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CPCU 551 Chapter 7

Business Income Insurance

QuestionAnswer
Business Income Insurance covers reduction in an organizations income when operations are interrupted by damage to property cause by a covered peril - Measured in terms of Net Income - covers the reduction in net income cause by accidental prop damage
Net Income the difference between revenues and expenses Revenues - Expenses = Net Income
Profit Net Income that results when revenues exceed expenses
Net loss net income that results when expenses exceed revenues
Expenses that occur as an effect of business interruption continuing, non continuing & Extra Expenses
Continuing Expenses if business is interrupted for a short time: payroll of key employees, debt repayments, taxes, & Ins If longer interruption: expenses can be reduced or eliminated
Extra Expenses incurred to mitigate the effects of a business interruption - often pay for themselves- can reduce bus income loss
Non continuing expenses will not continue during a business interruption- ex: bldg catches fire, required to vacate premises, power, phone water etc could be turned off
What is the hindrance in a magnet property having a business interruption? Magnet properties can draw traffic to other business, if it shuts down the walk in traffic may slow down as well
In order for business income to apply, this must occur: an interruption of operations caused by property damage from a covered peril to property at locations or situations described in the policy resulting in a loss of business income and/or extra expense
What are the key factors to consider during the pre loss analysis of business income and extra expense exposures? all aspects of an organizations business income and extra expense exposure resulting from an accidental property loss. not all causes/occurrences of loss are insurable exposures
What is one of the most important steps an organization can take to to prevent or reduce business income and extra expense losses prepare a disaster plan
Where does property loss or damage that can cause an organization to experience a business income loss? either on or away from the premises
Damage to property at the Organization's own premises the on premises business income and extra expense coverage is not limited to the firms own property
Damage to property away from the organization's own premises can result from: loss or damage to orgs own prop off prem - dependent prop expos- interruption of utility svcs - acts of civil authorities - adverse weather
Organizations own property off premises often overlooked - involves damage to an orgs own prop while off prem - could be in transit or stored or worked on at the prem of a bailee
Dependent Property Exposures "contingent bus income" - exists when supplier or producer depended on by buyer - control by lessening the dependency -
Interruption of Utility Services the resulting loss of power or other utilities can shut down most any organization
Acts of Civil Authorities The additional coverage pays for loss of business income and extra expense if access to the insureds prem is prohibited by civil authority because of damage at another premises, must be caused by covered peril
Adverse Weather windstorm & hail may not damage insd prop, could wash out roads, or bridges, cover in debris, keeping customers, employees, & suppliers away
Time Factors of Business Income Loss depends on anticipated revenue & how long bus income reduced or extra expenses are incurred. & Seasonal flucts in bus income - duration of bus income directly related 2 time required 2 replace or repair + time required 2 restore 2 normal level of bus
Time required to replace damaged property depends on time needed to repair or reconstruction bldg- construction delays can be expected after catastrophic events
Bottleneck applied to situations in which work form several assembly lines or processes must flow through or depend on continued operations at a single job site or position - water bottle factory
Estimated Max Loss (EML) objective to estimate the lgst loss that could occur in the future - bus income wkshts useful - goal to develop solid foundation for selecting coins % & amount of ins
Coinsurance Basis a projection of income and expenses for 12 mos following inception
Business Income Worksheet used to analyze biz income loss expos & determine approp coins % & limit
Extended Business Income (EBI) covers income loss insured for up to 60 days after damage is restored to use
Business Income & Extra Expense Coverage Form includes insuring agreement for extra expense coverge, additional coverages, a coverage extension, and several conditions
Business Income Coverage forms CP 00 30 Business Income & Extra Expense Coverage CP 00 32 Business Income (Without Extra Expense) Coverage Form
