(June
2019)
INTRODUCTION
Time element insurance covers time-sensitive consequential
losses that result from covered direct physical loss or damage to buildings
and/or personal property. Time element insurance losses are
considered to be consequential or indirect damage because they develop
only after direct damage occurs.
DIRECT DAMAGE VS. INDIRECT DAMAGE
Direct damage refers to physical loss or damage
to tangible property. When an apartment building burns down, the structural
damage is visible and readily measured. However, the time element loss is much
less apparent and more difficult to quantify.
The flow of rental income revenue from the
damaged apartment building ends immediately after the direct damage loss
occurs. The total gross rental income loss is the number of months needed to
repair or rebuild the facility multiplied by the monthly rental income. This is
considered business income.
The apartment owner arranges with a fellow
apartment owner to offer temporary housing to his tenants in
order to reduce his business income loss and retain his tenants. The
additional cost to assist the tenants is considered extra expense.
Another issue to consider is that some tenants
in the damaged or destroyed building may lose very attractive leases as a result of the direct damage. They incur the financial
loss of the value of the remaining portion of their leases. This is considered
leasehold interest.
INSURABLE RISK VERSUS BUSINESS RISK
Direct loss of or damage to tangible property
is only one of many causes of indirect losses.
|
Examples:
- A
printing operation is completely shut down when its employees go on strike
for two months.
- A local
restaurant that specializes in offering Australian cuisine loses 80% of
its business when its customers' tastes change, and they decide to eat elsewhere.
- A tenant
in a building has an attractive ten-year lease. It must move out when
the building owner goes out of business trying to affect repairs to
address environmental issues and nobody else purchases the building.
|
Each of these is an example of a business risk.
Each is a result from an event other than direct physical loss or damage to
property that insurance covers. Standard insurance coverage forms and policies do
not cover such indirect losses.
MATCHING COVERAGE TO THE RISK
It
is difficult to determine the correct business income limit to carry because
losses are evaluated based on expected or anticipated lost income. The named
insured's financial statement is a useful and practical starting point to
develop an appropriate limit for the coverage selected. Current financial
conditions, emergency plans, long-term business plans, and specific business
processes are just a few examples of other issues that must be addressed and
evaluated before selecting the appropriate coverage form and its limit.
Regardless
of the coverage form selected, Insurance Services Office (ISO) CP 15
15–Business Income Report/Work Sheet should be used as part of the process to
develop and determine the proper limit of insurance. It has detailed
instructions and steps to follow to determine the appropriate limit for the coverage
selected.
Related
Article: 131.6-2, CP 15 15–Business Income Report/Worksheet
POLICY MAKE-UP
Time Element coverage requires at
least the following seven forms:
- Common
Policy Declarations
- IL
00 17–Common Policy Conditions
This mandatory form
contains the common conditions that apply to all commercial insurance
coverages. It is required to be used with all simplified monoline or multiline
policies.
Related Article: Related
Article: 130.6-31, IL 00 17–Common Policy Conditions Analysis
- CP
DS 00–Commercial Property Coverage Part Declarations
Related Article:
130.4-1, CP DS 00–Commercial Property Coverage Part Declarations
- CP
00 90–Commercial Property Conditions
Related Article:
130.6-24, CP 00 90–Commercial Property Conditions Form Analysis
- One or more time
element coverage forms:
- CP 00 30–Business Income (and Extra Expense)
Coverage Form
- CP 00 32–Business Income (without Extra
Expense) Coverage Form
- CP 00 50–Extra Expense Coverage Form
- CP 00 60–Leasehold Interest Coverage Form
Related Article: 131.4-2, ISO Time Element Coverage
Forms Analysis
- One
or more of the Causes of Loss Forms:
- CP 10 10–Causes of Loss–Basic Form
- CP 10 20–Causes of Loss–Broad Form
- CP 10 30–Causes of Loss–Special Form
Related Article:
130.6-1, Basic, Broad, and Special Causes of Loss Forms Analysis
- Policy
Cover or Policy Jacket
TIME ELEMENT COVERAGE FORMS
ISO provides four primary time element coverage
forms:
Related Article: 131.4-2, Time Element Coverage
Forms Analysis
- CP 00 30–Business Income (and Extra
Expense) Coverage Form
This is the most
frequently used coverage form. It reimburses the named insured for business
income lost and extra expenses incurred that result from direct physical loss
or damage to property by a covered cause of loss. Extra expense coverage
reimburses the named insured for the additional costs incurred to continue
operations.
|
Example:
Tony’s Comic Book Shop
burns to the ground. Tony loses significant income from walk-in customers. He
rents space at another location so his regular customers can continue their
reading habits while a new shop is being built. The extra expenses to rent
the location plus the reduced income due to the loss are covered.
|
