Business Income Insurance Quiz

Business Income Insurance

• Business income insurance covers the reduction in a business's income when operations are disrupted by damage to property.
• Also known as "business interruption" insurance.
• It provides time element coverage.

Measurement of Business Income Losses

• Net income = Revenues - Expenses
• Business income insurance covers reductions in net income.
• This includes expected net income (which may be a net loss) minus actual net income.
• Expenses include continuing and non-continuing expenses, as well as extra expenses.
• Property and perils involved include covered and non-covered property/perils.

Events That Could Cause a Business Income Loss

• Damage to property at the organization's own premises.
• Damage to property away from the organization's premises (owned and non-owned).

Damage to Property at the Organization's Own Premises

• Analyzing exposure to business income loss resulting from losses of your own property is a part of a comprehensive risk management program.
• Usually done alongside the assessment of property losses.
• These exposures are typically easy to recognize.

Damage to Property Away from the Organization's Own Premises

• Own property off premises (in-transit, with a bailee).
• Dependent property exposures (supply chain, key suppliers/manufacturers, key buyers, leader properties).
• May consider reducing dependency.
• Interruption of utility services.
• Acts of civil authority.
• Adverse weather.

Time Factors of Business Income Loss

• When do we expect business income to be reduced? (Important if there are seasonal variations).
• How long do we expect business income to be reduced?
• Time required to replace damaged property
• Time required to restore normal rate of income
• Loss of customers
• Loss of licenses, leases, market share, etc.
• Time is not necessarily related to the size of the physical loss.
• Bottlenecks
• Pollution
• Information technology

Measuring Business Income Severity

• Most conservative approach assumes a worst-case scenario business interruption.
• Assumptions for the estimated maximum loss (EML) include:
  • Longest possible duration
  • Worst time for loss

Calculation of EML

• The coinsurance basis provides a starting point for EML estimation.
• Adjustments to the coinsurance basis include:
  • Non-continuing expenses
  • Time required to restore property
  • Peak seasons
  • Extended business income loss
  • Changes in expenses/revenues during the restoration period
  • Extra expenses
  • Anything else potentially affecting loss

Business Income Worksheet

• Purpose: Calculate insurance limits; report business income values to insurers; help underwriters evaluate business income exposure.
• Coinsurance basis: Not the EML. Business income exposure for 12 months (estimated loss), plus the most operating expenses (over 12 months after policy inception).

Adjustments to Coinsurance Basis

• Non-continuing expenses
• Maximum period of restoration
• Peak periods
• Extended business income loss
• Changes in expenses/revenues during the restoration period
• Projections changing?
• Extra expenses
• Allowance for mistakes/errors/oversights

Coinsurance Percentage and Limit of Insurance

• Coinsurance percentages include 50%, 60%, 70%, 80%, 90%, 100%, and 125%.
• As coinsurance percentage increases, rates decrease
• Appropriate coinsurance percentage = EML/(Coinsurance basis).
• Limit of insurance: Choose the higher of EML or the amount needed to satisfy the coinsurance requirement (Coinsurance percent times coinsurance basis).

Business Income Coverage (BIC)

• BIC without extra expense
• BIC with extra expenses
• Business income including rental value
• Business income other than rental value
• Rental value only
• Extra expense coverage form

BIC Insuring Agreement (I)

• Actual loss of income sustained:
  • Net income that would have been earned
  • Continuing normal operating expenses
  • Due to necessary suspension of operations (partial or total disruptions)
  • Period of restoration (usually starts 72 hours after loss, ends when property is replaced or business resumes).
  • Does not allow for ordinance/law or pollution cleanup.

BIC Insuring Agreement (II)

• Caused by direct physical loss of or damage to property at the described premises
• Caused by a covered loss (using Basic, Broad, or Special cause of loss forms).

