An Insurance Claim: A Dispute over Accounting Rules (Case Study‪)‬

CASE DESCRIPTION A grower, an individual, claiming damage to his grape crop, files an insurance claim. The claim is more than a million dollars and asserts that inclement weather forced a late harvest of the crop resulting in a loss. The grower sales the late harvested grapes to a corporation owned 100% by the grower based on an agreement that the corporation will pay the grower the amount of the sales proceeds of the concentrate after all expenses are paid. The corporation converts the grapes into concentrate and then sells the concentrate to an unrelated party. The corporation prepares and provides a worksheet to show that the amount available to be paid to the grower (the net income from the transaction) is clearly less than the insured amount. The worksheet is presented in an income statement like format and is purported to be in conformity with Generally Accepted Accounting Principles (GAAP) by a Certified Public Accountant (CPA) hired by the grower. The insurer disagrees that the worksheet appropriately reports the net income from this transaction and further disagrees with some of the assertions relied on to prepare the worksheet. The dispute goes to arbitration. The arbitration board has the difficult task of determining whether the worksheet appropriately reports the net income from the transaction and, further, whether the worksheet is in conformity with GAAP and whether it includes expenses that are reliable.