CAIB 2 Ch 7 PPT PDF

CAIB 2: Chapter 7 Business Interruption Insurance CAIB 2  CAIB 2 Section 1 The Need For Business Interruption Insurance  The Importance of Business Interruption Insurance BUSINESS INTERRUPTION...

CAIB 2: Chapter 7 Business Interruption Insurance CAIB 2  CAIB 2 Section 1 The Need For Business Interruption Insurance  The Importance of Business Interruption Insurance BUSINESS INTERRUPTION BROKERS MAY SHY AWAY DUE TO ESSENTIAL FOR BUSINESSES TO INSURANCE (BI) OFTEN PERCEIVED COMPLEXITY. PROTECT AGAINST LOSS OF MISUNDERSTOOD. INCOME. CAIB 2 Risks of Not Having Business Interruption Insurance Physical damage vs. income loss. Example: Antwerp ethylene oxide plant explosion. Statistics: High failure rates for businesses without BI. CAIB 2 Why Selling Business Interruption Coverage is Essential Protect clients' interests and assets. Reassure confidentiality and privacy. Discuss business continuity planning. Risk management role of brokers. CAIB 2 Obstacles to Selling Business Interruption Coverage Technical complexity and perceived difficulty. Reluctance of clients to share financial information. Lack of awareness about the importance of BI. CAIB 2 Physical Damage to Property Overview Business interruption requires a covered property loss. Damage can come from various sources such as fire, flood, and wind. Fire Damage Includes both direct damage and secondary effects like smoke and water damage. Example: Fire may not completely destroy a building but can still halt business operations. Other Natural Disasters Floods, earthquakes, and windstorms can cause severe disruptions. These events often lead to significant repair times and operational downtime. CAIB 2 Failure or Breakdown of Public Utilities Impact of Utility Failures Utilities like electricity, water, and gas are critical for business operations. Utility failures can halt business activities significantly. Historical Examples 1998 Quebec Ice Storm: Power outages affected dairy farmers and other businesses. 2003 North Eastern Blackout: Massive blackout impacting millions of people and businesses. CAIB 2 Transportation- Related Accidents Types of Disruptions Accidents can prevent access to business premises. Dangerous goods spills or train derailments can lead to evacuations and business shutdowns. Historical Examples 1979 Mississauga Train Derailment: Evacuations and disruptions caused by toxic gas. 1989 Elma Train Derailment: Evacuations due to the threat of explosion from flammable gas. CAIB 2  Physical Damage to Neighbouring Premises Impact on Adjacent Businesses Damage to nearby properties can lead to business closures. Example: Damage to anchor tenants in malls or business districts can affect neighboring businesses. Historical Example 1986 Saint John Explosion: Damage led to the closure of the entire downtown area, affecting local businesses. CAIB 2 Loss Caused to Major Supplier or Customer Impact of Supplier or Customer Loss Disruptions at key suppliers or customers can affect your business significantly. Example: A major fire at a supplier’s plant or disruption at a major customer can impact your business operations. Examples A fire at a sole supplier can halt production. Delays in a major customer’s operations can reduce sales and revenue. CAIB 2  Actions of Regulatory Authorities & Ancillary Causes Regulatory Actions Civil authorities may restrict access or mandate repairs, extending interruption periods. Examples include emergencies like natural disasters or civil unrest. Ancillary Causes Strikes or lock-outs can delay rebuilding and prolong interruptions. Example: Construction industry strikes affecting repair timelines. CAIB 2 Funding Options During Business Interruption Reduction of Capital Reserves Use retained profits for ongoing expenses. Impact: Can delay future investments and expansion plans. Bank Loan Additional operating loans to cover expenses. Impact: Increases financial burden due to interest and repayment obligations. Increasing Product Prices Potential to generate extra revenue. Impact: Risks making prices uncompetitive, potentially reducing long-term income. CAIB 2 Business Interruption Insurance Basics Purpose of Coverage Helps cover ongoing expenses and lost profits during interruptions. Ensures business continuity and financial stability. Policy Structure Endorsement to property insurance, not standalone. Triggered by covered occurrences under property