Business Income & Extra Expense 3 options - Business income including rental value - busines income other than rental value - rental value only * Option chosen shown on dec page
BI&EE Business Income Including Rental Value covers both loss of rental value & loss of other business income - if building untenantable insurer pays for loss of rental income from tenants * loss of biz income/extra expenses for its own biz
BI&EE Business Income other than Rental Value covers business income other than rental value- could be chosen by a biz that has rental income to lose but doesn't want to cover it - biz with no rental income might choose this option
BI&EE Rental Value Only covers Rental value only - "rental value" includes anticipated net rental income from tenants, charges that are the legal oblig of the tenants
BI&EE Coverage Form Key Requirements Actual loss of biz income- due 2 necessary suspension of your ops- during period of restoration- cause by direct physical loss of or damage to property at the described prem- loss or damage cause by a covered cause of loss
Actual Loss of Business Income form covers only actual loss sustained by named insured - does not require the insd to have been earning a net profit before the loss occurred in order to receive any benefit
Due to Necessary Suspension of Your Operations loss of BI must be sustained b/c of necessary suspension to INs Ops- if rental coverage is included, suspension means all or part of prem untenantable
During Period of Restoration coverage begins 72 hrs after the physical loss or damage occurs - ends on the earlier of 2 - 1when prop should w/ reasonable spd & similar quality repaired or replaced- 2 when biz resumed at new permanent location
Caused by Direct Physical Loss of or Damage to Property at Described Premises requires that suspension caused by loss or damage at property which are described in the decs- damage must be the cause of loss of biz income
Cause by a Covered Cause of Loss determined by whichever causes of loss form (basic, broad,special) is designated on the dec
Extra Expense Coverage necessary expense incurred at restoration would not have been incurred w/out loss- used to avoid of minimize suspension of biz & continue ops - minimize suspension if insd cannot continue ops - to replace or repair prop-
BI Additional Coverages and Coverage Extension 4 Categories - Civil Authority - Alterations & New Buildings - Extended Business Income - Interruption of Computer Operations
BI Civil Authority Additional Coverage extends BI covg form 2 include actual loss of biz income & nec expenses incurred bc access 2 insds prem cut off by action of civil auth- covered cause of loss cause damage- access 2 area cut off- prop w/in 1 mile- action taken due 2 dangerous conditions
When does BI Civil Authority Additional Coverage begin? When does Extra Expense begin? BI - 72 hours after time of first action of civil authority that prohibits access to described prem continues for up to 4 consec wks- EE -immediately after time of first action
When does Extra Expense Civil Authority Additional Coverage End? the later of: 4 consecutive weeks after date coverage begins - when civil authority coverage for the biz income coverage ends- could receive pay for up to 4 wks & 3 days (72hrs)
What 2 Endorsements are used to modify the Civil Authority additional coverage? CP 15 32 CAChanged Endt can increase 4 wks to 60, 90 or 180 days &/or 1 mile - BIChanges - Beginning of period of restoration endt CP 15 56 reduces 72 hrs to 24 hrs
Alterations and New Buildings Additional Coverage ins loss of biz b/c damage to new bldg or structures at prem OR alts or adds to existing bldgs- also applies 2 BI losses resultingfrom damage to machinery, equip, supplies or bldg materials located on or w/in 100 ft
Extended Business Income Additional Coverage (EBI) replaces income lost during the period of restoration, which ends the date when the prop at the described prem should be repaired, rebuilt, or replaced with reasonable spd & quality
How many days will the insured be reimbursed for loss of business income with EBI? 60 Days
What are the 2 division of EBI? Business Income other than Rental Value, & Rental Value - both end 60 days or on date the insd w/ reasonable spd could have restored normal conditions which ever is earlier
Extended Period of Indemnity optional coverage that lengthens duration of EBI additional coverage for up to 2 yrs
Interruption of Computer Operations Additional Coverage coverage for loss of business income or extra expense due to a suspension of operations resulting from an interruption of computer operations caused by destruction or corruption of electronic data as a result of a covered cause of loss - $2,500/policy yr
Covered Causes of Loss for Interruption of Computer Operations Additional Coverage virus, harmful code, or similar instruction designed to damage or destroy any part of a computer system or to disrupt its normal operation
