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FIL350 - Chapter 7

Business Income Insurance

QuestionAnswer
Business Income Insurance Covers INDIRECT losses resulting from direct physical damage loss to property
2 elements of business insurance 1. Lost profit 2. Extra expenses
Two ways to measure business income losses 1. Difference (or decrease) in net income: Expected net income minus actual net income 2. Lost profit + continuing expenses
Continuing expenses vs. non-continuing expenses - Continuing expenses continue during shutdown (salaries, insurance, some utilities)
Estimated Maximum Loss (EML) considerations - Identify BI loss exposures: on premise and off-premise (key suppliers) - Length of suspension of operations & recovery time - Seasonal fluctuations - Estimation errors
Types of BI coinsurance - Choices range from 50,60,70, 80,90,100, and 125% - Rate discounts for higher coinsurance - Applied to 12 month period (so 50% coinsurance = 6 months)
BI required insurance Required insurance = coinsurance % x (annual profit + (most)expenses)
BI coinsurance example - Company with annual income & expense of $180k, BI policy with 50% coinsurance, $60k limit. Fire causes $12k in BI loss. Equation: (60k/90k)x12k=$8k. - Remember [did/should]x Loss. The 90k comes from $180k x 50%
Selecting BI coinsurance Choice of coinsurance = EML(estimated maximum loss)/coinsurance basis. Recall that coinsurance basis = income + operating expenses for 12 month period
Three Business Income Coverage (BIC) forms 1. Business income (and extra expense) coverage form 2. Business income (without extra expense) coverage form 3. Extra expense coverage only form
Business Income (and extra expense) coverage form coverages Covers lots income, continuing expenses, and extra expenses incurred due to shut down
Structure of BIC (Business Income Coverage) Forms (5 parts) 1. Business income 2. Extra expense coverage 3. Additional coverages 4. Coverage Extension 5. Conditions
Three options for Business Income Coverage 1. BI including rental income 2. BI other than rental income (tenant) 3. Rental income only (landlord)
5 BI Coverage requirements 1. Loss of business income has occurred 2. Operations are suspended 3. Losses covered during period of restoration (usually 72 hrs after direct damage) 4. Shutdown caused by property damage to premises 5. Due to covered cause of loss
3 categories of BI Extra Expense Coverage 1. Expenses to avoid/minimize shutdown and continue operations (renting new facility) 2. Expenses to minimize suspension of business (contracting to others) 3. Expenses to repair/replace property if it reduces BI loss (overtime pay to repairmen)
6 BI coverage extensions and exclusions 1. Civil authority 2. Alterations to new buildings 3. Extended business income (EBI) 4. Limited protection - interruption of computer operations 5. Limited mold coverage (cause of loss form) 6. Coverage extension - newly acquired locations
BI additional coverage: Civil authority - Access to premises is restricted by civil authority from prop damage by covered cause of loss - Coverage begins after 72 hours, lasts up to 4 weeks - EE (extra expense)coverage begins immediately
BI additional coverage: Alterations and new buildings - Coverage possible for new buildings under construction at premises or for alterations if delayed by physical damage - Includes building materials & supplies within 100' - Period of restoration begins on the projected starting date of completion
BI additional coverage: EBI (extended business income) - Covers reduction in earnings up to 30 days after reopening - Can be lengthened up to 2 years (bowling alley with seasonal league)
BI additional coverage: Limited protection - interruption of computer operations - Only $2,500 per year for BI loss if computer problems caused by virus or broad form perils - Excludes manipulation by employee or repairmen
BI coverage extension: newly acquired locations - Must use at least 50% coinsurance - 30 days of coverage to provide insured time to report new exposure - $100,000 limit (in addition to policy limit)
BI Limited mold coverage - In causes of loss form, not BI form - Full coverage provided during period of restoration if caused by covered peril (e.g., fire) - If peril results in subsequent mold causing shutdown, 30 days BI coverage provided
BI and EE exclusions mentioned in Causes of Loss Forms - Damage to finished stock (covered by BPP) - Labor strikes at premise - Loss of license or contract - Off-premises service interruption - Antennas - Other consequential losses (e.g., share value)
Extra Expense policy limit structure based on period of restoration Limit on loss payments condition (e.g., 40%-80%-100%) means 40% maximum of policy limit if period of restoration <30 days. 80% is % of limit if period of restoration is 30-60 days. 100% of limit if >60 days
Optional BI Coverages - Maximum period of indemnity (up to 120 days): used for companies with likely short shutdowns. - Monthly limit indemnity: maximum recovery over 30-day period is a chosen fraction of the total limit - Agreed value: based on EML
BIC Blanket coverage - Useful for companies with several locations that are interrelated - Specific insurance at each location may underestimate insurance needs - Coinsurance can be chosen
BIC Ordinary Payroll Coverage options - Ordinary payroll expenses are those that do NOT normally continue during long shut down - BIC pays these expenses - Endorsement can exclude ordinary expenses or limit them to a certain number of days (90 or 180), this lowers coinsurance basis
Power, heat, and refrigeration deduction endorsement - These expenses can be large for manufacturing companies and drive up coinsurance basis unless they select this endorsement
