NOTE: This analysis is based on the 10 12 edition of these coverage forms. ISO introduced them in most states with an effective date of 04 13. Changes from the previous edition are highlighted in bold.

CP 00 30 BUSINESS INCOME (AND EXTRA EXPENSE) COVERAGE FORM

The introductory paragraph emphasizes there are certain provisions that limit coverage and recommends the insured carefully review the entire policy to understand the rights and responsibilities of all parties involved. This review is particularly important for understanding coverage details and exclusions.

Additionally, it explains the insurance company uses 'you' and 'your' to refer to the named insured, and 'we', 'us', and 'our' to refer to the insurance company.

Lastly, it is important for the insured to review Section F—Definitions to ensure there is a clear understanding of the words or phrases appearing in quotes, as they have special meanings.

A. COVERAGE

1. Business Income

The business income provision has two components: Net Income and Continuing Normal Operating Expenses.

a. net income

This represents the net profit or loss before income taxes, reflecting the income that would have been earned or incurred. The word “would” is essential here. Unlike tangible damage losses, business income depends on assumptions about what might have happened if no loss had occurred. This can cause disagreements when estimating the extent of a business income loss.

When calculating net income for manufacturing risks, include the net sales value of production.

Example: Paul’s Supplies earned a total net income of $120,000 during the past 12 months. However, a contract they just signed guarantees a minimum of $250,000 for the next 12 months. If Paul’s incurs an income loss, it is based on the current situation, including the signed contract.

b. continuing expenses for normal operations

These expenses represent the second component of Business Income and are ongoing operating costs that must be paid even after a loss, including payroll.

A time element loss can occur even if the first component, which is net income, reflects a net loss. This is due to the second component—continuing normal operating expenses—representing ongoing costs that must be paid even after a loss, such as payroll and other fixed expenses. This provision helps to ensure businesses can maintain their essential operations during a recovery period, despite the financial impact of the interruption.

The net sales value of production must be added to other income before various types of deductions are taken in order to establish the actual net income to be used.

Example: Net Sales Value of Production calculation for manufacturing risks.

Gross sales		$1,000,000
Beginning inventory	$500,000
Ending inventory	$400,000
Inventory difference		+$100,000
Discounts, returns, bad debts, discounts, prepaid freight, etc.		–$50,000
Total net sales value of production		$1,050,000

The net sales value of production calculation begins with gross sales. The difference between the beginning and ending inventory value is then added to the sales.

Finally, anything directly related to the inventory that does not continue if there was no inventory is deducted. Some examples of deductions are returns, allowances, bad debts, discounts, collection expenses, and prepaid freight.

The CP 15 15 Business Income Report/Worksheet is very helpful in developing an accurate net income figure, which can be helpful in setting a business income limit.

Related Article: CP 15 15–Business Income Report/Worksheet

NOTE: Each component is calculated separately and then added together. If one component is negative and another is positive, they must still be added together.

Example: Marianne is caught in an economic downturn, but she remains determined to persevere. She employs a dozen people and is optimistic her business will improve in the next quarter. Unfortunately, a fire causes significant damage just as recovery is expected to begin.

Thanks to business income coverage, she can still pay her staff and cover ongoing expenses during repairs. Her projected net loss is $50,000, with ongoing costs totaling $235,000. Her insurance will cover $185,000, which is $50,000 less than her total expenses.

There are three options available for this coverage. A limit must be indicated on the declarations next to one or more of the options. If multiple coverage options are selected, the provisions of the coverage form apply separately to each option.

· Business Income (including Rental Value)

· Business Income (other than Rental Value)

· Rental Value Only

Depending on the selected option, each one will affect the rating, loss payments, and potential coinsurance penalties differently.

Following the discussion on the components of business income, the actual insuring agreement is provided as follows:

This coverage form pays the actual business income loss the named insured experiences when their business operations are suspended during the repair or replacement period. The suspension must be caused by direct physical loss or damage from a covered cause of loss to property. The loss must occur at a premises listed and described on the declarations with a limit for business income coverage.

Example: Overheated baking equipment caused an explosion that severely damaged Lorenzo’s Bakery. The store is closed during repairs. Lorenzo has a $50,000 business income limit at this location.

Since the damage stems from a covered loss at a listed location with business income coverage, his insurance covers up to $50,000 for the period needed to restore the bakery.

If the loss involves personal property in the open or in a vehicle, coverage extends to any area within 100 feet of the insured premises.

The definition of premises is modified when the named insured occupies only a portion of a building. This includes all of the following:

· The part of the building the named insured occupies, leases, or rents.

· When business personal property is in the open or in a vehicle, premises are extended to include the area within either 100 feet of the building or 100 feet of the premises, whichever is greater.

· Any part of the premises or building used to service or gain access to the area occupied, rented, or leased by the named insured.

NOTE: The business income coverage form was revised after the 1990s bombing of the World Trade Center in New York City. The revision recognized that a tenant might not suffer direct damage but could still face substantial business income loss if the building they occupy is damaged, hindering access for employees and customers.

Example: Walter’s Café is located on the ninth floor of a 14-story building. A significant fire damages the basement and lobby, preventing customers and employees from entering or accessing the premises. As a result, Walter’s experiences a loss of business income until access is restored. This loss is covered since the damage affected the means of access to the building.