insurance. CAIB 2 What Business Interruption Insurance Covers Operating Expenses Includes costs that continue despite the interruption (e.g., utilities, salaries). Net Profit Compensates for the loss of income due to business interruption. CAIB 2  Gross Earnings Form Overview American approach: Coverage starts at loss and ends when property is restored. Key Features Payment stops once the property is reinstated. Basic form may lack an indemnity period unless extended by additional premiums. Assumption Assumes business returns to pre-loss competitive position immediately after restoration. CAIB 2 Profits Form Overview British approach: Coverage continues until income returns to pre-loss levels. Key Features Typically covers lost income for 12 to 36 months. Reflects the time needed to regain pre-loss profitability. Assumption Acknowledges that restoring property alone doesn’t restore profitability. The additional coverage accounts for the time needed to fully recover. CAIB 2 Coverage Perils and Trigger Conditions Coverage Alignment Business Interruption insurance covers the same perils as the property insurance policy. Triggered by loss or damage to property covered under the commercial property policy. Non-Standalone Policy Business Interruption insurance is not a standalone policy; it’s an endorsement to the property policy. Coverage is only available if the underlying property insurance covers the loss. CAIB 2 Contracts of Indemnity Indemnity Nature Property insurance indemnity is based on the value of the property before the loss. Business Interruption insurance deals with projections and probabilities. Measure of Recovery Recovery is based on projected income that would have been earned if the interruption hadn’t occurred. Economic conditions influence the amount payable; e.g., a downturn in sales could affect the claim amount. CAIB 2 Period of Indemnity Coverage Duration Typically insures loss of income for up to 12 months from the date of the loss. Coverage extends beyond the policy expiry date if the loss occurs on the last day of a 12-month policy. CAIB 2  Expenses to Reduce the Loss Allowable Expenses Costs incurred to mitigate the loss are covered, excluding expenses to extinguish a fire. Examples include: Over-time salaries for contractors. Advertising for new business locations. Increased shipping costs for urgent equipment. Rental of alternate premises. Claim Savings Expenses are reimbursed if they contribute to an overall reduction in the insurer’s claim payout. CAIB 2 Access Denied by Coverage for Civil Authority Orders Provides indemnity if access to the Civil Authority premises is restricted due to civil authority orders. Includes closures caused by riots, explosions, fires, or other disasters. Limitations Coverage is subject to specific limitations outlined in Business Interruption forms. CAIB 2 Myth 1 — Broker’s Need for Accounting Expertise Myth: Brokers need to be accountants to understand Business Interruption insurance. 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). CAIB 2 Expense Categories in Business Interruption Insurance Fixed Expenses: Continue during the interruption. Examples: Mortgage interest, salaries, property taxes. Semi-variable Expenses: May or may not continue during the interruption. Examples: Advertising, temporary salary continuation. Variable Expenses: Vary directly with the level of business activity. Typically do not need insurance as they decrease proportionally with reduced sales. CAIB 2 Profit Categories Gross Profit: Calculated as net sales minus the cost of goods sold. Example Calculation: Sales ($500,000) - COGS ($130,000) = Gross Profit ($245,000). Net Profit: Gross profit minus all operating expenses. Example Calculation: Gross Profit ($245,000) - Operating Costs ($180,000) = Net Profit ($65,000). Coverage Implications: Insuring only net profit is insufficient as it does not account for ongoing expenses. CAIB 2 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. Importance of Accurate Coverage: Verify that policy definitions match the business's needs. Work with accountants to ensure appropriate coverage levels. CAIB 2  Myth: Business Interruption insurance should only be sold to Myth 2 — profitable businesses. Reality: Insurance needs are similar regardless of profitability. Business Key Points: Continuing Expenses: Businesses, whether profitable or Interruption not, still face ongoing