The recent fires in California are, and have been for a long time, a nearly annual event for which California has become famous. The depth and severity of the recent fires, however, are on a scale of what is rarely seen. Preliminary reports indicate the two largest fires may have been started by malfunctioning utility company equipment. If this is the case, there is significant litigation that will be filed between now and 2019. Hundreds of homes and businesses were damaged or destroyed and the quantification of those losses will be the focus of a lot of work and possibly litigation.
With the destruction of a business is the loss of an asset (the business), employees’ jobs, and also the product or service supply for all the customers. Often that business represents the hopes and dreams and lifelong efforts of one or several people. That loss can be quantified and, under certain circumstances, can be recovered either through an insurance claim or legal action to the extent it can be established that human error or negligence caused the fire.
Several years ago, three major fires burned in Southern California. Each of the fires were separately started due to negligence. The sparks turned to flames and were carried all the way to the ocean by Santa Ana winds. In the wake of these three fires, hundreds of homes and businesses were destroyed. Because of the negligent causation, lawsuits were initiated on behalf of those business owners to recover the damages. Arxis was retained to determine the amount of the damages incurred by many of those business owners.
The nature of a fire necessarily means that the business is reduced to ashes, as are all the local business records. In cases like this, those records must be re-created sufficient to provide the basis for an opinion regarding damages. This is a situation where the forensic accounting and business valuation truly is forensic.
To the extent the business was damaged but would survive the damage calculation was based on lost income from the date of the fire until the business was restored to full function. For a destroyed business the damage was the amount of the business value immediately before the fire.
The businesses we were hired to analyze included farms, manufacturers, and service businesses. In many cases significant work was done to re-create financial records. As can be imagined, we were dealing with business owners who were severely impacted by these circumstances, both professionally and personally. The human toll of this kind of loss is hard to describe. It is very common for small business owners to believe that their business is worth far more than it will sell for. This perception is doubly difficult to manage in the emotional dynamics of a natural disaster.
The litigation was managed by several law firms on either side of the cases. The initial cases were vigorously litigated. Opposing financial experts were strongly challenged. Calculations, assumptions, and conclusions were tested and verified under the auspices of the court. Ultimately, the first case settled which set the stage for all subsequent cases also settling.