2. Extra Expense

a. coverage

Extra expense coverage applies to each listed location in the declarations with a business income insurance limit. If the location is not specified on the declaration, then there is no coverage for that location.

b. period of restoration – eligibility

Extra expenses are costs that exceed normal operating expenses and would not have been incurred unless there was direct physical loss or damage to the property caused by a covered loss.

Extra expenses are eligible for reimbursement when they do any of the following:

· Help avoid or minimize business downtime and allow operations to continue at either the same or a temporary location. Relocation expenses and costs to equip and operate such a replacement or temporary location are considered extra expenses.

· Minimize business downtime if operations cannot continue at any location.

· Repair or replace property. This does not include the actual cost of repairing or replacing the property, which is not covered here. Instead, it covers the additional cost needed to speed up the repair and replacement process, but only to the extent this extra expense reduces the loss this coverage would otherwise pay without that additional cost.

Example: A fire damages Journey Dry Cleaners. It destroys the ironing press, which must be replaced. All other equipment can be cleaned and returned to service within 60 days. However, the new ironing press will take four months to arrive. The supplier can ship the ironing press earlier for an additional cost to Journey.

This additional cost is covered by the extra expense coverage form, but the coverage is limited to the amount that would reduce the overall loss otherwise payable under this form.

Example: Ashland Floral sustained heavy smoke damage from a small fire five days before the start of the prom season. Not wanting to disappoint customers, Ashland has flowers shipped overnight and arranges for a refrigerated unit to store them.

Ashland cannot sell the flowers for more than she had previously quoted, so she takes a loss on the orders. However, she satisfies and retains her customer base.

The good news for Ashland is that the added costs of shipping the flowers and leasing the refrigerated unit are considered covered extra expenses.

3. Covered Causes of Loss, Exclusions, and Limitations

This coverage form does not include the causes of loss, exclusions, or limitations. The Basic, Broad, or Special causes of loss form must be attached and shown on the Declarations page.

4. Additional Limitation–Interruption of Computer Operations

a. electronic data

There is no coverage for business income loss due to the destruction or corruption of electronic data. However, some coverage is available under item 5, Additional Coverage d. Interruption of Computer Operations.

b. extra expense – electronic data

There is no coverage for extra expenses related to the destruction or corruption of electronic data, even when action is taken to avoid or minimize the suspension of operations. However, limited coverage is provided under 5. Additional Coverage d. Interruption of Computer Operations.

c. electronic data described

This item describes electronic data as items stored in or used by computer software programs. The items can be stored in the computer or on a drive, disk, or other media. Electronic data is considered virtually any information, fact, or program that can be stored in and retrieved by a computer.

Example: Kollectitall's client mailing list is stored on a computer and backed up on disks in the office. A fire destroys the computer and all its backup disks. Kollectitall incurs business income and extra expense losses while trying to recreate the lost information. This loss is not covered due to this limitation.

d. Electronic data that is an essential component of building systems such as heating, ventilating, air conditioning, elevators, lighting, or security systems is not subject to this limitation.

5. Additional Coverages

This coverage form has four additional coverages:

a. civil authority

A covered cause of loss may damage premises other than those of the named insured, leading civil authorities to restrict access to the insured premises. If this occurs, this coverage will provide coverage for the resulting lost income beginning 72 hours after the restriction begins for up to four weeks.

Extra expenses are not subject to the 72-hour waiting period and are covered for up to four consecutive weeks following the initial civil authority action.

Example: A fire caused severe damage to Charlie’s Coin Laundry, located next to Jenny’s Package Liquors. The fire destroyed the laundry building's structure, and the fire chief is concerned the brick wall adjacent to Jenny’s store might collapse. As a safety measure, access to Jenny’s store is restricted until the wall is safely demolished.

Jenny’s Package Liquors will be closed for nine days. While her business income loss is covered because fire is a covered peril, her compensation will not begin until 72 hours after the loss, meaning she will only be paid for six days of lost income.

For coverage to apply, the insured property must be within one mile of the damaged property.

Example: Mytell Chemical is currently on fire, raising concerns among civil authorities about potential chemical releases. As a precaution, they have ordered an evacuation of all areas within a two-mile radius of Mytell.

· A business located within a one-mile radius has immediate coverage for extra expenses and business income coverage beginning after the 72-hour waiting period.

· A business located beyond the one-mile radius but within the two-mile radius will not have coverage.

NOTE: One mile in a densely populated urban setting may seem large, but it is very small in less populated suburban and rural settings. The impact could be significant for businesses in disaster areas where civil authorities may close certain sections to maintain control, even if many properties are not damaged.

Let’s consider the following: coastline communities impacted by hurricanes or rural areas affected by tornadoes. Some businesses or communities might be relatively undamaged after a storm, but civil authorities may restrict access to them to control the more severely damaged, larger areas.

Adding CP 15 32–Civil Authority Changes should be considered. Part B of the endorsement schedule permits a radius greater than one mile. Insurance companies may not be willing to add the word “unlimited,” but they might agree to a radius that includes the business's county.

Related Article: CP 15 32–Civil Authority Change(s)

b. alterations and new buildings

Similar to other property forms, CP 00 30 automatically includes coverage for business income losses to covered buildings resulting from a covered physical damage loss on the insured premises and related to the following:

· New buildings or structures under construction or completed.

· Existing buildings or structures undergoing additions or alterations.