costs during interruptions. Examples: Rent, salaries, utilities. Insurance Contract of Indemnity: Insurance compensates based on actual expenses incurred. and Not intended to improve the business's financial position post-interruption. Profitability Coverage Principle: The aim is to cover earned expenses, not to subsidize losses or create profit. CAIB 2 Myth 3 — Business Interruption Insurance and Third-Party Liability Myth: If a loss is caused by someone not insured by the policy, there is no need to purchase Business Interruption insurance. Reality: Business Interruption insurance is crucial regardless of the party responsible for the loss. Key Points: Recoverability from Third Parties: Losses due to third parties can be pursued legally. Business Interruption insurance provides immediate relief. Legal Action Challenges: Cost: Legal expenses can exceed initial estimates and awarded costs may not cover all legal fees. Delay: Legal proceedings can take months or years, leading to significant delays in compensation. Risk: Legal outcomes are uncertain; damages awarded may be insufficient or the defendant might be unable to pay. CAIB 2  CAIB 2 Section 2 Determining Need, Type and Amount Determining the Need for Business Interruption Insurance Key Consideration: Assess if the business has potential for interruption due to loss or damage of physical assets. Indicators of Need: Business Type: Businesses reliant on physical assets or location. Examples include manufacturing, retail, and service-based businesses. Impact of Interruption: Evaluate how interruptions could affect ongoing expenses and revenue. Financial Risk: Consider the financial impact of potential interruptions on cash flow and solvency. CAIB 2 Determining the Type of Coverage Needed Gross Earnings Form: Suitable for businesses with short interruption periods and minimal long-term impact. Coverage Profits Form: Ideal for businesses expecting Forms prolonged interruptions and potential customer loss. Nature of the Business: Short-term vs. long-term interruption effects. Key Factors Types of Perils: Duration and severity of interruption caused by specific perils (e.g., fire vs. power outage). CAIB 2 Calculating the Amount of Coverage Needed - Worksheet Completion Coverage Calculation: Use worksheets provided with Gross Earnings and Profits Forms. Worksheets help determine insurance values based on financial data. Gross Earnings Form Calculation: Covers reduction in gross earnings minus non-continuing charges and expenses. Profits Form Calculation: Covers gross profit by adding net profit to insured standing charges. CAIB 2 Accounting for Future Trends Considerations: Financial data from statements may be outdated by the time of a claim. Adjust coverage to account for future trends and potential changes in business performance. Example: Financial statement from one year prior may not reflect current operations or future trends. Adjust for potential changes in income and business conditions. CAIB 2 Ensuring Accurate Coverage Limits Review of Financial Statements: Ensure that financial information used for coverage calculations is current and accurate. Insurance vs. Accounting Terms: Understand the differences between insurance definitions and accounting terms. Use insurance meanings for accurate coverage determination. Projection of Lost Income: Project income losses for at least two years to cover potential extended interruptions. CAIB 2  Overview of Business Interruption Insurance - Gross Earnings Endorsement Form Form Type: Gross Earnings Endorsement Form (Mercantile or Non-Manufacturing) - IBC 4029. Purpose: Coverage focuses on reduction in gross earnings due to business interruption. Concepts also apply to the Profits Form. CAIB 2 Measure of Recovery Coverage Basis: Reduction in gross earnings directly resulting from business interruption. Less charges and expenses that do not continue during the 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. CAIB 2 Gross Earnings Definition 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 purchased from outsiders. Important Note: The definition of gross earnings is specific to insurance and differs from accounting definitions. CAIB 2 Income and Non- Continuing Expenses Income Includes: Net sales and additional earnings (e.g., rental income, on-premises services). 