Chapter 7 - Business Interruption Insurance

Provide five sources of B.I losses and an example of each

i) Physical damage to business ( Fire destroys business and customers cannot make purchases(
ii) Failure of public utilities ( Ice storm damages power lines and power cannot be resorted for several days)
iii) Transportation related accidents (Railcar containing hazardous gas overturns causing evacuation of town. As a result, sales at business cease)
iv) Physical damage to neighbouring premises ( Client sees drop in sales when anchor store burns to the ground)

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Identify three sources of funding available to businesses when their operations are interrupted

i) Reduce capital reserves
ii) Take out a bank loan
iii) Purchase adequate amounts of B.I. insurance

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What are two key coverages provided by B.I policies?

i) Insure lost net profit of the business which it could have earned had there been no loss
ii) Insure expense that must continue during period of B.I.

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What is the period of indemnity provided by Gross Earnings Forms?

Coverage begins on the date of destruction or damage and continues for time necessary to repair or replace damaged property

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What is the period of indemnity provided but Profits Forms?

Coverage begins on the date of destruction or damage and continues until the pre-loss sales have been re-stablished

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When would you recommend insureds purchase a Profits Form?

When customers need to be won back after shut down of business, Profits form should be purchased

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Identify Characteristics common to all B.I Policies
i) Insure same perils covered by property insurance

Coverage on the property triggers coverage under business interruption policies

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Identify Characteristics common to all B.I Policies
ii) Contracts of Indemnity

Claim payments based on amounts business could have earned had the loss not occurred

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Identify Characteristics common to all B.I Policies
iii) Indemnity period limited by policy expiration

When losses occur during policy period, coverage will not end upon policy expiration

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Identify Characteristics common to all B.I Policies
iv) Payment for expenses to reduce loss insured provided insurer saves money in b.i. loss the client spends in extra expenses

When clients can spend a little to re-establish business, even in part, insurer will pay for these expenses. Insured is required to show that this expenditure is less than amount of savings in business interruption loss

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Identify Characteristics common to all B.I Policies
v) Coverage provided when access prohibited by order of civil authority

Sales will plummet when no customers can get to client's business. When access is prevented by civil authority, coverage for subsequent business interruption is covered

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What are three examples of expenses to reduce loss that would be insured by B.I policies?

i) over-time salaries to contractors repairing business
ii) Promotional materials required to provide awareness of new business location of insured business
iii) Extra charges to bring in needed equipment by air instead of truck

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Why should insureds cover their gross profit and not just their net profit?

By insuring gross profit of businesses, coverage would be available for necessary continuing expenses and not just lost net profit

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What may happen if only the gross profit shown on insured's financial statements are insured (hint-trending)

When only gross profit shown on financial statements is insured, clients would find themselves in a position of underinsurance. This is because future trends in business have not been considered

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Why should business operating with a loss purchased business interruption insurance?

When operating with a loss, businesses are less able to withstand even short interruption of business

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What are two factors to consider when deciding which form of business interruption insurance to purchase?

i) Nature of business
ii) types of perils most likely to cause losses

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When using old financial statements to establish amount of insurance, what problems could be encountered?

Clients may be underinsured because future trends were not considered

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What type of employee salaries may not be considered a 'necessary continuing expenses?'

Ordinary Payroll

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Explain the due diligence and dispatch provision found in the Gross Earnings form

Everyone involved in the restoration of the business must act with due diligence and dispatch

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What are two situations which could cause insureds to purchase the 50% Co-Insurance option on Gross Earnings form?

i) When sales are consistent from month to month
ii) When interruption will likely be short

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State the four provisions of the Premium Adjustment Clause found in Gross Earnings forms

i) Application for premium adjustment must be made within 12 months of expiry of policy
ii) When losses were paid during policy term, premium is considered to be fully earned
iii) 50% co-insurance basis forms are eligible for refunds up to 25% of premium
iv) 80% co-insurance basis forms are eligible for refunds up to 50% of premium

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When will payment be made when there has been an Interruption by Civil Authority?

This coverage is available only when there has been damage to neighbouring premises from a peril induced under insured's policy resulting in access being denied by civil authority

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How long will coverage be provided when there is an Interruption by Civil Authority?

Coverage is available for two weeks when access is prohibited by order of civil authority

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Explain the Due Diligence and Dispatch provision of the Profits forms

Only clients are required to exercise due diligence and dispatch

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Describe how claims are paid with the Monthly Earnings Endorsement forms

Claims are limited to 25% of the amount of insurance for any 30 consecutive calendar days

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Define 'Contributing Properties'

These are properties clients are dependent upon to supply materials or goods

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Define 'recipient properties'

These are properties clients are dependent upon to purchase their goods

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Define 'magnet properties'

these are properties clients rely upon to draw large numbers of customers near their business

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Describe the purpose of the Extra Expense Form

There are certain businesses that cannot afford to close during reconstruction after losses. This form pays extra expenses incurred to get back into business as soon as possible after an insured loss

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When selecting an amount of coverage on an Extra Expense Form, businesses should refer to a plan. What is the name of this plan and what is the basis of this plan?

Name of Plan-BUsiness Recovery Plan
Basis of Plan- Worst case scenario

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When your client has Extra Expense insurance in the amount of $20,000 how much coverage would be provided if the basis of settlement was 40/70/90/100?

$8,000 when restoration period is less that 30 days
$14,000 when restoration period is less that 60 days
$18,000 when restoration period is less that 90 days
$20,000 when restoration period is more that 120 days

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Why should some insureds purchase Extra Expense along with their Gross Earning of Profits forms?

Gross Earnings and Profits forms require clients to reduce amount of business interruption loss by more than extra expenses incurred while reducing loss. Extra Expense forms do not limit coverage in this way

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What two types of fees can be insured by Business Interruption forms?

i) Auditors Fees
ii) Professional Fees

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Which form provides the best protection and why?

Professional fees because this form insures all fees incurred in claims process including accounts, actuaries, lawyers or business consultants