Limited Coverage for Fungus, Wet Rot, Dry Rot, and Bacteria Additional Coverage 30 days of coverage for BI&EE due to fungus, wet rot, dry rot, and bacterial damage- 30 days need not be consecutive-
Newly Acquired Locations Coverage Extension applies only when 50% or greater coins is shown in declarations- provides 30 days of coverage at a new location- coverage ceases when policy expires- $100,000/location- does not apply to prop at fairs & exhibitions
BI Conditions Duties in the Event of Loss org must resume all or part of its ops as quickly as possible- if not the insurer will calculate loss based on length of time it would have taken to resume operations as quickly as possible
BI Conditions Loss Determination Insds net incom b4 loss occurred- likely net income if no loss occurd- op expenses, including payroll, necessary 2 resume ops at same level of srvc that existed just b4 loss- other relevant sources of info including insds financial records/bills/invoices
What condition requires the insured to make detailed financial records available for the insurer's use? Loss Determination Condition
Coinsurance Condition of Business Income Insurance BI insd can choose from wider range of percentages- % is not applied against a prop value, applied against the total net income & operating expenses for 12 mos beginning with the later of the policy inceptn or the last previous anniversary date
What are the business income coinsurance percentages an insured can choose from? 50, 60, 70, 80, 90, 100, 125
BI optional coverage for modifying coinsurance: Maximum Period of Indemnity good for bus unlikely to sustain interruption for more 4 mos- coins does not apply- insr pays BI loss up to 120 days- premium rates substantially higher
BI optional coverage for modifying coinsurance: Monthly Limit of Indemnity suspends coins- most insr will pay for each prd of 30 days is actual BI loss sustained, not to exceed limit of ins x fraction shown in declarations (1/3 1/4 or 1/6)
BI optional coverage for modifying coinsurance: Agreed Value coins suspended- insd & insr agree to a set of valued reported in a written statement- limit no less than agreed value at time of loss,
BI optional coverage for modifying coinsurance: Agreed Value - differs from BPP in what ways? Insd must complete BI worksheet- if amount of BI ins is changed without submitting new wkst, coins is reactivated- insrs typically charge 10% premium for Agreed Value option
Characteristics for selecting the No Coinsurance Option EML is small % of amount needed to satisfy 50% coins requirement- Max prd of indemnity does not provide adequate coverage- monthly limit of indemnity requires an amount of ins lgr than insds EML
Advantages of No Coinsurance Option Coins penalty never applies- insd not required to file BI worksheets with insr- no 120 day restriction on prd of restoration- does not impose fractional limit of recovery in any one month
Extra Expense Coverage Form intended for orgs that must continue their ops at any cost and do not want to cover loss of biz income
What is the difference between the extra expense coverage in the Business Income & Extra Expense Coverage Form and the Extra Expense Coverage Form? Limits on Loss Payment condition- encourage ins to value by limiting recovery for certain time prds to stipulated %s of the overall limit of ins- omission of this condition is an advantage of the Business Income & Extra Expense Coverage Form
Limits on Loss Payments Percentages many combinations- usual 40%-80%-100%- ex./ limit 100k- if period of restoration is 30 days or less extra expenses up to $40k paid- 30-60 days $80k paid- 61+ days $100k paid
Determining the Extra Expense Limit other than 100% 1st 2 mos- insd must estimate: mas loss in 1st 30 days- ML 1st 60 days- ML entire prd restoration- min ins determined dividing estimated extra expense 1st 30 days by % chosen 4 1st month
Business Income Coverage Options: Blanket Business Income Insurance one limit of ins applies to all of hte insds locations & blanket rate can be used- to be eligible all premises must be owned, managed or controlled by insd- any coins %
Business Income Coverage Options: Payroll Limitation or Exclusion Endorsement 3 appraoches- 1cover all payroll 2exclude payroll using CP 15 10 3limit payroll - 2nd & 3rd approach unse endt CP 15 10
What are the options for employee payroll coverage through the payroll limitation or exclusion endorsement? All Employees - All employees and job classifications except officers, execs, mgmnt personnel, & contract employees- All employees and job classifications except those specifically mentioned- only those employees &/or job class specifically mentioned