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. CAIB 2 Coverage on "Actual Loss Sustained" Basis Principle of Indemnity: Coverage is based on actual loss sustained during the interruption period. Income Loss: Insured receives payment for income they would have earned if no loss occurred. CAIB 2 Evaluating Loss of Income Pre-Loss Analysis: Assess past sales and income to estimate the loss impact. Seasonal Businesses: Special considerations for businesses like ski resorts or golf courses affected by timing of the loss. CAIB 2 Evaluating Continuing Expenses Continuing Expenses: Only expenses necessary to resume operations with the same quality of service are covered. Examples: Salaries for specialized employees may be covered; however, general payroll might not be if easily replaceable. CAIB 2 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 (e.g., landlord, insured, others) may reduce the period of indemnity. CAIB 2 Delays Caused by Insured’s Landlord Potential Issues: Lease renegotiations or cancellations. Delays due to underinsurance or property sale negotiations. Examples: Landlord using the opportunity to renegotiate leases or delay reinstatement due to property sales. CAIB 2 Delays Caused by Insured Potential Issues: Insured’s personal delays (e.g., vacation). Delays in selecting contractors or tendering work. Examples: Insured delaying work due to personal reasons or procrastination. CAIB 2 Delays Caused by Others Examples: Impact: Architect’s delay in preparing specifications. Such delays will also be deducted from the Municipal approval delays. indemnity period. Contractor disputes. CAIB 2 Summary of Key Points Coverage Focus: Gross Earnings Endorsement Form covers reduction in earnings and certain continuing expenses. Adjustments: Evaluate actual loss, continuing expenses, and due diligence in restoring operations. CAIB 2  Assessment Regularly review and update financial information. Practical Ensure understanding of insurance definitions versus accounting terms. Implications for Insureds Action Steps Act promptly and efficiently in the event of a loss. Address any potential delays proactively to ensure full coverage. CAIB 2 Payroll Options Overview Coverage Requirements: Insured must cover all payroll expenses, including taxes and vacation pay. Insurer evaluates necessity of continuing payroll expenses for coverage. Key Considerations: Officers and key employees typically covered. Ordinary payroll expenses may not always be necessary. CAIB 2  Ordinary Payroll Definition Definition: Included in Ordinary Payroll: Coverage Limitation: Payroll for all employees except key Employees who can be laid off and Ordinary payroll may not be staff whose services are crucial and re-hired without significant impact. recognized as a necessary cannot be easily replaced. continuing expense by the insurer. CAIB 2  Example of Ordinary Payroll Exclusion Case Study: Barney’s Tool Shop: Six counter staff with easily replaceable skills. Business interruption: Closed for six months. Coverage Impact: Insurer may not cover payroll for counter staff during the closure. CAIB 2 Factors in Determining Payroll Coverage Key Factors: 1.Identification of Key Employees: Special skills or roles that are hard to replace. 2.Training Time: Time required to train new staff to maintain service quality. 3.Local Labour Standards: Compliance with notice and layoff regulations. CAIB 2 Payroll Insurance Options Options Available: Full Ordinary Payroll Coverage: For 90 or 180 days. Exclusion of Ordinary Payroll: No coverage for ordinary payroll costs. Co-insurance Considerations: Options not available on a 50% co- insurance basis. CAIB 2 Limited Coverage Option (90/180 Days) Short Interruption: Insurance for full ordinary payroll may be beneficial for short-term interruptions. Cost-Benefit Analysis: Compare costs of retaining staff versus hiring and training new employees. CAIB 2 Ordinary Payroll Exclusion Implications: No coverage for ordinary payroll expenses. Awareness of provincial labour laws is crucial for financial planning. Provincial Labour Standards: Notice and payment requirements vary by province and union agreements. CAIB 2 Wages in Lieu of Notice Endorsement Endorsement Purpose: Covers wages in lieu of notice when termination occurs without proper notice. Premium and Coverage: Typically 500% of the building rate. Coverage generally for two weeks' salary, with potential for extension. CAIB 2 Impact of Payroll Expense Amendments Amendment