Podcast
Questions and Answers
What can be a consequence of damage to nearby properties during an accident?
What can be a consequence of damage to nearby properties during an accident?
Business interruption insurance can function independently of property insurance.
Business interruption insurance can function independently of property insurance.
False
What is one action that regulatory authorities might take during a natural disaster?
What is one action that regulatory authorities might take during a natural disaster?
Restrict access to affected areas
A major fire at a supplier's plant can halt _____ for a business.
A major fire at a supplier's plant can halt _____ for a business.
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Which of the following is NOT a funding option during business interruption?
Which of the following is NOT a funding option during business interruption?
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What is one potential impact of increasing product prices during a business interruption?
What is one potential impact of increasing product prices during a business interruption?
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Operating expenses covered by business interruption insurance include salaries and utilities.
Operating expenses covered by business interruption insurance include salaries and utilities.
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What is the primary purpose of business interruption insurance?
What is the primary purpose of business interruption insurance?
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Business interruption insurance is often straightforward and easy to sell.
Business interruption insurance is often straightforward and easy to sell.
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Name one major historical example of a utility failure that impacted businesses.
Name one major historical example of a utility failure that impacted businesses.
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Business interruption insurance is essential for protecting against loss of _______.
Business interruption insurance is essential for protecting against loss of _______.
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What is a common obstacle to selling business interruption coverage?
What is a common obstacle to selling business interruption coverage?
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The risks associated with not having business interruption insurance are low for most businesses.
The risks associated with not having business interruption insurance are low for most businesses.
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What type of damage is necessary for triggering business interruption insurance?
What type of damage is necessary for triggering business interruption insurance?
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Which of the following is included under coverage for civil authority orders?
Which of the following is included under coverage for civil authority orders?
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Brokers must have accounting expertise to effectively understand Business Interruption insurance.
Brokers must have accounting expertise to effectively understand Business Interruption insurance.
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What are the three categories of expenses in Business Interruption insurance?
What are the three categories of expenses in Business Interruption insurance?
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Gross Profit is calculated as net sales minus the __________.
Gross Profit is calculated as net sales minus the __________.
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Which type of expense typically does not need insurance coverage?
Which type of expense typically does not need insurance coverage?
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What is the key implication of insuring only net profit?
What is the key implication of insuring only net profit?
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Income is defined as total earnings from __________ or services.
Income is defined as total earnings from __________ or services.
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What does 'gross earnings' include according to insurance definitions?
What does 'gross earnings' include according to insurance definitions?
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Exclusions for deductible expenses include other expenses not directly tied to production or service delivery.
Exclusions for deductible expenses include other expenses not directly tied to production or service delivery.
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What is the principle of indemnity in the context of insurance coverage?
What is the principle of indemnity in the context of insurance coverage?
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Coverage on an 'Actual Loss Sustained' basis compensates only for the __________ income.
Coverage on an 'Actual Loss Sustained' basis compensates only for the __________ income.
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What is considered a continuing expense?
What is considered a continuing expense?
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Seasonal businesses do not require special considerations for evaluating loss of income.
Seasonal businesses do not require special considerations for evaluating loss of income.
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What could potentially reduce the period of indemnity for an insured party?
What could potentially reduce the period of indemnity for an insured party?
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What is the maximum liability period for media and data loss in terms of business interruption?
What is the maximum liability period for media and data loss in terms of business interruption?
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Insurers will always cover the full amount of expenses that reduce losses.
Insurers will always cover the full amount of expenses that reduce losses.
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What type of insurance should be considered for additional protection against media and data loss?
What type of insurance should be considered for additional protection against media and data loss?
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Coverage for business interruption due to media and data damage is limited to a maximum of _____ days.
Coverage for business interruption due to media and data damage is limited to a maximum of _____ days.
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Which condition must be met for coverage when access to the insured premises is prohibited?
Which condition must be met for coverage when access to the insured premises is prohibited?
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Electronic Data Processing (EDP) policies offer less coverage for media and data loss than standard property policies.
Electronic Data Processing (EDP) policies offer less coverage for media and data loss than standard property policies.
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What must occur for the indemnity coverage regarding media and data loss to extend beyond 30 days?
