UK: Liability: When Do The Numbers Become Important?

Last Updated: 2 July 2018
Article by Paul Isaac

This month MDD focuses on liability claims and looks at the benefits of getting the right technical accounting expert engaged early on to stress test quantum.

What you will learn from reading the article include:

  1. How early involvement provides better tools for settling problematic liability claims.
  2. Strategies for using forensic accountants to minimise costs.

When claims of negligence are brought against business owners, independent professionals or self-employed individuals, liability insurance is critical. There are of course many different types of liability cover available, including product liability, product recall, D&O liability, professional indemnity, public liability, employers liability and so on. We will put product liability and recall to the side for now – a subject for a later article.

A successful claim depends on establishing liability i.e. whether the unintended actions of an insured led to some form of damage to a third party. Examples include a faulty product causing injury; a wrongful act, negligence, error, breach of duty or trust leading to injury, physical damage or financial damage; or negligent advice / service leading to financial loss.

The focus is often on establishing the cause – which makes sense (no liability, no claim). The issue though is not only that establishing liability can take time, but importantly – it is not always black and white.

While determining liability understandably comes first, is there enough being done to understand the potential value of the claim at an early stage? In our experience, a limited quantum investigation in parallel with the liability review is important and may result in savings or allow a more cost-effective view to be taken in relation to the costs being incurred in the liability evaluation.

Below we provide some real examples of how the qualified input from an experienced forensic accountant enabled better decision making and savings when dealing with liability claims.


Typically, accountants only get involved when it is confirmed that there is an exposure or liability to a third party. Where proceedings have been issued, instructions to review a third-party claim often arrive late in the day, providing little time for much more than a desktop review of a claim.

Benefits of Early Involvement

It does not necessarily follow that all first party Business Interruption claims are well adjusted so it is important to have an experienced accountant review all claims where there is a potential recovery.

We were retained by the claimant (a hotel) on a subrogated claim where it was alleged that the defendant's failure to clean duct-work and canopies in one of several restaurants within the hotel led to a fire. The defendant had liability coverage and disputed it was at fault.

Our instructions arrived on the Friday evening before a mediation the following Thursday. We were asked to review the settled first party claim that had been prepared by the loss adjuster and formed the basis of the subrogated claim.

Within a day, our review of the claim revealed several significant issues with the claim including:

  • application of the hotels own Departmental rate of profit to revenue losses, which understated certain revenue losses by around 60%
  • failure to apply a trend factor to revenue projections
  • no consideration of fixed cost savings
  • no review of make-up in the hotel sister restaurants
  • significant accounting data had never been requested

For several months, the claimants were proceeding towards litigation with a nonsensical and ultimately unsupported claim – which the first party insurers had settled. Our review led to an overhaul of the claim and was not contested by the defendant.

It is risky to assume that all recovery claims on your liability policies are reasonable just because the first party claim was settled. Engaging a qualified forensic accountant to check the approach and rationale of a claim can bring clarity to your case and save significant litigation costs in the longer run.

Ensuring Supporting Data Stands up to Scrutiny

In contrast to the previous example, we were retained on behalf of liability insurers on a recovery matter involving a fire which brought about losses at a neighbouring food manufacturer. Our involvement came a few months after proceedings were issued and within 2 months of mediation.

We received three lever arch folders of data containing the claim and a number of supporting documents. Upon careful review of the documentation, much was found to be duplicative or variations of the same data. For example, monthly stock and production data varied slightly from one version to the next.

Unreliable data cannot be used to accurately calculate any loss. In this case, depending on which stock / production data was used, the calculated sales losses varied (due to inventory usage and make up).

Thanks to the fact that we had sufficient time to meet with the claimant's representative, we were able to identify which base data was correct. This led to concessions from the claimant's accountant, reducing the claim by around 20%.

The lesson here is that the earlier quantum can be reviewed, the more certainty insurers have over quantum which means better, more informed offers can be made.

Identify and Strip Out Speculative Claims

It would be naive to think all claims are submitted in the expectation that they will be paid in full. This is not an accusation of anything sinister, but we have seen multiple examples of speculative claims which, unless considered by an experienced forensic accountant, may go unchallenged.

We were retained by liability insurers in respect to damage to a server belonging to a global manufacturing entity. Their entire ERP system was inoperable for several months, meaning no visibility on stock, financials, customer accounts etc. The claim we received was significant, with several line items relating to issues such as increase in working capital (higher amount of cash tied up in the business).

In respect of the increased cost of working capital, the claim was that the lack of stock visibility lead to overstocking / higher debtor levels and therefore higher "working capital". It was claimed that this was a cost as it would have required financing either via a bank loan or an alternative return.

This was a theoretical claim and would have required some evidence of what the return on the capital would have been assuming it was invested elsewhere, or the cost of additional loans required in order to make up for the shortfall. As soon as discussions started on this matter, the claim item was dropped.

By having an experienced forensic accountant understand these complex accounting issues early, this issue (and several other issues) were quickly eliminated.

Giving Scope for Early Offers

In several cases, an initial review of a claim and its support will reveal significant shortcomings in terms of what can be supported. We will naturally request any missing data and this often focuses the mind on a more realistic quantum.

We were retained by liability insurers in relation to a European-based chemical material manufacturer that supplied product to a large wafer manufacturer. Adjusters for the Claimant had confirmed a BI claim at an amount of just under £5 million including lost sales.

Within a few days, our review revealed several material issues that brought the figure down to under £1 million. Reasons for this reduction included: no evidence to support a sales loss given declining demand and make up ability and therefore use of a variable replacement cost of damaged wafers instead of selling price.

Often, an element of "litigation risk" is worked into contentious liability claims. This may be a rounded percentage factor applicable to quantum which reflects the potential for losing certain legal arguments. Clearly, where a claim is realistically worth 20% of its stated value, it demonstrates the importance of having a sound basis from which to make a settlement offer.

The Power of a Request For Information

Finally, often a simple request list will bring quantum into focus. We have dealt with many liability claims where some concise document request lists and questions regarding the claim will stimulate material revisions to the claim.

A recent example relates to a claim faced by an insured where some detailed questions regarding the documentation provided, and a request for additional documentation led to an immediate restatement of the claim to just over 50% of the original value.


There is huge benefit of having a qualified set of forensic accounting eyes on your liability claims at an early stage. The trend today seems to be about cost-reduction, but it is invariably a false economy to leave the accounting to chance.

Clarity in terms of quantum will not only give you a realistic view of the matter at hand, but it will also help you devise settlement strategies early which will reduce the overall time and cost associated with general liability claims. An independent forensic accountant will also be in a position to defend the quantum position should legal proceedings commence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Paul Isaac
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