Effects: Adjusting ordinary payroll expenses impacts overall policy terms. Co-insurance Requirement: Any changes to payroll expenses make the policy subject to an 80% co-insurance requirement. CAIB 2 Premium Adjustment Overview Concerns in Estimating Gross Earnings: Over-insurance: Risk of excessive coverage leading to unnecessary costs. Under-insurance: Inadequate coverage that may result in insufficient protection and potential co-insurance penalties. Solution - Premium Adjustment Clause: Allows for adjustment of premium based on actual gross earnings. Refund for excess premium if insured amount exceeds needs. CAIB 2 Premium Adjustment Details Application for Refund: Must be done within 12 months after the policy expires. No refund if the insurer has paid a claim; premium is considered fully earned. Refund Limits Based on Co-Insurance: 50% Co-Insurance Basis: Refund up to 25% of the annual premium. 80% Co-Insurance Basis: Refund up to 50% of the annual premium. Benefits of Premium Adjustment Clause: Provides flexibility in adjusting coverage limits to match actual earnings. Helps in safeguarding against future increases in gross earnings. Reduces risk of Broker’s Errors and Omissions claims. CAIB 2 Resumption of Operations Condition of Insurance: Insured must reduce loss by: (a) Resuming Operations: Complete or partial resumption of operations at the damaged property or other locations. (b) Utilizing Available Resources: Making use of merchandise or other property at the described locations or elsewhere. Obligations of the Insured: Take Necessary Steps: Implement strategies to resume business operations as soon as possible. Partial or full resumption of operations is required. Impact of Non-Compliance: Failure to comply with resumption obligations will lead to a reduction in the amount payable under the insurance policy. CAIB 2 Expenses to Reduce Loss Coverage for Expenses: Covers necessary expenses aimed at reducing loss (except for fire-extinguishing expenses). Total reimbursable expenses cannot exceed the amount by which the loss is reduced. These expenses are exempt from the Co-insurance Clause. Legal Duty to Mitigate Damages: Insured is required by law to mitigate losses. To qualify for reimbursement, expenses must result in a reduction of the total loss. If no reduction occurs, those expenses are not covered. Key Limitation: Cap on Reimbursement: The insurer will only cover expenses up to the amount by which the loss was reduced. CAIB 2  Scenario 1: Full Reimbursement $5,000 monthly rent for alternate premises. The expense allowed the business to resume earlier, Expenses to reducing the overall claim by $25,000. Full $5,000 monthly rent was covered by the insurer due to significant savings. Reduce Scenario 2: Partial Reimbursement $15,000 rental cost only reduced the loss by $10,000. Loss – Insurer covered only $10,000 as it matched the reduction in loss. Insured bears the excess $5,000. Scenarios & Judgement and Coverage Limits: Insured must evaluate whether expenses will effectively reduce losses. Judgement Expense Coverage Cap: Insurer covers only the portion of expenses that directly reduce losses. For additional protection, consider Extra Expense Insurance (IBC 4027). CAIB 2  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. CAIB 2 Media Limitation – Coverage Details 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. CAIB 2 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. Typically sufficient to address interruptions caused by major events like fires or explosions, usually resolved within two weeks. CAIB 2  Example Scenarios: Police or Fire Department Closure: Coverage applies if authorities block access to the insured's premises due to damage to nearby properties, with coverage limited to two weeks. Example Major Natural Disasters: Businesses with relevant coverage (e.g., earthquake insurance) can claim for income Scenarios and losses due to area-wide closures, even if their own property was not directly damaged. Practical Practical Measures: Considerations Coverage Check: Ensure policies include coverage for civil authority interruptions, particularly in areas prone to significant events like natural disasters. Plan Ahead: Consider additional coverage for high-risk scenarios or areas where civil authority actions might impact access. CAIB 2  By-Laws Exclusion: Definition: Excludes increases in loss resulting from compliance