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
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
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.