Claims update: Calculation challenges

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The path for a subrogation claim by Air France was cleared when the French court found Continental Airlines responsible for the 2000 Concorde crash. Frédérique Hardy examines the obstacles and challenges inherent in complex recovery actions.

In December 2010, Continental Airlines was found responsible for the crash of the Concorde aircraft in Paris on 25 July 2000. The French court judgment paves the way for Air France to bring a subrogation claim against Continental Airlines, as a number of claims were originally settled by the former airline's insurers.

In total, insurers are believed to have paid compensation in the region of €100m (£84.3m). This comprised compensation to the families of passengers, crew members and the ground casualties; as well as property damage and business interruption losses to the hotel damaged in the accident. Following the French judgment, Air France may now seek to recover its losses from Continental.

Although original claim settlement figures can be used as the basis for a subrogation claim, it is common for the quantum in subrogation claims to differ from the settlement — the underlying principle being that a claim brought in a subrogation action is no longer bound by the terms of the policy contract. Uninsured losses may arise for many reasons, such as policy limits, under-insurance, self-insured retention or limited indemnity periods.

Practical accounting issues
There are some practical accounting issues surrounding the calculation of claims in a subrogation context. It can be a costly exercise to prepare an entirely new set of calculations, which makes it tempting to 're-use' the claim settlement with only minor modifications to account for uninsured losses.

It is true that the introduction of an entirely new approach would have to be justified to the third party against the original settlement methodology, which was deemed 'good enough' to reach settlement. But, there are several issues to consider that may make it worthwhile giving additional and individual attention to a subrogation claim.

Documentation supporting the subrogation claim is likely to be collated from the insured's various submissions to support the original insurance claim. This documentation is often obtained over a period of time in a to-and-fro process to identify and collate the relevant information, and to update data as the loss unfolds.

Once a claim is settled, it may become difficult to fill in any gaps in the original documentation. This is because insurers may not have direct access to source such paperwork and, once settlement is reached, may find it difficult to interest the insured in spending time and effort collating additional documentation. Also, many years having elapsed, knowledgeable staff may have left; it may be costly to retrieve data from archive; or information may simply not have been retained. Consequently, it is always worth keeping potential subrogation in mind to obtain the best possible supporting information at the time of the initial insurance review.

Furthermore, the process of settling an insurance claim often takes many months or years. It is not unusual for initial claims to include estimated figures, which are then updated as further information becomes available. For instance, the ramp-up of actual sales following resumption of activities may be estimated to the end of the indemnity period but settlement may be reached before all actual data becomes known. Where settlement figures include estimated amounts, additional documentation in support of actual results should be collated and calculations should be updated. The same applies if trends were based on market projections or economic forecast.

Settlements based on simplified calculation methods to minimise cost and/or speed the process up may also be difficult to support in a subrogation action. In the case of the Concorde crash, compensation for the families of victims is said to have been based on a standardised point system flowing from factors such as the number of dependants and the victim's earnings. Compensation that is derived from standardised rules or a standard set of documentation may be criticised as lacking in accuracy, and the third party may demand individual calculations for each subset of the overall claim.

Insurance settlements may also be reached on a commercial basis. This means that an insurer may accept the calculation of a loss without the benefit of full documentary support, or may accept assumptions deemed favourable to its insured. Claims for losses are often based on projections and business trends but such projections should be tested and substantiated rather than negotiated, as the third party may reject the negotiated amount.

Warning over sampling
Another example would be a claim for expenses that may include hundreds of invoices, some for very small amounts. The insurer may choose to verify such costs on a sample basis, by isolating the larger amounts, or by using a random sample and extrapolating findings. In a recovery action, the third party may not accept sampling and may seek to exclude all costs that are not supported by a specific invoice.

In addition to seeking recovery of settled amounts, Air France may also consider claiming for commercial financial losses resulting from the crash. The Concorde fleet was grounded and then withdrawn from operations. Air France may have suffered costs associated with the grounding and testing of the fleet. It may have also suffered a financial loss as a result of ceasing operations, in the form of lost revenue and/or lost market share.

The financial losses arising from the Concorde crash are unique and complex. They encapsulate many categories of loss including loss of earnings suffered by individual victims; property damage and business interruption suffered by the hotel onto which the plane crashed; additional expenses and potential loss of profits suffered by Air France.

The strength of the case on quantum would be a function of both the quality of the original accounting review work, and of the quality and focus of the additional work carried out to update the claim in preparation for the subrogation itself.

frederique hardy rglFrédérique Hardy is a senior manager at RGL Forensics in London

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