· Time lost due to damage or destruction of construction equipment or materials within 100 feet of the premises, effectively serving as builder’s risk coverage for loss of income.

· If delayed occupancy occurs because of the covered physical damage loss, coverage starts on the date to which operations would have begun if no damage had occurred.

o This coverage allows the insured to recover income they would have earned if the new structure had been ready and a covered loss had not occurred.

NOTE: This Additional coverage does not include coverage for newly acquired locations. Newly acquired locations are covered under the Newly Acquired Locations Extension of Coverage. However, the extension is only available when 50% or more coinsurance is shown on the declarations.

c. extended business income

(1) Business Income Other Than “Rental Value”

A covered physical damage loss must occur for this coverage to apply.

Income operations typically do not return to a pre-loss level when repairs are complete and business operations resume. It usually takes some time to attract new tenants, regain lost clients, or return to the previous level of manufacturing output. This additional coverage provides an additional 30 days to cover income lost during the period between resuming operations and reaching the previous income level.

However, this coverage excludes business income loss if the adverse conditions result from the covered loss in the insured's area.

This additional coverage does not necessarily begin when business income coverage ends. Instead, it begins when the property (excluding finished stock) is rebuilt, repaired, or replaced and operations resume. Business income coverage terminates when the property should have been reconstructed, repaired, or replaced, without requiring operations restart. As a result, there may be a gap between the end of business income coverage and the beginning of extended coverage.

Example: The covered loss at Bill’s Tin Snipping should have been repaired in ten weeks. However, Bill takes one of those weeks as vacation, goes hunting, and refuses to talk to the contractor during that time.

Bill’s reopens 11 weeks after the date of loss. Payments under business income end after ten weeks. Extended Business Income coverage begins on the date that Bill actually resumes operations, 11 weeks after the direct loss.

This additional coverage extends business income for 60 consecutive days or, as stated above, when the insured operations could be reasonably restored at the level prior to the loss, whichever comes first. However, coverage for additional periods is available at an additional premium.

Example: Carl’s French Cookery is closed for six weeks after its crepe maker explodes. When it reopens, the first week's sales are only half of what they were before the loss. As the weeks go by, sales gradually increase, but it takes three months before sales return to the pre-loss level.

(2) “Rental Value”

A covered physical damage loss must occur for this coverage to apply.

If the loss involves rental income, coverage begins when repairs are complete and continues for either 60 consecutive days or until a tenant can move in, whichever occurs first. However, coverage does not apply if the rental income loss is caused just by poor business conditions resulting from the same covered loss that caused the insured’s physical damage.

Example: A windstorm damages the Grace Place Apartments. Repairs are now finished, and the units will be ready for occupancy 180 days after the covered loss. All 20 original tenants had to find other housing following the damage, and only 5 returned.

Scenario 1: Grace Place offers substantial incentives to fill the apartments because the current number of available units exceeds demand. Even then, it takes over four months for all units to become occupied. Extended Business Income coverage applies because the occupancy issue is not directly related to the cause of loss that caused the damage.

Scenario 2: Grace Place offers significant incentives to fill the apartments because the number of units currently available exceeds demand. Even then, it takes over four months for all the units to be rented out. The delay was due to limited access and job opportunities in the area following the tornado that also damaged Grace Place. Extended Business Income coverage does not apply because the occupancy issue is related to the cause of loss that produced the damage.

d. interruption of computer operations

This additional coverage provides nominal limits for the same items listed in 4. Additional Limitation–Interruption of Computer Operations. It covers business income and/or extra expenses due to direct damage to electronic data, as defined in that section, with a $2,500 limit unless the insured selects a higher limit, as indicated on the declarations.

This additional coverage is not subject to the same causes of loss forms as other coverages. The applicable changes to the causes of loss form are as follows:

· If other coverage is subject to the special causes of loss form, this additional coverage applies only to losses due to the specified causes of loss and collapse.

· If other coverage is subject to the broad causes of loss form, only those causes of loss and collapse are covered.

· If an additional covered cause of loss is added to the causes of loss form, the covered cause of loss added does not apply to this additional coverage.

· Coverage also includes virus and hacking.

o Coverage does not apply to damage due to employee manipulation of computer systems. Employees include temporary and leased employees.

o Coverage does not apply if an outside entity specifically hired to work on the system causes the damage.

The $2,500 limit (or the limit shown on the declarations) is an annual aggregate. It applies to all losses incurred during the policy term, regardless of when or where they occur.

Example: Jay’s policy period is June 1 to June 1, and the policy covers 10 locations. Jay’s computer operations experienced a loss at location 1 on September 1. The total amount of loss is $2,400.

When an identical loss occurred at location 2 on October 1, only $100 is available to pay the second loss.

This additional coverage ends when the restoration period ends, even if the limit has not been exhausted.

6. Coverage Extension

This coverage extension rewards the insured if business income coverage is written with a 50% or higher coinsurance percentage.

NOTE: There is no mention this requirement is waived if one of the alternative coinsurance options is selected. Therefore, this extension may not apply if the Optional Maximum Period of Indemnity or Monthly Limit of Indemnity is selected.

Newly Acquired Locations

This additional coverage applies to newly acquired locations. However, newly acquired property located at fairs or exhibitions is excluded.

· Business income and extra expenses are extended to newly acquired locations.

· A limit of $100,000 applies to each new location, unless a higher limit is chosen and indicated on the declarations.

