The Role of Forensic Accounting in Insurance Claims

By Sean Flavin November 12th, 2020

Most people probably think of accounting as a function of their finance department. But forensic accounting? Well, that’s another story. Forensic accountants combine their number-crunching acumen with a unique set of investigative skills to transform data into comprehensive analyses used in fraud cases, financial crime investigations, and even murder trials.

Forensic accounting can also be especially valuable in determining insurance claims costs. Since the group captive members we work with are both the insureds and the owners of their own insurance company, these companies have a unique interest in how claims costs are determined. So, to explain the value of forensic accounting in insurance, we invited Timothy Gillihan — a financial accountant at J.S. Held with 15 years of experience in the industry — to join our regular Risk Control Webinar. Here is an overview of his presentation.

Forensic Accounting in Insurance Claims

The purpose of forensic accounting in insurance claims is to quantify the economic damage of each case. Forensic accountants are independent, highly specialized accountants who use a combination of historical data, current conditions, and future predictions to calculate that damage and provide the most accurate account of costs possible. (It’s important to note that forensic accountants don’t focus on determining liability; they are typically only there to evaluate damages.)

In the commercial space, forensic accountants often work on several types of insurance claims and for a variety of involved parties.

“An insurance carrier might hire a forensic accountant to evaluate a claim and make a recommendation on payment,” said Gillihan. “Or, on the claims preparation side, a financial accountant might work with the insured to prepare a recommendation to present to the carrier.”

What Forensic Accountants Assess for Each Claim

When it comes to commercial insurance, forensic accounting can determine major claims costs like:

Personal Injury: The personal costs that individuals (both employees and non-employees) incur in work-related incidents — e.g., lost wages.

Business Interruption: The cost a business incurs from an incident — e.g., loss of revenue.

An Example of Forensic Accounting in Action

To give you a better idea of how forensic accounting in insurance works, Gillihan walked through a typical claim example. In this example, an employee driving a company-owned dump truck is involved in an accident that results in a claimed injury to the other vehicle’s driver and causes significant damage to the dump truck.

This example includes both significant types of claims costs listed above — a personal injury to the other driver and damage to the dump truck. According to Gillihan’s presentation, here’s how a financial accountant might go about determining the personal economic damages across four categories.

Earnings/Earning Capacity

If the other driver in our example was an employee of another company at the time of the accident, a forensic accountant would use the individual’s wages and benefits to determine lost earnings. If the injured person owned a business, the financial accountant would calculate how much the accident impacted the company financially.

Current and Future Medical Expenses

Accurately calculating current expenses is relatively simple. Forensic accountants typically just go through existing invoices to determine the cost of the care already provided to the other driver.

Determining future medical expenses, however, is a little more complicated. First, forensic accountants typically have to work with a medical expert, who comes up with a lifecare plan for the injured driver. Forensic accountants then use this plan to calculate costs over their work-life expectancy. Then, the accountant would have to discount those costs to present value.

“Look at this process as first growing the future loss by inflation, said Gillihan. “Then, you discount those costs to present value by saying ‘OK, the injured individual is going to have this much in expenses over the next 30 years, what lump sum do you need today that could be invested reasonably and safely in order to grow to meet those needs?’”

Household Services

If the other driver is injured to the point they’re no longer able to perform standard household chores, a forensic accountant will assign value to the missed work. To do this, a forensic accountant would interview the injured driver to determine what they were previously able to do around the house and combine that information with data from various studies to predict the overall cost.

Out-of-Pocket Costs

This expense is relatively self-explanatory. To determine out-of-pocket costs, a forensic accountant would simply add up any expenses an incapacitated person incurred due to the injury.

Learn More About Forensic Accounting in Insurance

Forensic accounting is an essential component in determining the overall claims costs, which is valuable information for insurance carriers and insured companies. To learn more about how Gillihan’s company, J.S. Held, handles forensic accounting in insurance claims, check out this page on the company’s website.

About the Webinar

This presentation was part of CRI’s Risk Control Webinar Series — weekly installments of webinars to educate the group captive members we work with on topics like workplace safety, organizational leadership, and company performance. The thoughts and opinions expressed in these webinars are those of the presenters and do not necessarily reflect CRI’s positions on any of the above topics.

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