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By Fred Kruse, CPA, CFF, CFE – Hutton, Kruse & Fink, Ltd., Buffalo Grove, Illinois

In today’s business environment, management is looking for ways to improve the bottom line by reducing costs.
One of the ways that insurers are attempting to reduce the cost of claim adjustment is by employing the use of a template for business interruption / time element claims.  In many cases, these templates can be very useful from a time spent point of view and sometimes from a cost / benefit point of view as well.

However, there are certain times when the utilization of a template for these types of claims can prove to be expensive to the insurance company, such as when:

  • An overworked adjuster is focusing more on completing the template than what the documentation utilized as a source is portraying about the business.
  • The business itself does not report routine expenses in a way that would normally be expected and in the categories that are used in the template.
  • The environment in which the business operates impacts the actual collection of revenue normally charged or recognized in reports.
  • The claim submission includes descriptions that appear and are incorrectly assumed to correspond with normal revenue and expense categories seen in other businesses. This can include labeling expenses as “extra” which are actually ongoing or “continuing” expenses.
  • Reliance on descriptions used in claim submissions for utilizing the template and settling a claim that eventually finds its way to subrogation and then the third party insurer challenges the settlement and claimed amounts which were paid in settling the claim are denied and become costs of the claim administration for the insurer.

Medical / Dental Practices

One type of business that does not lend itself particularly well to the use of a template in business interruption situations is a medical /dentist practice. We are routinely asked to review these types of claims by insurers that utilize templates or that have discovered that there is additional analysis that must be done on these claims in order to arrive at a settlement amount that approaches “actual loss sustained”.

We routinely see claims for dentists and medical practices that would be overpaid by more than 100 percent (some as high as 300 percent) if the analysis that was needed regarding collections and operating expenses was not performed. For a claim under $5,000 this may not seem significant but when the template spits out an amount of $50,000 and higher, it is time to step back and take a second and third look at why the template provided that amount and what might not be considered in the mechanics of the template scenario.

All Workers May not be Employees

In a service business like a medical/dental practice, it is normal to assume that the largest component of operating expenses would be payroll, since you have to have personnel and employees to provide the service. However, just like the insurance companies, these practices are looking at ways to reduce their costs as well and they might be utilizing numerous independent contractors that can serve the practice without the cost of benefits. An analysis of payroll expenses incurred prior to the loss compared to payroll expenses during the loss may indicate that payroll is 100 percent continuing. What is typically missed is that the cost associated with independent contractors also needs to be identified and treated as non-continuing. These expenses are not necessarily reported in a category that is readily identified and may be “buried” or “hidden” in another category on the income statement or tax return. The non-use of independent contractors can be a significant factor in the calculation of lost practice/business income.

It’s Not How Much Revenue You Bill… It’s What You Collect

How much a medical or dental practice collects on billings is an important consideration in the overall process of settling a claim. Depending on the specific location and management practices employed by the insured, the amount collected for every $100 billed can be as high as $95 or as low as $20. This is where we see the greatest shortcoming of relying solely on the use of a template. All would agree that potentially paying out over 300 percent more on a claim than was actually sustained in a loss is certainly an area that should be considered when evaluating costs.

The analysis of the collection percentage is not a difficult analysis to perform for an accountant or anyone that has some business background; however it may involve using a different set of documents and different time periods for each analysis. Tax returns and income statements for the practice may not necessarily provide amounts that incorporate collection percentages.

We would be happy to discuss options with any insurers or adjusters about how we can assist in these types of claims. We can also provide free on site education about these situations. We can be contacted at hkf@hkf-cpa.com or 847-419-0369.