· Coverage ends when one of the following occurs first:

o Policy expiration

NOTE: A location obtained just before the expiration date must be reported to the company promptly to prevent a potential lapse in coverage.

o 30 days after acquisition or construction first begins.

o Values are reported to the insurance company.

· An additional premium is charged and is calculated as of the date the property is acquired.

· Coinsurance does not apply to this coverage extension.

B. LIMITS OF INSURANCE

The most the insurance company pays for a single occurrence is the Limit of Insurance shown on the declarations.

Extra Expense, Civil Authority, Alterations and New Buildings, and Extended Business Income will not increase the Limit of Insurance. These additional coverages are a part of and do not increase the Business Income Limit shown on the declarations.

However, the coverage extensions–Newly Acquired Locations and Additional Coverage – Interruption of Computer Operations have separate limits listed on the declarations. These limits are not included in the Business Income Limit of Insurance shown on the declarations.

C. LOSS CONDITIONS

This section details the obligations of the named insured and the insurance company toward each other. The insurance company can void coverage if the named insured fails to fulfill its duties. The insurance company can be sued or face penalties if it breaches the contract. These conditions are in addition to the Commercial Property Conditions and the Common Policy Conditions.

Related Articles:

CP 00 90–Commercial Property Conditions Form Analysis

IL 00 17–Common Policy Conditions

1. Appraisal

If the named insured and the insurance company cannot agree on the Net Income, operating expense, or the claim settlement amount, either party can request an independent appraisal in writing. Once requested in writing, the process is as follows:

· Each side appoints a competent and impartial appraiser.

· The two appraisers then select an umpire.

· If the two appraisers cannot agree on an umpire, they can request a court judge with jurisdiction appoint one.

· The appraisers submit their recommendations to the umpire, who reviews only the differences.

· A decision by any two of these three individuals is final and binding for all.

· Each party pays for its own appraiser and shares any other common costs.

This process specifically applies to the claim's value and does not determine whether the claim is covered.

The insurance company retains the right to deny a claim even after it has gone through the appraisal process.

2. Duties in the Event of Loss

a. insured responsibility

This coverage form requires the insured to take certain actions to minimize a loss or assist in recovery efforts against parties who may be responsible for the loss. Coverage can be voided if the insured does not comply with all of the following:

· Notify the police. This requirement applies only if there is a possibility of a law being broken.

· Promptly notify the insurance company of the loss and describe the property involved.

· Report the details of the loss to the insurance company as soon as possible, including how, when, and where it happened.

· Take all reasonable steps to protect the damaged covered property from further loss and keep records of the expenses incurred to do so.

o If covered, these expenses are paid as part of the final settlement, but do not increase the Business Income Insurance limit.

o If the property or loss is not covered, the insurance company will not reimburse mitigation expenses.

NOTE: The term “Covered Property” is used in only this condition and nowhere else. In addition, the expenses paid are to reduce the direct damage loss to the property, while this coverage pays for loss of income. Does this inadvertently provide direct damage coverage within time element coverage? Are expenses only paid if they reduce the loss of income claim?

Example: Jeremy spends $50,000 to safeguard his property after a windstorm damages his building's roof. Given the value of the equipment inside, this amount seems reasonable. The Business Income coverage limit is $100,000.

Jeremy’s business income loss is assessed at $75,000, leaving only $25,000 available to cover the expenses related to his protection efforts.

· The insured must allow the insurance company to inspect the damaged property and examine their books and records. This can be done as often as the insurance company requires, provided the inspections and examinations are considered reasonable. This may involve taking samples of the damaged property for analysis and making copies of the books and records.

· Submit to the insurance company a signed and sworn proof of loss with all requested information for claim investigation within 60 days request.

· Cooperate with the insurance company as it investigates or settles the claim.

· Resume operations promptly if the insured intends to stay in business.

b. examination of insured

The insurance company has the right to examine any and all insureds. It can examine each insured separately, outside the hearing of other insureds. All responses to examination questions must be signed. Multiple examination requests may be made, but these requests must be reasonable.

3. Loss Determination

This section is crucial for understanding how to select the right insurance limit and avoid surprises after a claim. It is broken into four parts:

a. business income

The loss amount is based on the following:

· Net income profit or loss prior to the loss

· Probable net income if a loss had not occurred

However, this does not include net income likely to have been earned by an increase in sales due to favorable business conditions the named insured could not capitalize on because of the loss payment.

Example: The raging California wildfires destroy many homes and businesses. John’s Hardware is one of those businesses. As soon as people return home and start buying building materials to repair their homes, every hardware store in the area scrambles to meet the demand, with most doubling their normal sales.

John’s Hardware cannot include the loss of those windfall profits in determining its business income loss.

· All continuing and operating expenses required to resume operations at the same level as before the loss. This includes payroll.

Example: John’s Hardware employed ten people before the loss. John’s must pay higher rates and salaries to retain them or hire new employees due to the demand for help after the losses.

· Other pertinent information applying to the loss. Every loss is unique, and differences in operations and circumstances must be considered.

The named insured must provide the insurance company with factual data to substantiate the claimed loss value. This includes items such as financial records, bills, invoices, deeds, contracts, and any other information relevant to the loss.

b. extra expense

The loss amount is based on the following:

· Expenses the insured incurs during the restoration period that exceed normal operating costs and would not have occurred without the physical damage loss.

