F. DEFINITIONS
The Business Income (and
Extra Expense) Coverage Form has six definitions. All should be carefully
reviewed because of the impact they have on the coverage being provided.
1. Finished Stock
This is stock that the
named insured manufactures. However, there are two exceptions:
- Whiskey
and other alcoholic products are considered stock unless there is a
coinsurance percentage for business income on the declarations. This
applies only when these items are being aged.
- Stock
that the named insured manufactured and that is held for sale at any
retail location premises that this coverage form insures is not considered
finished stock.
Note: This term is used in only
5. Additional Coverages c. Extended Business Income. This section states that
the extended business income begins even if the finished stock has not been
replaced. More importantly, it is used in the causes of loss forms that exclude
business income loss due to damage to finished stock and the time to reproduce
it.
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Example: Krissy Chrizmaz
has a retail outlet adjacent to its manufacturing plant that has $200,000 in
finished stock on its premises. The manufacturing plant itself has $500,000
in finished stock. A tornado damages stock at both locations. Coverage
applies for the time needed to replace the stock at the manufacturing plant.
There is no coverage for the time needed to replace the stock at the retail
outlet. The building and personal property coverage form covers the direct
damage to the finished stock. Extended Business Income coverage begins when
Krissy resumes operation, although Krissy needs 180 days to replace the
damaged finished stock.
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2. Operations
a. These are the business
activities that occur at the premises described on the declarations.
b. When rental value is
included, operations also means whether a tenant can occupy the premises.
Related Court Case: Business Income Held Not Applicable to Building Not
Scheduled for Such Coverage
3. Period of Restoration
This is the period of
time during which coverage applies. It begins either:
a. Seventy-two hours after
the time of covered loss or damage. This applies to business income coverage.
Note: CP 15 56–Business Income
Changes–Beginning of the Period of Restoration can be used to reduce the
waiting period to 24 hours or to completely eliminate it.
Related Article: CP 15 56–Business Income
Changes–Beginning of the Period of Restoration
b. Immediately after the time
of covered loss or damage. This applies to extra expense coverage.
Under either of these,
coverage ends on either the date when property at the described premises should
be repaired, rebuilt, or replaced or the date that the business reopens at a
new location. A major sticking point in evaluating when a premises
should be ready is the clarifying statement that the repairs, building, or
replacing must be done on a timely basis and with substantially similar
materials.
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Example: Maisy May’s hat manufacturing
plant uses a custom-built machine. It takes 10 months to build a new machine
and deliver it following a covered loss. Maisy May’s insurance carrier believes
that Maisy May could have been back in business in four months if she had
accepted a similar machine and refuses to pay more than a four-month business
income loss.
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The period of restoration
does not include any increased time period required because of an ordinance,
regulation, or law being enforced or because of the compliance with any ordinance,
regulation, or law regulating construction, use, repair, or
demolition of any structure. (10 12 change)
Note: This can cause a
significant gap in coverage.
Related Article: CP 15 31–Ordinance or
Law–Increased Period of Restoration
The period of restoration
also does not include any increased time period required to test for, monitor,
clean up, remove, contain, treat, detoxify, neutralize, or in any way respond
to or assess the effects of pollutants.
The policy expiration date
does not affect the period of restoration.
Related Court Case: Earnings Insurance Held
Not Applicable When Motel Was Not Closed By Volcanic Ash
4. Pollutants
These are irritants and
contaminants such as smoke, vapor, soot, fumes, acids, alkalis, chemicals, and
waste of a solid, liquid, gaseous, or thermal nature. Waste includes property
to be disposed of, as well as property to be recycled, reconditioned, or
reclaimed.
5. Rental Value
This is a specialized type
of business income that consists of two parts.
a. The net income, either
profit or loss, from tenant(s) that occupy the premises. The fair rental value
of the named insured’s occupancy of its own premises is included in the net
income amount.
b. The normal operating
expenses of the premises that continue after a loss. Examples of such expenses
are payroll and tenants’ legal obligations that become the owner’s obligation
during the period of time when the premises cannot be occupied.
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Example: Trey and Margo own a strip shopping
center. They have five tenants in addition to their own shop in the center.
Heavy ice and snow accumulations cause the roof to cave in and everyone must
vacate during the repairs. The monthly business income rental value is as
follows:
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Rental income from five tenants
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$10,000 ($2,000 per tenant)
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Trey and Margo’s rental value
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$2,000
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Payroll
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$1,500
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Contracted utilities
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$2,500
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Total monthly rental value
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$16,000
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Trey and Margo have a rental value
loss of $16,000 per month until the damage from the roof collapse is repaired.
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6. Suspension
This is either of the
following:
- The
complete closure of the named insured’s business operations or a slowdown.
- If rental
value coverage is included, it means when tenants cannot occupy all or any
portion of the insured premises.
