CAIB 2 - Chapter 7 Flashcards PDF

# Card Front ## Business Interruption Insurance (BI) - Income Loss - Operating Expenses - Property Damage - Civil Authority Order - Net Profit - Gross Profit - Fixed Expenses - Variable Expenses - Extra Expense Insurance - Due Diligence and Dispatch - "Actual Loss Sustained" Basis - Coverage Durat...

# Card Front ## Business Interruption Insurance (BI) - Income Loss - Operating Expenses - Property Damage - Civil Authority Order - Net Profit - Gross Profit - Fixed Expenses - Variable Expenses - Extra Expense Insurance - Due Diligence and Dispatch - "Actual Loss Sustained" Basis - Coverage Duration - Media Limitation - Gross Earnings (Insurance) - Continuing Expenses - Interruption by Civil Authority - Pre-Loss Analysis - Seasonal Businesses - Non-Continuing Expenses ## Broker's need for Accounting Expertise - Clients don't want to purchase Business Interruption Insurance to fund or pay limited expenses. - Gross Earnings Form/Profits ## 5 Characteristics Common to All Business Interruption Forms Affects a decision as to the type of coverage to be purchased. ### Considerations in Determining the Amount of the Loss - Identify 2 Factors that might affect the determination of the actual loss sustained. - What reasons can be used to adjust payroll on a limited basis? - Provisions contained in the premium adjustment clause. ## Key Features to the PROFITS FORM - Deal with continuous expenses. - Businesses would purchase extra expenses. - Expense payment is made in the event of rent or rental value endorsement. # Card Back Insurance that protects businesses from income loss due to disruptions, like property damage or utility failures. - The **reduction in earnings** a business experiences due to an interruption in operations. - **Costs continuously incurred** even when business isn't operating, like salaries and utilities. - **Physical harm** to a business's property due to perils like fire or natural disaster. - An order from a governing body preventing access to a property, often due to risk or repair. - **Gross profit** minus all operating expenses, representing a company's true income. - **Revenue** minus the cost of goods sold. A good starting point in evaluating profit potential - **Ongoing costs** that remain consistent, regardless of business activity (e.g., rent). - **Costs** that fluctuate with production, such as raw materials. ## Extra Expense Insurance - It helps cover extra costs, like alternative facilities or specialized services, to maintain operations during a disruption. ## Business Interruption Insurance Coverage Calculation - The time it reasonably takes an insured business to restore operations following a loss, when performed with good judgement and efficiency. - The length of time BI coverage applies, generally up to the time needed to repair damage. - Business Interruption insurance coverage limits for media and data loss, usually a maximum of 30 days. - Total business income, subtracting costs directly related to operations. - Expenses necessary for essential operations even during an interruption. - Business interruption due to prevention access or movement by local authorities. - Evaluating prior financial data to assess potential income loss on a business interruption claim. - Companies with income varying throughout the year; special claim considerations may apply. - Costs not directly needed for operations if business doesn't run. - Brokers do not need deep accounting knowledge to sell BI policies, basic understanding is sufficient. - Classifying businesses as semi-variable, and variable to better understand and estimate costs due to regulatory authorities. - Ancillary causes - strikes/lockouts. ## Increasing Product Prices to Cover the Loss - Business Interruption Insurance under both forms is usually 12 months, but can be extended for an additional premium. ## Considerations for Business Interruption Insurance - Profit Form or Gross Earnings - The insured will be provided for whatever method of calculating the amount of the loss. - The guide for reporting the business's exposure for business interruption insurance is longer than a broader one. - Earnings less the charges & expenses which do not necessarily continue during the interruption. - The amount of insurance by adding to the net profit the amount of the insureds standing (business) revenue, which has been determined with due diligence & dispatch if the insured does not act with the same diligence and dispatch. - If the income trends would never go back to the levels occurred. ## Premium Adjustment Clause - As a result the insured may decide to reduce premium payable by deleting ordinary payroll. - The insured may decide to reduce cost to recruit & retrain new employees within weeks of the interruption. - 50% Co clause insured is entitled to 25% max refund. - When coverage is on 80% Co Ins Clause refund is 50% ## Provisions - That the insured do whatever they can do to prevent delays in reinstating the property. - Payroll, depreciation of stock or bad debts. - Provisions can be made to insure ordinary payroll. ## Business Exposure - The amount of insurance is available is based on the time needed to resume normal operations referred to as a RESTORATION PERIOD. - Estimated rental value of unoccupied portions. - Fair rental value of the portions of the building occupied by the insured. - The amount of insurance is based on the insured's best judgement and efficiency. - The period of time needed to perform restoration is the restoration period. - It also takes into account the potential for additional disruptions.