· Salvage value of property purchased for temporary use will be deducted from the total expenses incurred.

· Extra expense paid by other insurance will be deducted from the total expenses incurred.

o This provision excludes coverage under the same plan, terms, conditions, and provisions as this coverage form— CP 00 30—Business Income Coverage Form–With Extra Expense.

Example: John’s Hardware holds an exclusive contract to supply liquid propane gas in the region. Losing this contract would happen if its customers do not receive supplies. To ensure the contract remains intact and to meet its terms, John rents a large tent for the gas operation and arranges emergency shipments.

Additionally, John rents trucks for fuel delivery, as the loss made his own trucks unusable. The additional expense coverage in this form covers the costs of the tent and truck rentals, along with the extra expenses for emergency shipments.

· Any other expenses necessary to reduce the business income loss.

c. resumption of operations

If the named insured can resume operations, even if only partially, but does not, the business income loss is reduced accordingly.

Similarly, the extra expense loss is reduced if it is determined the business can resume normal operations.

Example: John’s Hardware is finally repaired, restocked, and ready to reopen. However, John chooses to give his employees a week off before the grand opening as a thank you for their hard work.

The insurance company does not cover this delay or any loss of business income. Additionally, it does not reimburse the rental costs for the tent and trucks for that week, since John could have reopened and operated normally but chose not to.

d. not resuming operations

This section addresses cases in which businesses do not resume operations promptly or at all. Various reasons can cause this, and although the loss is still covered, it is assessed differently. The insurance company covers only the amount of loss it would have incurred if the insured business had resumed operations without delay.

Example: Greg reluctantly took over his dad's business, but he dreamed of becoming a stock car driver. He saw his chance when a tornado destroyed the building. He took full advantage and decided to use the insurance money to build a racing team.

The insurance company estimated the loss of income based on Greg’s accounting records and the average time to rebuild in the community, and paid a business income amount that both Greg and the insurance company agreed upon.

4. Loss Payment

The insurance company will pay the loss amount within 30 days if all the following conditions are met:

· The insurance company has received the insured’s signed and sworn proof of loss.

· The insured has complied with all the coverage form’s requirements.

· Both the insured and the insurance company have agreed on the amount of loss.

· An appraisal award has determined the amount of loss.

D. ADDITIONAL CONDITION

COINSURANCE

Coinsurance is a rating credit in the premium calculation the named insured receives in exchange for its promise to maintain a certain limit of insurance. It also acts as a penalty if the insured fails to meet the required limit. Coinsurance is a common concept in direct damage property coverages.

Related Article: Coinsurance Clause

Applying coinsurance to business income losses is more complex because any loss payment depends on future earnings, which are influenced by multiple variables. This means the insurance limit must be forward-looking.

Coinsurance Penalty

A coinsurance penalty may be imposed if the named insured agrees to accept a premium credit in exchange for a promise to maintain a specified insurance limit. The promised limit must equal the net income and all operating expenses for a 12-month period multiplied by the chosen coinsurance percentage. The insured can earn a higher coinsurance credit by insuring for higher percentages and, accordingly, higher insurance limits.

Coinsurance Available Percentages

The available coinsurance percentages are:

· 50%

· 60%

· 70%

· 80%

· 90%

· 100%

· 125%

The 125% option reflects the fact that the business income limit must also include a limit for extra expenses. The extra expense amount is not included in determining the coinsurance penalty, and using the 125% option rewards the named insured for anticipating its extra expense exposure.

Determining the Coinsurance Penalty

An additional condition explains how the penalty is determined if the insurance limit is less than the required coinsurance limit. The required coinsurance limit is determined by multiplying the coinsurance percentage by the anticipated net income and operating expenses for the 12 months following the policy inception date. Losses are subject to a penalty if the insurance limit is less than the required limit to meet the coinsurance condition.

Deductions Allowed

The coverage form permits deducting 12 separate items from operating expenses to determine compliance with the coinsurance condition. These items are used for coinsurance purposes and are listed only in this section. Any items deducted here are not necessarily or automatically deducted in the section related to loss determination.

The twelve items are as follows:

· Outgoing prepaid freight

· Allowances and returns

· Discounts

· Bad debts

· Collection expenses

· *Raw stock, along with factory consumable costs

· *Merchandise sold costs

· Costs of other consumed supplies

· **Services purchased from others not intended to be resold

· **When CP 15 11 is attached, power, heat, and refrigeration expenses

· **When CP 15 10 is attached, payroll expenses as limited by the endorsement

Mining properties receive special deductions:

· Royalties

· Actual calculated depletion. This a unit or cost depletion and not based on a percentage.

· Retirement and welfare fund charges based on tonnage

· Costs of hired trucks

*Transportation charges are part of these items.

**Only expenses not contractually required to continue are part of these items.

Four steps to determine the penalty:

Step 1. Determine the actual net income and operating expenses for the 12 months after the policy inception date, had there been no loss.

Step 2. Multiply Step 1 by the coinsurance percentage on the declarations.

Step 3. Divide the insurance limit by the value obtained in Step 2.

Step 4. Multiply the amount of loss by Step 3.

The insurance company pays no more than the lesser of the limit of insurance or the amount determined in Step 4.

Example: Lana’s Boutique purchases business income coverage with a $100,000 limit on January 1st, subject to 80% coinsurance. After a strong sales increase from a contract on March 1st, Lana’s fails to raise its business income limit.

