for those savings Profit

Net Profit

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Underinsurance

1. Assess adequacy of sum insured by calculating ‘sum at risk’

a) Apply rate of gross profit to standard turnover for full MIP to assess sum at risk
b) For this purpose, both rate of gross profit and standard turnover should be
adjusted for trends clause in the same way as for the loss calculation

2. If sum at risk exceeds sum insured, calculate percentage underinsurance and apply the
resulting % as a discount to the measured loss

3. To the extent that the trends clause operates to increase the sum at risk over the sum
insured, the application of an underinsurance adjustment will ensure insurers’ liability
under the policy doesn’t exceed the sum insured

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Deductibles / Waiting Periods / Sub-limits

Deductible Sub-limits

• Monetary amounts • Typically apply to

• Time period - different causes
waiting period • E.g. Flood /
• Time period - earthquake /
average daily value supplier or
• Time period - ADV customer causes /
of loss cyber

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Concurrent Causes

1. Orient Express Hotels – 2010 UK High Court Judgment

Trends cause should be fully applied such that, an undamaged hotel in a totally
destroyed city would likely be found to have suffered no loss

2. 2011 Thai Floods – Claims mostly resolved during 2012-2013

Many insurers agreed to allocation of loss amongst potential insured and uninsured
concurrent causes

3. FCA Test Case – Jan 2021 UK Supreme Court Decision

Arrived at opposite conclusion from OEH for a number of policy wordings such that
adjustments should not be made under a ‘trends clause’ if those adjustment flow
from the same underlying or originating cause as the insured peril
Policy wordings may be revised to address this
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Worked Example

Indemnity period from 1 March 2022 to 30 September 2022 Savings:

Reduction in Rent $ 128,112
Prior 12 Months: Reduction in Utilities $ 54,789
Revenue $ 12,817,445
Variable Costs $ 5,114,733 Waiting Period:
Rate of Gross Profit 60% First 3 days' Loss (Detailed Calculation) $ 24,339
Standard Turnover (1 Mar to 30 Sep 2021) $ 7,499,132
Measure Before Adjustment for Underinsurance:
Projected Annual Revenue Growth 6.7% Loss of Gross Profit $ 2,671,940
ICW Recoverable $ 901,767
Indemnity Period: Savings $ -182,901
Standard Turnover (adj. for trend) $ 8,001,574 Waiting Period $ -24,339
Actual Turnover $ 3,555,419 $ 3,366,468
Reduction in Turnover $ 4,446,155
Loss of Gross Profit $ 2,671,940 Underinsurance:
Sum Insured $ 8,000,000
ICW: Standard Turnover (adj. for trend) $ 13,676,214
Total Incurred $ 1,288,123 Sum at Risk $ 8,218,794
Loss of Turnover Avoided $ 1,500,556 Addequacy of Sum Insured 97%
Economic Limit $ 901,767
ICW Recoverable $ 901,767 Measure Adjusted for Underinsurance $ 3,276,848.40

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Property

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Stock

Reasons Categories

1. Not directly assessable by adjusters in 1. Raw material

many cases 2. Work in progress
a) Total destruction / loss / theft 3. Finished goods
b) Historic undetected losses 4. Waste material
c) Ongoing operations making spot 5. Retail stocks
assessment impossible
6. Samples
7. Consignment inventory
2. Can be estimated from financial
records – types:
a) Perpetual
b) Periodic

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Process

1. Determine actual stock (through Opening Stock (last reliable stock count)
sample/full count)

Add: Purchases / Goods In

2. Review historic movements
a) Accounting system
Less: Sales / Goods Out
b) Paper records (e.g. goods in / out
notes etc)
c) CCTV Adj: Inventory Shrinkage

3. Compare with other locations Less: Remaining Stock

4. Assess reasonableness of conclusions Equals: Theoretical Stock Loss

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Incentive Investigations

Red Flags Potential Scope

1. Policyholder in financial distress 1. Determine whether claim is inflated

2. Slow moving inventory (generally or just
particular items) 2. Determine financial condition of
3. Unreasonably high or increasing policyholder
inventory levels
4. Recent increases in sums insured/ scope 3. Determine whether policyholder’s
of coverage or sublimits disclosures to insurers were true
5. Repeat claims
6. Issues with supporting documents 4. Determine whether employees may have
manipulated records or concealed thefts

