TIME ELEMENT COVERAGE FORMS ANALYSIS

(February, 2009)

Note: This analysis is based on the 06/07 edition of the forms that were introduced by ISO in most states in November, 2008.
F. DEFINITIONS
Always review all definitions in a policy or coverage form. Coverage can be broadened, restricted or otherwise affected by the definitions provided in this section. The Business Income (And Extra Expense) Coverage Form includes six definitions.
1. Finished Stock is stock manufactured by the insured but there are two situations when manufactured stock is not considered finished stock. The first situation is whiskey and alcoholic beverages that are being aged, but, unless a coinsurance percentage appears on the declarations, they are not considered finished stock. The second is when the manufactured stock is at a retail location.
The term is used in only the Extended Business Income Additional Coverage in this form stating 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 where business income loss due to damage to the finished stock and the time to reproduce the finished stock is excluded.
Example: Krissy Chrizmaz has a retail outlet adjacent to its manufacturing plant containing $200,000 in finished stock. The manufacturing plant itself has $500,000 in finished stock. A tornado damages stock at both locations. Coverage does not apply for the time needed to replace the stock at the retail outlet but it does for the time needed to replace the stock at the manufacturing plant. The building and personal property form provides coverage for the direct damage to the finished stock. Extended Business Income coverage begins when Krissy Chrizmaz resumes operation even though 180 days are needed just to replace the damaged finished stock.
2. Operations is defined to mean only those business activities that occur at the premises described on the declarations. Please refer to PF&M Section 131_C056, Business Income Held Not Applicable to Building Not Scheduled for Such Coverage, in Court Cases to see how this definition restricted coverage. If Business income includes rental value, this term also refers to whether the premises can be occupied by a tenant.
3. Period of Restoration is the period of time in which coverage is provided. It is within this definition that the 72-hour waiting period is introduced – not in a separate deductible section.
The restoration period:

• Under business income coverage begins 72 hours after a covered direct loss or damage event. However under the extra expense coverage it begins immediately after the time of a covered direct loss or damage. The loss must be due to a covered cause of loss and at a described premises.

Note: Form CP 15 56 can be used to reduce the waiting period to 24 hours or completely eliminate the waiting period. Please refer to PF&M Section 131.6-11, Business Income Changes–Beginning of the Period of Restoration for more information on this endorsement.

• Under both extra expense and business income, coverage ends on either the date when property at the described premises SHOULD be repaired, rebuilt or replaced or 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 and replacement must be accomplished at a reasonable pace and with similar quality.

Example: Maisy May’s hat manufacturing plant uses a custom built machine. It takes 10 months for a new machine to be built and delivered following a covered loss. Maisy May’s insurance carrier believes that Maisy May could have been back in business in four months if she would have accepted a similar machine and refuses to pay more than a four months business income loss.
The period of restoration does not include any increased time period required based on enforcement of any ordinance, regulation or law that regulates construction, use, repair or demolition of any structure. This can cause a significant coverage gap. Please refer to PF&M Section 131.6-12, CP 15 31–Ordinance or Law –Increased Period for Restoration for an explanation of the gap and the coverage options.
In addition, period of restoration does not include coverage for increased time because of testing, monitoring, cleaning up, removal, containment, treatment, detoxifying, neutralizing or in any way responding to or assessing the effects of pollutants. Further, coverage ends when operations begin again either at the same location or at a different location. The expiration date has no impact on the period of restoration.
Please refer to PF&M Section 131_C013, Earnings Insurance Held Not Applicable When Motel Was Not Closed By Volcanic Ash, in Court Cases, for an interesting court case explaining when the period of restoration begins.
4. Pollutants in this form is the same as in the direct damage coverage forms and includes any solid, liquid, gaseous or thermal irritant or contaminant. This includes smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste is an extremely broad term that also refers to materials to be recycled, reconditioned or reclaimed.
5. Rental Value is the net income, either profit or loss, from tenant derived rental income. This includes the fair rental value of the insured’s occupancy of its own premises. Continuing expenses including, but not limited to, payroll and amounts that the tenants are legally obligated to pay but become the obligation of the owner during the period the premises are untenable are also included.
Example: Trey and Margo own a strip shopping center. Trey and Margo have five tenants as well as their own shop in the center. Heavy ice and snow loads cause the roof to cave in and everyone must vacate during the repairs. The monthly business income rental value is as follows:

Trey and Margo have a rental value loss of $15,000 per month until the roof collapse damage is repaired.