A hailstorm damages Lana’s building, forcing a three-month halt in operations.

Lana’s insurance company finds the total business income and operating expenses would have been $175,000, resulting in a loss of $80,000. A coinsurance penalty is applied since Lana’s coverage limit is inadequate.

Step 1. The company's actual income from business operations and expenses amounts to $175,000.

Step 2. $175,000 multiplied by .80 coinsurance equals $140,000.

Step 3. Dividing the $100,000 insurance limit by $140,000 results in 0.714.

Step 4. The $80,000 loss is multiplied by 0.714, equaling $57,120.

Since Lana’s did not carry sufficient insurance coverage, it incurred a $22,880 coinsurance penalty.

NOTE: Coinsurance does not apply to extra expense. Therefore, extra expense losses are not reduced by a coinsurance penalty. If the insured does not anticipate a business income loss but could face significant extra expense costs, choosing a high coinsurance percentage to lower the rate might offer a cost benefit with little or no coverage penalty.

Related Article: Business Income Alternatives to Coinsurance

E. OPTIONAL COVERAGES

There are four optional coverages available. Each one applies separately. Three of the optional coverages are actually alternatives to coinsurance. The coverage(s) selected should be shown on the declarations.

1. Maximum Period of Indemnity

This valuation clause addresses business income loss and extra expenses incurred within 120 days following the loss, up to the limits specified in the declarations. All other conditions remain unchanged.

Most small businesses find this approach straightforward because it sidesteps coinsurance penalties. However, it is not suitable if the business cannot restart operations within 120 days. This method typically results in higher premiums, but it may lead to a lower final premium if the insured chooses lower coverage limits.

Related Article: Business Income Alternatives to Coinsurance

2. Monthly Limit of Indemnity

This method is more complex than the Maximum Period of Indemnity but simpler than the coinsurance approach. The insured selects a percentage, such as 1/3 (33 1/3%), 1/4 (25%), or 1/6 (16 2/3%). This percentage applies to each 30 consecutive day period following the start of the restoration period.

The percentage selected indicates the portion of the insurance limit applicable to each 30-day period during which the loss persists. Payments stop once the monthly limit is reached and then restart the following month.

Related Article: Business Income Alternatives to Coinsurance

*Example:* Gustav’s Cards purchases a $100,000 limit with a 1/4 (25%) monthly indemnity limit. A covered loss occurs in January. The amount of loss paid is the lesser of either the actual amount of loss for the given month or 1/4 (25%) of the limit of insurance.
*Actual monthly loss amounts*	*Amount available*	*Amount paid*
First 30 days: $50,000	$100,000 X 25% (.25) = $25,000	$25,000
Second 30 days: $15,000	$100,000 X 25% (.25) = $25,000	$15,000
Third 30 days: $10,000	$100,000 X 25% (.25) = $25,000	$10,000
Fourth 30 days: 0	$100,000 x 25% (.25) = $25,000	$0
Total: $75,000	Total: $75,000	$50,000
Gustav’s Cards absorbs $25,000 of the business income loss, based on the timing, the amount of loss in each month, and the selected recovery percentage.

NOTE: This limitation only applies to business income. It does not apply to any covered extra expenses or costs incurred by the insured. However, once the combined total of business income and extra expenses reaches the insurance limit, coverage ends.

3. Business Income Agreed Value

This option enables the named insured to benefit from the coinsurance credit on the rating without risking a coinsurance penalty.

For the coverage to apply:

· The insured must complete, sign, and submit a business income worksheet to the insurance company.

· The worksheet should include the financial data for the insured operations over the 12 months before the worksheet date and include estimates for the 12 months immediately after the coverage begins.

· The company underwriter will review and approve the worksheet and its values.

· Agreed Value and the agreed limit must be shown on the declarations.

· Any loss during the policy year is adjusted regardless of the coinsurance condition.

· If a new worksheet is not submitted every 12 months or within another specified period, the agreed value clause lapses and the coinsurance condition is reinstated.

· If the insurance limit on the declarations is less than the agreed-upon value, any loss must be adjusted. The adjustment factor is the business income limit of insurance divided by the agreed value.

Related Article: Business Income Alternatives to Coinsurance

4. Extended Period of Indemnity (10 12 change)

This optional coverage amends A. Coverage—5. Additional Coverages—c. Extended Business Income by adjusting the 60-day period after business operations resume to the number of days entered on the declarations.

Extended Period of Indemnity is intended for businesses expecting ongoing losses as they rebuild their client and contract base. Under this optional coverage, the insured must evaluate the difficulty and time needed to regain customers after resuming operations.

Example: Friend’s, Inc. developed a loyal clientele because of its ability to provide excellent and timely service. However, Friend's knows its clientele will go elsewhere if its business closes for even a short period. It also knows it will take at least six months to resume normal operations and regain those clients.

With this knowledge of their business, Friend's purchases Business Income Coverage with an Extended Period of Indemnity of 180 days.

F. DEFINITIONS

The Business Income (and Extra Expense) Coverage Form includes six definitions, all of which should be thoroughly reviewed due to their impact on the coverage provided.

1. Finished Stock

This is stock manufactured by the named insured.

However, there are two exceptions:

· Unless a coinsurance percentage for business income is indicated on the declarations, whiskey and other alcoholic products being aged are regarded as stock.

· Stock the insured has finished manufacturing and is held for sale at a covered retail location is not classified as finished stock.