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Representations and
Warranties

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Reps & Warranties

1. Recap prior coverage of post-M&A disputes

a) Diminution of value
b) Overpayment

2. Typical coverage:
a) May be taken out by buyer or seller
b) Losses (buyer), liabilities (seller), legal costs etc
c) Dollar-limited amount equal to percentage of purchase price
d) Deductible
e) Exclusions for contractual adjustments (PPAs) and other transaction-specific
causes

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Directors & Officers

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Overview

1. Cover for directors and other officers of a business for the decisions they take
a) Financial reporting or market disclosure errors
b) HR issues / misconduct
c) Corporate manslaughter
d) Actions outside of authority or in breach of rules and regulations

2. Exclusions normally include:

a) Intentional breaches of duties
b) Fraud

3. Typically insures directors and officers for their personal liability to the company or
third parties and the company for any liabilities it incurs to third parties as a result of
directors or officers’ mistakes
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Personal Injury & Fatal
Accident

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Basis for Claims

Common Scenarios Common Causes

1. Claims by surviving dependants of a 1. Motor accidents

deceased (spouse, children and, 2. Medical negligence
sometimes, parents)
3. Work accidents
a) Loss of dependency
4. Aviation / train / shipping casualties
b) Loss of inheritance

2. Claims by injured individuals

a) Loss of earnings
b) Loss of earning capacity (reduced
annual earnings or shortened
career)
Issues
1. Insurance often responds
2. Consequent public policy considerations

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Traditional Approach

Zhu Xiu Chun v Rockwills Trustee Ltd [2016] SGCA 52

1. Multiplier-multiplicand

2. Multiplicand based on post-tax income

3. Multiplier assessed by reference to prior

cases

4. Inheritance multipliers lower than

dependency multipliers

5. Further discussion available in Armstrong v

Quest [2019] SGCA 75
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Other Juridisdictions

UK
1. Ogden Tables default starting points since House of Lords decision in Wells v Wells
2. Multiplier-multiplicand
3. Tables for other vicissitudes and risk of pre-deceasing trial
4. Discount rate set by Lord Chancellor, but court can deviate if appropriate

US
1. DCF models often used
2. More likely to see promotions/salary increases modelled

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Singapore and the PIRC Tables

1. PIRC Tables - first court-endorsed actuarial tables published by SAL in early 2021

2. Previously only option was a 2015 Sweet & Maxwell publication

a) Yielded similar results – Lee v Tay [2021] SGHC 264 at [146]

3. Limitations
a) Missing adjustments for other vicissitudes
b) Missing adjustments for risk of pre-deceasing trial
c) Lack of precedent covering its application

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Current Singapore Practice

1. Application of PIRC Tables and resolution of gaps in the Singapore data yet to be fully
tested

2. Court expects multipliers for loss of inheritance to additionally reflect delayed receipt
(relative to dependency) and post-retirement expenditure from the inheritance pool

3. Some experts, but not all, will include detailed analysis of prior years’ expenditure and
savings in order to demonstrate reasonableness of projections and conclusions

4. Key post-PIRC Tables decisions:

a) Pollman v Ye [2021] SGHC 77
b) Foo v Seto [2021] SGCA 92

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Appendix 1:
Reading materials

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Prescribed Reading Materials [F = Full reading]

1. Extracts from Riley on Business Interruption Insurance (11th Edition)*

*please refer to LumiNUS folder

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Supplementary Reading Materials [O = Overall Understanding]

1. Ogden Tables (8th Edition)

2. Zhu Xiu Chun v Rockwills Trustee Ltd [2016] SGCA 52*

3. Lee v Tay [2021] SGHC 264*

4. Armstrong v Quest [2019] SGCA 75*

5. Pollman v Ye [2021] SGHC 77

6. Foo v Seto [2021] SGCA 92

*please refer to LumiNUS folders

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Prior Weeks’ Q&A

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Questions
1. Will the full content in the prescribed readings (GAR Chapters) be tested or is it just meant to
help with understanding of the lecture slides?

Key principles covered by the readings will be examined – however the key principles
have also been either highlighted in the lecture slides or by me during the lectures

2. Will you need to cite cases in answers?

No, neither the names of cases nor details from the judgments provided will be
examined, the judgments were provided to aid understanding so that you can see how
the concepts are applied

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