Questions often arise about business income coverage, particularly with regard to the waiting period, what constitutes a loss of business income and how additional coverages apply.
Most everyone understands an insurance deductible and how it is applied. Take, for example, a real estate franchise. A building worth $ 100,000 burns to the ground. Assuming it was insured at value, with a deductible of $ 500, the insured would receive loss compensation of $ 99,500. The $ 500 deductible is retained by the carrier as a portion of the insured’s loss.
What seems confusing to many is a loss that involves not only property damage but also lost business income and additional expenses.
Business income and additional expenses are one option for business property coverage. Business income is also referred to as business interruption or time element coverage. It protects the insured’s business income that would normally be generated if there had been no physical damage or loss of property.
Identify the business loss
A loss of business income occurs when all three of the following events occur:
- A direct physical loss to ownership of a covered cause of loss, based on the risks covered in the applicable causes of loss form (basic, broad or special).
- Then there must be a suspension of the insured’s operations (or rents) for a “reclamation period”.
- Finally, the insured must have suffered a real loss of income (or rents) due to the suspension of operations.
If one of these three actions does not occur, there is no insurable loss of business income. However, there is a caveat. If an insured elects not to resume operations or does not resume operations as quickly as possible, payment of business income will be based on the time it would have taken if the insured had resumed operations as quickly as possible. .
For example, business owners have decided, following a disaster, to close their business and retire rather than restore the building and resume operations. If policyholders continued operations, it would take two months to repair the building and replenish the inventory. Thus, policyholders will be compensated for two months of lost business income.
The restoration period is the time required to repair or replace damaged goods so that normal operations can resume using due diligence and shipping, with reasonable speed. For each occurrence of loss of business income, a 72 hour waiting period applies. This waiting period is not a deductible in itself; however, it is this part of the lost business income that must be borne by the insured. The 72 hour waiting period applies to the “restoration period” and begins at the time of direct physical damage to the property.
The 72 hour waiting period applies in addition to any other real estate deductible that may apply at the time of the loss. For example, if an insured suffers a loss caused by a fire that results in loss of business income, the real estate deductible will apply to the building loss and the waiting period will apply to the loss of income of business.
The “restoration period” ends as soon as the property is rebuilt, replaced or repaired to a similar quality and reasonable speed, or when the business resumes in a new permanent location, whichever occurs first.
Determination of loss coverage
As a general rule, the direct physical loss should relate to the goods covered in the premises described. The premises described can mean several things depending on the operations of the insured. The described premises of an owner or landlord are all premises for which the insured landlord or landlord has purchased business income insurance. The premises described include the area within 100 feet of the premises or 100 feet from the building (if the insured only leases, rents or occupies a part of the building) and any area of the building that serves the premises. If the insured only rents, leases or occupies part of the building, the premises described include the area used to serve or access that part of the building.
In particular, there are a few instances where business income coverage will apply to assets that are not located in the premises described.
Additional civil authority coverage will apply if a covered cause of loss causes damage to property not located in the premises described. Coverage applies if civil authority prohibits access to the area immediately surrounding the damaged property and the premises described are within one mile of such damaged property. The action of the civil authority must be brought for one of the following reasons:
- Due to the hazardous physical conditions of this damaged property;
- Due to the persistent cause of the loss that caused the damage;
- Allow the civil authority to have unhindered access to damaged goods.
Coverage is limited to four consecutive weeks following the start date of civil authority coverage, i.e. 72 hours after the civil authority has prohibited access to the damaged property.
For example, a large fire continues to burn for a week, destroying several buildings within a one-mile radius of the insured’s factory, and the fire department prohibits access to that entire area for two weeks. Business income coverage will be available as soon as the first 72 hours have elapsed from the time the civil authority has prohibited access which has affected the premises of the insured. Note that for the coverage of additional expenses, there is no waiting period and the coverage begins immediately after the civil authority has denied access for the first time.
Additional Extended Business Income coverage begins after the insured resumes activities after a loss of covered business income, giving the insured up to 60 additional days to restore income to normal levels. When an insured suffers a loss, customers will find other sources for their product or will need to find another location to rent. Once the policyholder is back and up and running, it may still take some time for their clients to return or establish new tenants, and this coverage will give them an additional 60 days to restore their income level.
The Newly Acquired Locations expansion allows the BI limit of insurance to apply to goods at each location that the insured acquires (except at fairs or exhibitions), up to $ 100,000 per location, unless that a higher limit is not indicated in the declarations. Coverage ends when the first of the following events occurs:
- The policy expires;
- 30 days after the insured acquires or begins to build the property; Where
- When the insured declares values to the insurer.
Additional coverage and extension of coverage are part of and not in addition to the business income limit of the insurance. Additional expense insurance is also included in the business income limit or can be added as a separate coverage with its own insurance limit.
Additional cost insurance provides for the necessary expenses that policyholders incur to continue their operations after a direct physical loss which will allow them to reduce the downtime. The keyword for this coverage is “required”. For additional expenses, the business must do everything possible to continue operating and the expenses must be greater than the insured’s normal operating expenses.
For example, the expense of renting separate space or equipment so that the business can continue some or all of its operations during closure. These additional expenses will reduce the amount of lost business income to the extent that the insured can resume at least part of their activities, which is a necessary additional expense. Unlike business income, there is no waiting period for additional expenses; as such, coverage begins immediately after the time of direct physical loss or property damage.
Karen L. Sorrell, CPCU, ([email protected]) is Associate Editor of Practical Insights / The National Underwriter Company.