NOTE: This term appears only in 5. Additional Coverages c. Extended Business Income. It states that coverage begins even if the finished stock has not been replaced. More importantly, it is used in causes of loss forms that exclude business income loss due to damage to finished stock and the time needed to reproduce it.

Example: Krissy Chrizmaz has a retail outlet next to its manufacturing plant, holding $200,000 in finished stock, while the plant has $500,000 in finished stock.

A tornado damages stock at both locations. Coverage applies for replacing stock at the manufacturing plant, which takes 180 days, but there is no coverage for the retail outlet.

The building and personal property coverage form addresses direct damage to the finished stock, and Extended Business Income coverage starts when operations resume.

2. Operations

These are the business activities that take place at the premises described in the declarations. Additionally, when rental value is included, operations also refer to whether a tenant can occupy the premises.

3. Period of Restoration

This is the time during which coverage applies.

a. business income coverage

Coverage starts 72 hours after the covered loss or damage occurs.

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 eliminate it entirely.

b. extra expense coverage

Coverage begins immediately after the covered loss or damage occurs.

Coverage ends for both Business Income and Extra Expense either when the property at the designated premises is repaired, rebuilt, or replaced, or when the business reopens at a new permanent location. An important factor in determining when a premises is considered ready is that repairs are finished promptly and with quality comparable to the original materials.

Example: Maisy May’s hat manufacturing plant relies on a custom-built machine. It takes ten months to design and deliver a new machine after a covered loss. The insurance company believes Maisy May’s could have resumed operations in four months if she had accepted a similar machine and is only willing to cover four months of business income loss.

The restoration period does not include the increased time required to address the following:

· Ordinances, regulations, or laws.

· Regulations concerning construction, use, repair, or demolition of structures.

· Addressing in any way any type of pollution-related issues.

The policy's expiration date does not affect the duration of the restoration period.

4. Pollutants

This includes any irritants and contaminants such as smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste in various forms. Disposal, recycling, reconditioning, or reclaiming are classified as waste materials.

5. Rental Value

This is a specialized type of business income with two parts.

a. net income

This represents either profit or loss before taxes that would have been generated from rental income by tenant(s) occupying the premises. The fair rental value of the named insured’s occupancy of its own premises is included in this net income amount.

b. normal operating expenses

The normal operating expenses of the premises that continue after a loss. This includes payroll and tenants’ legal obligations that become the owner’s responsibility during the period when the premises cannot be occupied.

*Example:* Trey and Margo own a strip shopping center with five tenants in addition to their own shop. Heavy ice and snow buildup causes the roof to collapse, leading to the evacuation of all occupants during repairs. The monthly business income rental value is as follows:
Rental income from five tenants	$10,000 ($2,000 per tenant)
Trey and Margo’s rental value	$2,000
Payroll	$1,500
Contracted utilities	$2,500
*Total monthly rental value*	*$16,000*
Trey and Margo have a rental loss of $16,000 per month until the roof collapse damage is repaired.

6. Suspension

This includes the complete closure or a slowdown of the insured’s business operations. If Rental Value Coverage is included, it also means when tenants cannot occupy all or any part of the insured premises.

CP 00 32–BUSINESS INCOME (WITHOUT EXTRA EXPENSE) COVERAGE FORM ANALYSIS

This coverage form closely resembles the CP 00 30 – Business Income (and Extra Expense) Coverage Form, but with most references to extra expenses removed. The only Extra Expense Coverage included is for costs incurred to help lessen the business income loss, up to the maximum amount these costs mitigate the income loss.

CP 00 50–EXTRA EXPENSE COVERAGE FORM ANALYSIS

INTRODUCTION

Certain types of businesses do not experience a decrease in income even when they suffer direct damage. They make it a priority to spend whatever is necessary to keep their operations running, stay connected to customers and suppliers, and implement emergency measures to protect their income stream.

Form CP 00 50 covers these additional expenses. It is intended for businesses that do not need the business income loss coverage provided by CP 00 30. Using this form, the insured can develop a contingency plan, estimate additional expenses to remain operational, and purchase the precise coverage needed for the plan's duration.

NOTE: Some insured individuals may want to consider purchasing coverage under the CP 00 30, Business Income (and Extra Expense) Coverage Form, with a 125% coinsurance limit, rather than opting for the CP 00 50.

Choosing this option is especially useful for businesses that do not expect actual income loss and are primarily interested on the extra expense portion of the coverage. The CP 00 30 at 125% coinsurance is generally less expensive than the CP 00 50 and offers no limitations on the amount of the extra expense limit available in any given month.

The CP 00 50 is similar to the CP 00 30, except for four specific sections. This analysis focuses only on the differences in those four sections.

A. Coverage

The insuring agreement is similar, but all references to business income are removed.

· The Covered Causes of Loss, Additional Limitation–Interruption of Computer Operations, and Coverage Extensions are unchanged.

· Additional Coverages can only be modified by removing the Extended Business Income Coverage.

C. Loss Conditions

This section has two significant differences compared to the same section in CP 00 30.

3. Limits on Loss Payment

This method explains how Extra Expense is reimbursed. The basic coverage form allocates extra expenses across three periods: 30 days, 60 days, and beyond 60 days.

Here is how this coverage works:

· The insured receives 40% of coverage within the first 30 days of the restoration period.