What must occur for the indemnity coverage regarding media and data loss to extend beyond 30 days?
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Study Notes
Importance of Business Interruption Insurance
- Business Interruption Insurance (BI) is often misunderstood but essential for businesses
- Clients may shy away from BI due to perceived complexity
- BI insurance protects businesses against loss of income
Risks of Not Having Business Interruption Insurance
- Physical damage to property vs. income loss
- Statistics show high failure rates for businesses without BI
- High profile examples like the Antwerp ethylene oxide plant explosion demonstrate the importance of BI
Why Selling Business Interruption Coverage is Essential
- Protects the interests and assets of clients
- Reassures confidentiality and privacy
- Gives clients confidence in business continuity planning
- Highlights the risk management role of insurance brokers
Obstacles to Selling Business Interruption Coverage
- Technical complexity and perceived difficulty in understanding BI
- Client reluctance to share financial information
- Lack of awareness about the importance of BI
Causes of Business Interruption
- Damage to business property:
- Fire, including direct and secondary damage like smoke & water
- Other natural disasters like floods, earthquakes, and windstorms
- Failure or breakdown of public utilities:
- Utilities like electricity, water, and gas are critical
- Historical examples of utility failures causing significant disruptions like the 1998 Quebec Ice Storm and the 2003 North Eastern Blackout
- Transportation-related accidents:
- Accidents can prevent access to business premises
- Dangerous goods spills, train derailments can cause evacuations
- Historical examples: 1979 Mississauga Train Derailment (toxic gas), 1989 Elma Train Derailment (flammable gas)
- Physical damage to neighboring premises:
- Damage can force closures of adjacent businesses
- Example: damage to anchor tenants in malls or business districts
- Example: 1986 Saint John Explosion that shut down the entire downtown area
- Loss caused to major supplier or customer:
- Disruptions at key suppliers or customers can significantly affect a business
- Examples: Supplier plant fire, major customer disruption
- A fire at a sole supplier can halt production
- Delays at a major customer can reduce sales and revenue
- Actions of regulatory authorities & ancillary causes:
- Civil authorities may restrict access or mandate repairs, prolonging interruptions
- Ancillary causes like strikes or lock-outs can delay rebuilding
- Example: Construction industry strikes affecting repair timelines
Funding Options During Business Interruption
- Reduction of capital reserves:
- Using retained profits for ongoing expenses
- Can delay future investments and expansion plans
- Bank loan:
- Additional operating loans to cover expenses
- Increases financial burden due to interest and repayment obligations
- Increasing product prices:
- Potential to generate extra revenue
- Risks making prices uncompetitive, potentially reducing long-term income
Business Interruption Insurance Basics
- Purpose of coverage: helps cover ongoing expenses and profit loss during interruptions
- Policy structure:
- Endorsement to property insurance, not standalone
- Triggered by covered occurrences under property insurance
What Business Interruption Insurance Covers
- Operating expenses: costs that continue despite the interruption (e.g., utilities, salaries)
- Net profit: compensates for the loss of income due to business interruption
Coverage for Civil Authority Orders
- Provides indemnity if access to premises is restricted due to civil authority orders
- Includes closures caused by riots, explosions, fires or other disasters
- Coverage is subject to specific limitations outlined in Business Interruption forms
Myth 1 - Broker’s Need for Accounting Expertise
- Reality: understanding basic insurance terms is sufficient
- Key Terms for Brokers:
- Income: total earnings from sales or services
- Expenses:
- Fixed: ongoing costs (e.g., mortgage interest, management salaries)
- Semi-variable: costs that may vary (e.g., advertising, short-term salaries)
- Variable: costs that fluctuate with sales (e.g., cost of goods sold)
Expense Categories in Business Interruption Insurance
- Fixed expenses: continue during the interruption (e.g., mortgage interest, salaries, property taxes)
- Semi-variable expenses: may or may not continue during the interruption (e.g., advertising, temporary salary continuation)
- Variable expenses: vary directly with the level of business activity (e.g., cost of goods sold)
Profit Categories
- Gross Profit: Net sales minus the cost of goods sold
- Net Profit: Gross profit minus all operating expenses
- Coverage Implications: insuring only net profit is insufficient as it does not account for ongoing expenses