with any by-law, ordinance, or law By-Laws related to zoning, demolition, repair, or construction. Impact: Exclusion If adherence to by-laws delays repairs or increases costs, these additional losses are not covered under the standard policy. Endorsement Option: To cover these additional costs, an "Additional Time for Rebuilding" endorsement can be added to the policy for an extra premium. CAIB 2  Strikes: Definition: Excludes losses due to delays caused by strikes, labor disturbances, or sympathetic strikes. Impact: Additional income losses from delays in rebuilding or resuming business due to such disruptions are not Strikes and covered. Fines and Penalties: Fines/Penalties Definition: Excludes coverage for fines, damages, or penalties Exclusions resulting from breach of contract, delays, or non- completion of orders. Impact: Financial penalties related to contract breaches or delays are not covered under this policy. CAIB 2 Loss of Lease, Licence, and Policy Variations Loss of Lease, Licence, Contract, or Note on Exclusions: Order: Definition: Variations in Exclusions: Excludes coverage for losses due to Exclusions can vary by insurer, with the suspension, lapse, or cancellation additional exclusions including of leases, licenses, contracts, or terrorism, data issues, mold, orders after the indemnity period. asbestos, and more. Impact: Action: Any income loss resulting from these Always review specific policy wording cancellations after the indemnity and consider endorsements to period ends is not covered. address particular needs. CAIB 2  Historical Context: Business Introduction of Profits Form: Introduced in Canada at the turn of the 20th century. Interruption Designed for mercantile and manufacturing risks. Purpose: Insurance Aims to provide complete indemnity for business interruption losses. Comparison with Gross Earnings Form: Profits Terminology Differences: Gross Earnings Form: Covers "gross earnings." Endorsement Profits Form: Covers "gross profits." Insurance Basis: Form (IBC Gross Earnings Form: Focuses on net sales, equivalent to turnover in the Profits Form. Profits Form: Directly insures net profits. 4030) - End Result: Both forms ultimately seek to provide the same financial Overview outcome for the insured, despite different terminologies and methods. CAIB 2 Attractiveness of the Profits Form Advantages of the Profits Form: Direct Coverage of Net Profits: Insures net profits directly, which may align better with certain business models. Precision: Provides a more accurate representation of financial loss for businesses where profit margins are crucial. Considerations for Choosing Profits Form: Business Needs: The Profits Form might be preferred by businesses that find net profits a clearer indicator of their financial performance compared to gross earnings. Financial Accuracy: Directly insuring net profits can lead to more precise compensation for lost income during business interruptions. CAIB 2 Indemnity Period Definition: Period from the occurrence of an insured peril until 12 months later. Purpose: Covers business interruption until gross profit levels return to pre-loss levels. Extension Options: Can be extended to 18, 24, 30, or 36 months if needed. Insurance Requirements: Increased coverage may be needed for extended indemnity periods. CAIB 2 Provisions - By-Laws Coverage By-Laws Coverage (Provision 5(e)): Insures additional loss caused by compliance with by-laws or ordinances. Does not extend indemnity period or increase insurance limits. Purpose: Covers extra loss due to increased time for reinstatement from by-law requirements. CAIB 2 Provisions - Due Diligence and Dispatch Insured must act reasonably to minimize Due Diligence Requirement interruption and loss. (Provision 5(f)): Delays due to external factors (e.g., slow approvals, strikes) do not reduce claim payments. Differences from Gross Earnings More lenient Only delays caused by the insured's own actions Form: are penalized. CAIB 2  Coverage Differences and Costs No Co-Insurance Clause: Profits Form does not include a co-insurance clause. It aims to insure 100% of the required coverage. Standing Charges: Automatically covers all standing charges unless specifically excluded. Does not include depreciation or bad debts. Covers only permanent staff salaries. Coverage Costs: Typically 95% of the building or contents rate for non-manufacturing risks. Higher cost