Chapter 16 Forensic Accounting: Lessons Learned in Dealing with Additional Insureds

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 16 Forensic Accounting: Lessons Learned in Dealing with Additional Insureds

Richard H. Hershman, CPA, MBA, and Wendy R. Shapss, CPA, CFE, CFF, MBA

This section focuses on the involvement of forensic accountants in the financial, operational, and technical issues attendant with their litigation support role relating to disputes involving additional insureds.

Forensic accountants are called upon by counsel to help with insurance disputes in arbitration and pre- through post-litigation, providing services such as investigations, discovery, financial modeling and analysis, scenario reconstruction, interpretation of insurance policy language, damage assessment, expert opinions, and presentations to panels, judges, and jurors.

Much of the work performed by forensics accountants is not available in public case records, remaining instead within work papers and confidential case documents and files of respective counsel.

Nevertheless, this "behind-the-scenes" work of forensic accountants comprises a valuable body of knowledge regarding underlying issues related to insurance disputes, especially those involving additional insureds where multiple-party involvement adds to the complexity of a case.

The discussion of the representational case below highlights some of these litigation support issues, providing "lessons learned" insights that may help lead to a better understanding of the issues and the role of forensic accountants in assisting counsel in such matters.

I. Case Facts

Ace Realty was the owner of a large eight-story business condo housing retail businesses in the main shopping area of a major Midwest city. Floors 1-6 were owned and occupied by a variety of individual retail businesses. On July 21, Ace completed shell and core work and fit-out up to and including interior walls on floors 7 and 8 for Gold Enterprises. Gold was to take ownership July 25, 2005, and complete interior finishing before its official opening on September 19, 2005.

In anticipation of Ace completing its work, Gold hired Metro Construction as general contractor to perform interior finishing, and Metro contracted with Jones & Son Electrical, Citywide Plumbing, and Pace Carpentry for installation of electrical fixtures, plumbing-related fixtures, and carpentry/flooring/painting respectively. As instructed by Gold, Metro scheduled the contractors on a "fast track" plan to perform their work as concurrently as possible in order to permit occupancy by Gold by the date scheduled. Metro provided access to the building for the contractors to move equipment and material into the building on July 22 in anticipation of beginning work on July 25.

Around midnight July 24, a fire was reported on floor 6 where the contractors had stored their equipment and material. The fire caused significant damage to floors 7 and 8, as well as water damage to floor 6. An investigation by authorities from July 25 through July 27, reported to Ace and Gold on Friday, July 29, revealed that the fire was caused by improper storage of flammable materials in a temporary enclosure set up by the contractors. Gold immediately forwarded the investigation report to its insurance carrier, Builders Insurance.

Gold had builders risk insurance coverage for property damage, loss of earnings, and other coverage as set forth under policies from Builders. Midwest Re, a regional reinsurer, covered on a quota share basis certain builders risk policies that Builders wrote, including the one for Gold. Metro, Jones, Citywide, and Pace had coverage with their individual insurance carriers via ISO December 2004 CGL policies as named insureds. Under terms of written contracts, Gold was named an additional insured via ISO 20 10 07 04 endorsement by Metro, and Metro was named an additional insured via individual ISO 20 10 07 04 endorsement by Jones, Citywide, and Pace, respectively.

II. Nature of Ensuing Disputes and Underlying Issues

On Monday, August 1, Builders forwarded the fire investigation report to Midwest Re, requesting coverage in line with the reinsurance agreement. Midwest Re sent a letter to Builders denying coverage due to "failure to provide notification within 72 hours." Builders countered that the findings of the investigation report were essential to determining if Builders would be involved in coverage (i.e., the potential for arson), and thus Midwest Re was...