Understanding Policy Terms vs. Accounting Terms
- Insurance definitions vs. accounting definitions:
- Gross Profit: different in insurance compared to accounting
- Insurance terms may not align directly with accounting terms
- Gross Earnings: unique to Business Interruption insurance, also applies to the Profits Form
Measure of Recovery
- Coverage Basis: Reduction in gross earnings directly resulting from business interruption less charges and expenses that do not continue during interruption
- Coverage Duration: Up to the time required to rebuild, repair, or replace damaged property, not limited by policy expiration but by actual loss sustained
Gross Earnings
- Insurance Definition: Gross Earnings are the sum of total net sales and other earnings from business operations less costs: merchandise sold, materials and supplies consumed, and services purchases from outsiders
- Important Note: The definition of gross earnings is specific to insurance and differs from accounting definitions
Income and Non-Continuing Expenses
- Income Includes: Net sales and additional earnings
- Deductible Expenses: Merchandise sold, materials and supplies, and outside services not continuing under contract
- Exclusions: Other expenses not directly tied to production or service delivery are not deductible
Coverage on "Actual Loss Sustained" Basis
- Principle of Indemnity: coverage is based on the actual loss sustained during the interruption period
- Income Loss: Insured receives payment for the income they would have earned if no loss occurred
Evaluating Loss of Income
- Pre-Loss Analysis: Assess past sales and income to estimate the loss impact
- Seasonal Businesses: Special considerations are needed for businesses affected by the timing of the loss
Evaluating Continuing Expenses
- Continuing Expenses: Only expenses necessary to resume operations with the same quality of service are covered
- Examples: Salaries for specialized employees, but general payroll might not be covered if easily replaceable
Due Diligence and Dispatch Requirement
- Requirement Overview: Payments are based on the time required with due diligence and dispatch to restore operations
- Impact of Delays: Delays caused by various factors (landlord, insured, others) may reduce the period of indemnity
- Scenario 1: Expense Reduces Loss:
- The expense allowed the business to resume earlier, reducing the overall claim by 25,000.Full25,000. Full 25,000.Full5,000 monthly rent was covered by the insurer due to significant savings.
- Scenario 2: Partial Reimbursement
- 15,000rentalcostonlyreducedthelossby15,000 rental cost only reduced the loss by 15,000rentalcostonlyreducedthelossby10,000.
- Insurer covered only 10,000asitmatchedthereductioninloss.Theinsuredbearstheexcess10,000 as it matched the reduction in loss. The insured bears the excess 10,000asitmatchedthereductioninloss.Theinsuredbearstheexcess5,000.
- Judgement and Coverage Limits:
- Insured must evaluate whether expenses will effectively reduce losses
- Expense Coverage Cap: Insurer covers only the portion of expenses that directly reduce losses
- For additional protection, consider Extra Expense Insurance (IBC 4027).
Media Limitation - Coverage Details
- Coverage Limits for Media and Data Loss:
- Clause (a): Maximum liability of 30 consecutive calendar days
- Clause (b): Liability extends until the damaged or destroyed property is rebuilt, repaired or replaced if this period exceeds 30 days
- Application of Clauses:
- Media-Only Loss: Coverage for business interruption due to media and data damage is limited to a maximum of 30 days
- Loss Involving Other Property: If other insured property is also damaged, coverage for media and data continues until the other property is restored, potentially exceeding the 30-day limit
- Specialized Coverage: Electronic Data Processing (EDP) policies may offer broader coverage for media and data loss than standard property policies
- Best Practices: Regularly back up data and store copies off-site to mitigate potential losses
Interruption by Civil Authority - Coverage Scope and Purpose
- Coverage Scope:
- Duration: Up to 2 weeks
- Conditions for Coverage:
- Access to the insured premises is prohibited
- The prohibition is issued by a civil authority
- The prohibition is due to damage to neighboring property
- The damage is caused by a peril covered under the insured's policy
- Purpose of Coverage: To cover income loss when the insured premises are inaccessible due to external damage
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Description
This quiz explores the critical aspects of Business Interruption Insurance, including its importance, risks of not having it, and obstacles in selling coverage. Understand why this type of insurance is essential for protecting businesses against income loss and how it reassures clients about their financial stability.