Extra Expenses Coverage

• Necessary expenses incurred during the restoration period that would not have been necessary without the loss.
• Three categories: extra expenses to avoid or minimize suspension of business, expenses incurred to minimize suspension if operations cannot continue, and expenses to expedite repairs.

Civil Authority

• Extends BIC to include losses of business income if access to premises is cut off by civil authority. A cause of loss must have damaged property (not necessarily at the premises) if access is prohibited.
• Insured premises must be in the area within a one-mile radius.
• Action by civil authority is due to dangerous physical conditions or to enable access.
• 72 hour waiting period.

Other Additional Coverages

• Expenses to reduce loss (for BIC without extra expense form).
• Extra expense coverage (covers extra expenses only to reduce business income loss)
• Alterations and new buildings.
• Not subject to 72 hour waiting period or 30-day limit (as in BPP).
• Extended business income (EBI) - Add 60 days to period of restoration. Starts when operations resume. Extended period of indemnity - allow for increases (up to two years)

Other Additional Coverage/Coverage Extension

• Interruption of Computer Operations ($2,500 aggregate limit)
• Newly acquired locations (must have 50% or more coinsurance; $100,000 limit per location)

Conditions

• Duties in the event of loss (similar to BPP).
• Must resume operations as quickly as possible.
• Loss determination factors.
• Insured's net income before loss and likely net income if no loss occurred.
• Operating expenses (including payroll necessary to resume operations).
• Other relevant financial information.
• Determine extra expense (for Extra Expense form).
• Salvage value.
• Coinsurance

Coinsurance Options

• Maximum Period of Indemnity: Removes coinsurance clause; pays business income loss up to 120 days; higher insurance rates.
• Monthly Limit of Indemnity: Removes coinsurance clause; Choose “limit fraction”; Pays business income loss subject to 30-day limit of “limit fraction” times limit.
• Agreed Value: Suspends coinsurance; 10% rate increase. No Coinsurance

Endorsements (I)

• Blanket Business Income Insurance (good for interdependent locations, locations must be owned; no minimum coinsurance)
• Payroll coverage endorsements: BIC includes payroll expenses necessary to resume operations; Ordinary Payroll Limitation or Exclusion endorsement; Can limit payroll to 90 or 180 days or fully exclude; Discretionary Payroll Expense Endorsement.
• Power, Heat, and Refrigeration Deduction Endorsement: Allows manufacturers to exclude these expenses in coinsurance calculation.

Endorsements (II)

• Utility Services-Time Element endorsement: Extends property utility services endorsement to include business income loss.
• Ordinance or Law-Increased Period of Restoration endorsement: Allows for length of interruption and/or restoration to include time needed to comply with ordinances.
• Food Contamination Endorsement

Dependent Property Endorsements

• Endorsements for dependent property exposures
• Business Income From Dependent Properties-Broad Form
• Business Income From Dependent Properties-Limited Form
• Extra Expense From Dependent Properties
• Can choose contributing locations, recipient locations, manufacturing locations, or leader locations
• International coverage
• Business Income From Dependent Properties Limited International Coverage
• Extra Expense From Dependent Properties Limited International Coverage

Educational Institutions Endorsement

• Business Income Changes-Educational Institutions endorsement
• Period of restoration: Changed to end at the earlier of: day before opening of the next school term or date when school term is resumed at a permanent new location.
• Extended business income: If damaged property repaired within 60 days, policy covers losses during the entire school term; extension of recovery period can extend business income loss coverage to twelve months after period of restoration; can limit coverage to operations that generate tuition or fees.

Extra Expense (Only) Coverage Form

• Limits on loss payment: Popular limiting combinations is 40%-80%-100%.
• Determining extra expense limit: Often hard to do (no general rule of thumb) . Must consider limiting percentages

Test your knowledge on business income loss analysis and insurance coverage. This quiz covers key concepts such as Estimated Maximum Loss (EML), extra expenses, and conditions for Business Income Coverage activation. Perfect for finance or insurance students looking to review essential topics.