Discretionary Payroll Expense Endorsement CP 15 04 - extends business income forms to cover payroll expenses for specified job classes or employees regardless of whether such expenses are necessary to resume ops
Power, Heat, and Refrigeration Deduction Endorsement CP 15 11 only for manufacturing and mining firms
Endorsements for Dependent Property Exposures: Business Income From Dependent Property-Broad Form CP 15 08- used when the insd wants the same limit that applies to business income loss resulting from damage at its own premises to apply to business income loss resulting from damage to other properties as well
Endorsements for Dependent Property Exposures: Business Income From Dependent Properties- Limited Form CP 15 09- use when separate limits are preferred or when the insd wished to ins only the business income from the dependent properties
Endorsements for Dependent Property Exposures: Extra Expense From Dependent Properties CP 15 34- combined with extra expense coverage form, covers extra expenses b/c of direct loss or damage at other properties
Dependent Properties: Contributing locations locations that deliver materials or services to the insd or to other for the account of the insd- not including: water, power or communication supply services
Dependent Properties: Secondary contributing locations deliver materials or services to the contributing location that in turn are used by that location to provide materials or services to the insd
Dependent Properties: Recipient locations receive products or services from the insured
Dependent Properties: secondary recipient locations receive products or services from the recipient location which in turn receives products or services from the insured
Dependent Properties: manufacturing locations locations that manufacture products for delivery to the insureds customers under contract of sale
Dependent Properties: leader locations locations that attract customer to insureds business - magnet company
Business Income Insurance Provisions dependent prop must not be owned, operated or controlled by the insd- max amount payable is limit- physical loss must occur at a location specified in the endt sched
Business Income International Coverage CP 15 01 BI From Dependent Props Limtd International Cov- CP 15 02 Extra Expense from Dep Props Limtd Int Cov- insd must select lim for constributing locs or mftg locs
Business Income Amount of Insurance selected based on analysis of the biz income & EE losses that could arise from damage to or destruction of the locastion on which the insd is dependent
Business Income Education Institutions CP 15 25 BI Changes - Educational Institutions Endt- used to modify biz income forms to make them more approp for covering the biz income loss expos of schools
Educational Institutions Business Income: Period of Restoration def of prd of rest amended to end on the earlier of 2: day b4 the opening of the next school term following the date when the prop should be restored- date when the school term is resume at a permanent new loc
Educational Institutions Business Income: Extended Business Income replaces regular EBI provision- if damaged prop is actually repaired, rebuilt or replaced with in 60 or fewer days b4 sched opening of next school term policy will cover the actual loss of BI sustained during that entire school term
Educational Institutions Business Income: Limited Coverage restricts covg- opts incl both activities @ insds prem that generate tuition & related fees from students incl room board lab & other sources & tenantability of prem if rental value included- no bookstores, athletic events, activities related 2 grants
Business Income: Utility Services - Time Element Endorsement CP 15 45- modifies covg to incl loss of BI &/or EE resulting from suspension of ops @ described prem caused by interruption in utility svcs- Interruption of svc must b from covered cause of loss 2 type of supply prop thats been checked off the endts sched
Business Income: Utility Services - Time Element Endorsement: Supply Properties Water- Wastewater removal- Communication supple (incl overhead transmissions lines)- Communication supply (not incl overhead transmission lines)- Power Supply (incl overhead transmission lines)- Power Supply (not incl overhead transmission lines)
Business Income: Ordinance or Law- Increased Period of Restoration CP 15 31- extends covg to encompass increased period of suspension of ops brought on by enforcement of bldg laws- prd of restor refined to incl added time to replace damaged prop with replacement prop that complies with min standard of law
Business Income: Food Contamination Endorsement addresses costs of insd (restaurant or grocery) if food they sell is or is suspected 2 b contaminated- triggered if govt orders the insd to close- costs covd: expense 2 clean equipment, replace food, test empls 4 infection, & advertise 2 amend reputation
Created by: hongaro