May 2011, Volume 53
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BP 00 03–BUSINESSOWNERS COVERAGE FORM ANALYSIS

(September 2010)

NOTE: This analysis is of the 01 10 edition.

SECTION I–PROPERTY

A. Coverage

5. Additional Coverages

f. Business Income

(1) Business Income
(a) If the named insured's operations at a covered premises must be suspended because of direct physical loss or damage to covered property by a covered cause of loss, a business income loss occurs. The insurance company pays for the actual loss of business income sustained while operations are suspended. Payments made are not for longer than the period of restoration. With respect to personal property in the open or in or on a vehicle, premises also includes the area within 100 feet of the site where the described premises are located. If the named insured occupies only part of the site where the described premises are located, premises means:

  • The portion of the building the named insured occupies, rents or leases
  • Any area inside the building or on the site of the described premises that services or is used to gain access to the named insured's premises

Examples: Ohio Valley Dental is located on the floor above Van’s Drugstore. A door just inside the drugstore leads up a flight of stairs to Ohio Valley's premises. A fire at Van’s does not damage Ohio Valley Dental but access to its premises is denied because of damage to Van's and the staircase. Ohio Valley is covered because the staircase is considered part of its premises.
Grumley’s Restaurant is located on the first floor of a five-story building. A fire starts in the basement and destroys the electrical controls. Grumley’s must suspend operations even though it has not sustained any direct damage.

(b) The insurance company pays for only the loss of business income sustained during the restoration period that takes place within 12 consecutive months after the date of the covered loss or damage. However, it pays for ordinary payroll expenses for only 60 days after the date of loss unless a higher number of days is on the declarations.
Note: The defined period of restoration does not begin until 72 hours after normal business operations are suspended. This approach establishes a deductible expressed in terms of time without a dollar limitation.

Example: A fire starts at Jones Hardware at 8:00 a.m., just after the first shift arrives. Work ends at 8:15 a.m. but the fire rages for more than eight hours, finally ending at 4:45 p.m. Under the suspension of operations provision, even though the fire progressively damages the building and extends the necessary period of restoration, the interruption begins at 8:15 a.m., when the fire started, not at 4:45 p.m., when it ended.

Example: The same interpretation of when a loss begins can apply to causes of loss that take longer to occur, such as floods, hurricanes and earthquakes. This time BP 10 03–Earthquake is included. There is no loss of income if the first earthquake tremor that occurs on Tuesday does not damage the business. However, a tremor on Thursday at 8:00 a.m., which is within 72 hours of the first movement, causes the named insured's building to collapse. The business income loss begins at 8:00 a.m. on Thursday, the moment that the direct physical damage interrupted operations, not the moment when the earthquake covered cause of loss first occurred. A 72-hour waiting period after operations are interrupted applies before coverage begins.

Note: The business income deductible under this 72-hour waiting period arrangement may have a greater financial impact on the average business than other property deductibles.

Example: A business with no seasonal peaks and valleys needs $500,000 of annual business income coverage. This converts to an average of $1,370 per day or a total uninsured 72-hour loss of $4,110. If a hardware store needing the same amount of coverage derives 60% of its annual income in the spring and sustains a loss at that time of the year, its deductible is almost $10,000, based on $500,000 x .60 ÷ 90 days = $3,333 per day.

A three-day deductible for a business with peak seasons involving short-term events such as spring break, local fairs or events, auto races, or a Triple Crown horse race could lose much of its annual revenue during the 72-hour waiting period. The Businessowners Coverage Form does not have a standard endorsement that reduces the 72-hour waiting period deductible.
(c) Business income is defined as the net income that would have been earned or incurred if a physical loss or damage had not occurred. It excludes net income that could have been earned due to an increase in business volume due to favorable business conditions caused by the impact of the covered cause of loss on its customers or other businesses. It also includes continuing normal operating expenses and payroll incurred.
Note: Net income is the net profit or loss before income taxes.

Example: Lumberyard A was located directly in the path of an oncoming tornado but Lumberyard B was located far from it. After the tornado, Lumberyard B was able to raise its prices and have an incredibly profitable season. On the other hand, Lumberyard A was closed during the sales season which included the opportunity to supply material for the repairs faced by customers who also suffered tornado damage to their properties.
Note: Business income losses are adjusted with an eye to the future. What would Lumberyard A's earnings have been if it was open for business during the period of restoration? Let’s assume there was no tornado and Lumberyard A simply burned down. The adjuster looks at its earnings history, the state of the local and national economy during the period of restoration and the company’s historical peaks and valleys during the same period. This evaluation results in an estimated income loss amount that is paid. When examining the local economy, the adjuster discounts the supply and demand pricing that Lumberyard B charges to generate its huge profits.

Business income coverage is intended to put a business back into the same condition it was in before the loss. This coverage philosophy means that strange economic twists that occur with disasters are ignored.
(d) Ordinary payroll expense is the payroll for all employees except officers, executives, department managers, contract employees, and any additional exemptions on the declarations, such as job classifications or specific employees. In addition to payroll, it includes employee benefits directly related to payroll, FICA payments and union dues the named insured pays, and workers' compensation premiums.
Note: Company health insurance premiums not directly related to payroll, such as payments covering an employee’s dependents, are not considered ordinary payroll expenses. They would be considered normal expenses not related to ordinary payroll. As a result, the company could continue to pay for the Health Insurance premiums of ordinary payroll employees after the 60-day benefit period for ordinary payroll. This may be important for businesses with a large ordinary payroll staff that, if the ordinary payroll "employees" were to be laid off, could cause cancellation or modification of a favorable Health Insurance plan.