justified by extended indemnity and other features. CAIB 2  CAIB 2 Section 3 Miscellaneous Business Interruption Coverage Forms Contingent Business Interruption Coverages Definition: Insurance coverage for loss of income due to damage to a major supplier or customer. Types of Contingent Business Interruption: Contributing Property(ies) Recipient Property(ies) Magnet Property(ies) CAIB 2 Contributing Property(ies) Purpose: Protects against loss of income due to damage to a supplier or manufacturer. Coverage Details: Available under Gross Earnings or Profits Forms. Period of Indemnity determined by the selected form. Name and location of the contributing property must be specified. No financial interest in the contributing property required. CAIB 2  Recipient Property(ies) & Magnet Property(ies) Recipient Property(ies): Coverage for loss of income due to damage to a customer’s property. Applicable under Gross Earnings or Profits Forms. Magnet Property(ies): Coverage for loss of income due to damage to a key business that attracts customers to the area. Also known as anchor or leader properties. Insurable by endorsement. CAIB 2  Purpose: Covers costs incurred to resume business operations after a loss. Overview of Difference from Business Extra Expense Interruption Insurance: Does not cover loss of income. Endorsement Importance: Essential for businesses facing significant operational disruptions. CAIB 2  Insuring Agreement CAIB 2 Determining Amount of Insurance Risk of Under- Recommendation Common Method Insurance Develop a business Insureds often select a Potential issues if the recovery plan based "reasonable" limit coverage is on worst-case based on estimation. insufficient. scenarios. CAIB 2 How Claims Are Paid Payment Tiers Based on Restoration Time: Up to 40% for ≤1 month Up to 70% for >1 month but ≤2 months Up to 90% for >2 months but ≤3 months Up to 100% for >3 months but ≤4 months Example Calculation: $20,000 coverage, 2 months restoration = $14,000 (70% of limit). Options for Extended Coverage: Full limit available in the first month for an additional premium. CAIB 2 Overview of Rent or Rental Value Endorsement Purpose: Insures income loss from tenanted properties. Applicability: Can be attached to related property coverage or insured separately. Insured Income Types: Actual annual rents Estimated annual rental value of unoccupied portions Fair rental value of occupied portions by Insured CAIB 2 Calculation and Settlement of Claims Factors Influencing Payment: Actual and estimated rental income. Local vacancy rates. Increased competition. Claim Basis: Payment is based on the income the property would have earned if the loss had not occurred. Coverage Duration: Limited to 12 months from the date of loss. CAIB 2  Auditors Fees Endorsement Purpose Coverage Includes Limitations Covers costs for proving the amount Reasonable fees for auditors. No standard form; specifics of the loss. Fees for producing and certifying depend on the policy. business details required by the insurer. CAIB 2 Professional Fees Endorsement Purpose: Covers costs of professionals hired for claim preparation. Coverage Includes: Accountant, lawyer, marketing consultant, etc. Scope: More inclusive than auditors’ fees endorsement; includes a wider range of professionals. CAIB 2  Corresponds to: Gross Earnings Form Indemnity Period: Begins at loss occurrence Ends when property is restored and business resumes Co-insurance: Typically 80% Insured covers 20% of the loss Coverage: Limited Business Focuses on restoring business operations Income Form (IBC Does not cover income loss post-recovery Calculation Formula: 4106A & 4106B) Revenue shortfall × business income percentage Plus increased operational costs Less non-continuing expenses Coverage Types: Available in Named Perils (Form A) Available in Broad Form (Form B) CAIB 2  Corresponds to: Profits Form Indemnity Period: Begins at loss occurrence Ends when business income returns to pre-loss levels or 12 Extended months after the loss Co-insurance: 100% Business Full coverage provided if properly insured Coverage Enhancements: Income Form Includes by-laws, strike delays, and loss of lease/licenses Calculation Formula: Revenue shortfall × business income percentage (IBC 4107A & Plus increased operational costs Less non-continuing expenses 4107B) Coverage Types: Available in Named Perils (Form A) Available in Broad Form (Form B) CAIB 2