Business Income Insurance PDF

Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income Business Income (and Extra Expense) Coverage Form (General) BIC Coverage (Specifics)...

Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income Business Income (and Extra Expense) Coverage Form (General) BIC Coverage (Specifics) Extra Expense Coverage Form Business Income Insurance Chapter 7 RMIN 5530 Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income Business Income (and Extra Expense) Coverage Form (General) BIC Coverage (Specifics) Extra Expense Coverage Form Introduction Business income insurance covers the reduction to a business’s income when operations are interrupted by damage to property caused by a covered peril. Also referred to as “business interruption” insurance. Time element coverage. Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income Measurement of Business Income Losses Business Income (and Extra Expense) Coverage Form (General) BIC Coverage (Specifics) Extra Expense Coverage Form Measurement of Business Income Losses Net income = Revenues - Expenses Business income insurance covers reduction in net income. Expected net income (could be a net loss) minus actual net income. Expenses Continuing and non-continuing expenses Extra expenses Property and perils involved Covered property/perils Non-covered property/perils Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income Events That Could Cause a Business Income Loss Business Income (and Extra Expense) Coverage Form (General) Time Factors of Business Income Loss BIC Coverage (Specifics) Extra Expense Coverage Form 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 own premises. Owned Non-owned Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income Events That Could Cause a Business Income Loss Business Income (and Extra Expense) Coverage Form (General) Time Factors of Business Income Loss BIC Coverage (Specifics) Extra Expense Coverage Form Damage to Property at the Organization’s Own Premises Analyzing exposure to business income loss resulting from losses of your own property should be part of any comprehensive risk management program. Usually done in connection with assessing property losses. Usually these are the easiest exposures to recgonize. Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income Events That Could Cause a Business Income Loss Business Income (and Extra Expense) Coverage Form (General) Time Factors of Business Income Loss BIC Coverage (Specifics) Extra Expense Coverage Form Damage to Property Away from the Organization’s Own Premises Own property off premises In-transit With a bailee Dependent property exposures (contingent business income) Supply chain (key suppliers/manufacturers) Key buyers Leader properties May consider reducing dependency Interruption of utility services Acts of civil authority Adverse weather Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income Events That Could Cause a Business Income Loss Business Income (and Extra Expense) Coverage Form (General) Time Factors of Business Income Loss BIC Coverage (Specifics) Extra Expense Coverage Form Time Factors of Business Income Loss Must also consider time elements: When do we expect business income to be reduced? Important if there are seasonal variations in business income How long do we expect business income to be reduced? Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income Events That Could Cause a Business Income Loss Business Income (and Extra Expense) Coverage Form (General) Time Factors of Business Income Loss BIC Coverage (Specifics) Extra Expense Coverage Form How Long? Time required to replaced damaged property Time required to restore normal rate of income Loss of customers Loss of licenses, leases, market share, etc. Time required is not necessarily related to size of physical loss Bottlenecks Pollution Information technology Time required affects continuing and non-continuing expenses Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis EML Estimated Maximum Loss (EML) of Business Income Coinsurance Basis Business Income (and Extra Expense) Coverage Form (General) Adjustments to Coinsurance Basis BIC Coverage (Specifics) Coinsurance Percentage and Limit of Insurance Extra Expense Coverage Form Measuring Business Income Severity Most conservative approach is to assume a worst-case scenario business interruption. Assumptions for the estimated maximum loss (EML) include: Longest possible duration Worst time for loss Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis EML Estimated Maximum Loss (EML) of Business Income Coinsurance Basis Business Income (and Extra Expense) Coverage Form (General) Adjustments to Coinsurance Basis BIC Coverage (Specifics) Coinsurance Percentage and Limit of Insurance Extra Expense Coverage Form Calculation of EML The coinsurance basis (the exposed loss) provides starting point for EML estimation Adjustments to coinsurance basis: Non-continuing expenses Time required to restore property Peak seasons Extended business income loss Changes in expenses/revenues during restoration period Extra expenses Anything else (e.g. potential errors) Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis EML Estimated Maximum Loss (EML) of Business Income Coinsurance Basis Business Income (and Extra Expense) Coverage Form (General) Adjustments to Coinsurance Basis BIC Coverage (Specifics) Coinsurance Percentage and Limit of Insurance Extra Expense Coverage Form Business Income Worksheet Purpose of business income worksheet Calculate insurance limits necessary to comply with coinsurance condition of business income insurance Reports business income values to insurers Assists underwriters in accurately evaluating business income exposure Coinsurance basis: Not EML Business income exposure for 12 months (estimated loss for 12 months) Net income plus most operating expenses (again, over 12 months after policy inception) Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis EML Estimated Maximum Loss (EML) of Business Income Coinsurance Basis Business Income (and Extra Expense) Coverage Form (General) Adjustments to Coinsurance Basis BIC Coverage (Specifics) Coinsurance Percentage and Limit of Insurance Extra Expense Coverage Form 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 Do projections change? Extra Expenses Allowance for mistakes/errors/oversights Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis EML Estimated Maximum Loss (EML) of Business Income Coinsurance Basis Business Income (and Extra Expense) Coverage Form (General) Adjustments to Coinsurance Basis BIC Coverage (Specifics) Coinsurance Percentage and Limit of Insurance Extra Expense Coverage Form Coinsurance Percentage and Limit of Insurance Coinsurance percentages: Coinsurance percentage options include: 50%, 60%, 70%, 80%, 90%, 100%, and 125% As always, as coinsurance percentage increases, rates decrease Appropriate coinsurance percentage = EML/(Coinsurance basis) Limit of Insurance Choose higher of: EML Amount needed to satisfy coinsurance requirement (Coinsurance percent times coinsurance basis) Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income BIC Insuring Agreement Business Income (and Extra Expense) Coverage Form (General) Extra Expense BIC Coverage (Specifics) Extra Expense Coverage Form 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 Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income BIC Insuring Agreement Business Income (and Extra Expense) Coverage Form (General) Extra Expense BIC Coverage (Specifics) 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 the necessary suspension of your operations Includes partial or total disruptions During the period of restoration For insurance purposes, usually starts 72 hours after loss (waiting period) Ends when property should be replaced or when business is resumed at new permanent location Does not allow for ordinance/law or pollution cleanup. Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income BIC Insuring Agreement Business Income (and Extra Expense) Coverage Form (General) Extra Expense BIC Coverage (Specifics) Extra Expense Coverage Form BIC Insuring Agreement (II) Caused by direct physical loss of or damage to property at the described premises Caused by a covered loss (use any of the Basic, Broad, Special cause of loss forms) Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income BIC Insuring Agreement Business Income (and Extra Expense) Coverage Form (General) Extra Expense BIC Coverage (Specifics) Extra Expense Coverage Form Extra Expense Coverage Necessary expenses the insured incurs during the period of restoration that would not have been incurred if there had been no physical loss caused by a covered peril. Three categories: Extra expenses incurred to avoid or minimize the suspension of business and to continue operations (at or away from the premises) Expenses incurred to minimize the suspension of business if operations cannot be continued Expenses made to expedite repairs. Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Additional Coverages and Coverage Extension Estimated Maximum Loss (EML) of Business Income BIC Conditions Business Income (and Extra Expense) Coverage Form (General) Coinsurance Options BIC Coverage (Specifics) Endorsements Extra Expense Coverage Form Civil Authority Extends BIC to include losses of business income incurred if access to the premises has been cut off by action of civil authority if: A covered cause of loss caused damage to property not at insured premises Access to the area immediately surrounding the damaged property is prohibited by action of civil authority. Insured premises must be in the area (not further away than one mile (radius)) Action of civil authority must be due to dangerous physical conditions or to enable access by civil authority. 72 hour waiting period Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Additional Coverages and Coverage Extension Estimated Maximum Loss (EML) of Business Income BIC Conditions Business Income (and Extra Expense) Coverage Form (General) Coinsurance Options BIC Coverage (Specifics) Endorsements Extra Expense Coverage Form Other Additional Coverages Expenses to Reduce Loss (for BIC without extra expense form) Extra expense coverage Covers extra expenses only to the extent that they 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) Adds 60 days to period of restoration Begins when operations are resumed Extended Period of Indemnity option allow for further increases (up to two years) Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Additional Coverages and Coverage Extension Estimated Maximum Loss (EML) of Business Income BIC Conditions Business Income (and Extra Expense) Coverage Form (General) Coinsurance Options BIC Coverage (Specifics) Endorsements Extra Expense Coverage Form Other Additional Coverage/Coverage Extension Additional Coverage: Interruption of Computer Operations $2,500 aggregate limit Coverage Extension: Newly acquired locations Must have 50% or more coinsurance $100k limit per location (in addition to limits) Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Additional Coverages and Coverage Extension Estimated Maximum Loss (EML) of Business Income BIC Conditions Business Income (and Extra Expense) Coverage Form (General) Coinsurance Options BIC Coverage (Specifics) Endorsements Extra Expense Coverage Form Conditions Duties in the event of loss Similar to BPP Also must resume operations as “quickly as possible” Loss determination (factors) Insured’s net income before the loss 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 Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Additional Coverages and Coverage Extension Estimated Maximum Loss (EML) of Business Income BIC Conditions Business Income (and Extra Expense) Coverage Form (General) Coinsurance Options BIC Coverage (Specifics) Endorsements Extra Expense Coverage Form 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” ( 13 , 41 , or 16 ) Pays business income loss subject to 30 day limit of “limit fraction” times limit Agreed Value Suspends coinsurance 10% rate increase (as compared to 5% for BPP) No Coinsurance Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Additional Coverages and Coverage Extension Estimated Maximum Loss (EML) of Business Income BIC Conditions Business Income (and Extra Expense) Coverage Form (General) Coinsurance Options BIC Coverage (Specifics) Endorsements Extra Expense Coverage Form 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 Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Additional Coverages and Coverage Extension Estimated Maximum Loss (EML) of Business Income BIC Conditions Business Income (and Extra Expense) Coverage Form (General) Coinsurance Options BIC Coverage (Specifics) Endorsements Extra Expense Coverage Form 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 Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Additional Coverages and Coverage Extension Estimated Maximum Loss (EML) of Business Income BIC Conditions Business Income (and Extra Expense) Coverage Form (General) Coinsurance Options BIC Coverage (Specifics) Endorsements Extra Expense Coverage Form 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 between 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 Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Additional Coverages and Coverage Extension Estimated Maximum Loss (EML) of Business Income BIC Conditions Business Income (and Extra Expense) Coverage Form (General) Coinsurance Options BIC Coverage (Specifics) Endorsements Extra Expense Coverage Form 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 is repaired, rebuilt, or replaced within 60 days (or less) of the next school term, 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 Chapter 7 Business Income Insurance  Business Income Loss Exposure Pre-Loss Analysis Estimated Maximum Loss (EML) of Business Income Business Income (and Extra Expense) Coverage Form (General) BIC Coverage (Specifics) Extra Expense Coverage Form Extra Expense (only) Coverage Form Limits on loss payment Popular limiting combination is 40%-80%-100% Determining the extra expense limit Often hard to do/no general rule of thumb Must consider limiting percentages Chapter 7 Business Income Insurance