Business Income Premium Adjustment Endorsement Like reporting form, requires actual exposures to be reported and adjusted premium reflects coverage provided
Educational Institutions Endorsement Redefines period of restoration and EBI for schools who may lose entire year of tuition if closed on first day of school. - EBI otherwise only covers first semester
Ordinance or Law Endorsement - Increased period of restoration - Redefines period of restoration since demolition or meeting building code may increase time to restart business
4 types of Dependent Properties 1. Contributing location: furnishes materials (suppliers) 2. Recipient location: a customer (buyer) 3. Manufacturing location: makes products for delivery to insured's customers (contractor/outsourcing) 4. Leader location: attracts customers (mall)
3 endorsement options for protecting Dependent Companies 1. BI from Dependent Properties - Broad Form (same limits as BIC) 2. BI from Dependent Properties - Limited form (separate limit) - Extra expense also available 3. International coverage for suppliers & manufacturers for BI and EE
Net Income The difference between revenues and expenses
Profit Net income that results when revenues exceed expenses
Net Loss Net income that results when expenses exceed revenues
Continuing expenses Expenses that continue to be incurred during a business interruption
Non-continuing expenses Expenses that will not continue during a business interruption
Extra expenses Expenses, in addition to ordinary expenses, that an organization incurs to mitigate the effects of a business interruption
Dependent property exposure The possibility of incurring business income loss because of physical loss occurring on the premises of an organization that the insured depends on for materials, products, or sales.
Coinsurance basis The sum of the insured's estimated net income and operating expenses for the twelve months following policy inception, minus only those expenses listed in the business income worksheet.
Business income worksheet A sheet for calculating the amount of insurance to comply with the Coinsurance condition for income insurance forms for reporting income values to the insurer or for providing U/W with info they need to evaluate an organanizations income loss exposure
Period of restoration The period during which business income is covered the BIC forms; it begins 72 hours after the physical loss occurs and ends when the property is restored to use with reasonable speed.
Civil authority additional coverage Additional coverage in a business income form, covering loss of business income and/or expenses that result when access to the insureds premises is prohibited by a civil authority bc of damage by a covered cause of loss to property other than the insureds
Extended Business Income (EBI) additional coverage Coverage for business income losses that continue after the period of restoration ends; the coverage begins when the damaged property has been restored and ends when the insureds business returns to normal (max of 30 days)
Extended Period of Indemnity An optional coverage that lengthens the duration of the extended business income (EBI) additional coverage for up to two years
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 covered cause of loss
Maximum Period of Indemnity Option that deletes the coinsurance clause while limiting loss payment to the lesser of the amount of loss sustained during the 120 days following the beginning of the period of the restoration or the policy limit
Monthly Limit of Indemnity Option that deletes the coinsurance clause while limiting the amount recoverable during any month of business interruption to a stipulated fraction (1/6. 1/4, or 1/3) of the insurance amount
Ordinary payroll The entire payroll expense for all employees of the insured except officers, executives, department managers, and employees under contract.
Ordinary Payroll Limitation or Exclusion endorsement Endorsement that limits coverage for ordinary payroll expenses to a specified number of days or excludes such expenses altogether, allowing the insured to satisfy the coinsurance requirement with a lower amount of insurance
Discretionary Payroll Expense endorsement An endorsement that extends business income forms to cover payroll expenses for specified job classifications or employees regardless of whether such expenses are necessary to resume operations
Power, Heat, and Refrigeration Deduction endorsement Endorsement that eliminate power, heat, and refrigeration expenses from coverage and from the coinsurance calculation, allowing the insured to satisfy the coinsurance requirement with a lower limit of insurance
Business Income Premium Adjustment endorsement An endorsement that bases the final policy premium earned by the insurer on the actual exposure as reported by the insured at 12 month intervals
Business Income Changes-- Educational Institutions endorsement An endorsement that modifies business income coverage forms to make them more appropriate for covering the business income loss exposure of school
Utility Services-- Time Element endorsement An endorsement that covers loss of business income or extra expense at the insured premises caused by the interruption of utility services to the insured premises
Ordinance or Law-- Increase Period of Restoration endorsement Endorsement that covers business income during the additional time required to comply with building ordinances or laws
Business income Sum of net profit or loss that would have been earned or incurred if the suspension had not occurred and normal operating expenses, including payroll, that continue during the suspension
Created by: FIL350