· Then 80% of coverage if the restoration period is between 31 and 60 days.

· Finally, 100% if the restoration period is more than 60 days.

These percentages are shown on the declarations as 40/80/100. Alternative options include 35/70/100 or 100/100/100.

The insured can customize the payment schedule and extend payments for up to 12 months. To do so, CP 15 07–Expanded Limit of Loss Payment must be attached, and an increasing sequence of payout percentages must be shown on the endorsement schedule.

The payout for the first 30 days cannot exceed 40%. Each subsequent 30-day period must have a higher percentage than the previous one, culminating to 100%. The maximum number of entries is 12.

Example:

A 12-month plan might follow this pattern: 10/20/30/40/50/60/70/80/90/100/100/100

A 4-month plan might follow this pattern: 25/50/75/100

An important point is that the final percentage is not limited to just a 30-day period. It extends to the period of restoration beyond the previous 30-day period.

*Example:* Farley Office Supplies has a contract with its top customer that requires Farley to respond immediately at any time. Farley has a contingency plan and reciprocal arrangement to share facilities with Infuse Supplies if a loss occurs and operate out of Infuse’s location during night hours. A fire occurs at Farley's location, triggering the contingency plan. During the next 105 days of the restoration period, the company pays its employees a 10% bonus for working a third shift. Farley also pays Infuse rent for the use of its equipment and space, as well as overnight freight charges to maintain stock levels. The extra expenses incurred are paid as follows:
*Actual loss amount*	*Insurance amount available*	*Amount paid*
First 30 days: $50,000	$100,000 X 40% (.40) = $40,000	$40,000
First 60 days: $80,000	$100,000 X 80% (.80) = $80,000	$80,000 less $40,000 = $40,000
105 days: $100,000	$100,000 X 100% (1.00) =$100,000	$100,000 less $80,000 = $20,000
*Total: $100,000*	*$100,000*	*$100,000*

4. Loss Determination

This section has been changed slightly since all references to business income have been removed.

D. Definitions

This is Section D in CP 00 50 and Section F in CP 00 30. This is because coinsurance does not apply to CP 00 50 and does not include provisions for Additional Condition–Coinsurance.

The only difference between the forms is that CP 0050 does not use the terms "finished stock" and "rental value," and therefore they are not defined.

E. Optional Coverages

Optional coverages are not included in CP 00 50 because none are available.

CP 00 60–LEASEHOLD INTEREST COVERAGE FORM ANALYSIS

This coverage form was not updated with the 10 12 edition. This analysis is of the 06 95 edition.

INTRODUCTION

This coverage form provides protection for the named insured against financial losses if a covered cause of loss damages the leased property, resulting in the cancellation of a favorable lease.

NOTE: Financial loss goes beyond simply losing a profitable lease.

The coverage form’s introductory paragraph explains the insurance company uses 'you' and 'your' to refer to the named insured, and 'we', 'us', and 'our' to refer to the insurance company. Additionally, it is important for the insured to review Section F—Definitions to ensure there is a clear understanding of the words or phrases appearing in quotes, as they have special meanings.

A. Coverage

The coverage statement indicates that it covers loss of the insured's leasehold interest in a property scheduled on the declarations. Coverage applies only if the lease is terminated because of physical damage caused by a covered loss. It does not cover cancellations for any reason other than those specified, even if the insured suffers a financial loss.

Examples:

Scenario 1: Oldskool Dance Studio loses its fantastic lease agreement because a fire destroys the building it rents for its operations. This financial loss is covered.

Scenario 2: Oldskool Dance Studio loses its fantastic lease agreement after a city building inspector closes the building until safety requirements are met. This financial loss is not covered.

1. Covered Leasehold Interest

The Net Leasehold Interest amount must be shown on the Leasehold Interest Coverage schedule for coverage to apply, and means the following:

a. tenants' lease interest

This is the difference between the rent paid by the insured and the actual rental value of the described premises.

b. bonus payments

These are the unamortized parts of a cash bonus that will not be reimbursed to the insured. A cash bonus is funds paid by the named insured to acquire the lease. Payments for rent or security deposits are not included in this coverage.

c. improvements and betterments

These are the unpaid amounts for improvements or betterments financed by the insured. This only covers amounts not protected by other insurance, up to that coverage limit. It includes fixtures, alterations, installations, or additions the insured cannot legally remove. The insured must have either integrated these into the building they occupy or purchased them at their own expense.

d. prepaid rent

This is the portion of any advance rent payment that has not been amortized and will not be refunded. It excludes regular rent payments due at the beginning of each month or for other rental periods.

2. Covered Causes of Loss

This is based on the causes of loss form specified in the declarations. The named insured can choose from any of the causes of loss forms available within the ISO Commercial Property Program.

B. Exclusions and Limitations

This is based on the causes of loss form specified in the declarations.

C. Limits of Insurance

1. Applicable to Tenants' Lease Interest

a. the most paid

Upon cancellation of the lease, payment is limited to the insured’s net leasehold interest as of the date of cancellation. In some cases, the landlord may provide a new lease for the named insured to sign and continue at the same location. If the named insured agrees to the new, higher terms, the most paid is either the net leasehold interest or the difference between the old rent and the new rent, whichever is less.

b. automatic monthly decrease

The net leasehold interest amount decreases each month because it is calculated by multiplying the gross leasehold interest by the leasehold interest factor for the remaining lease period. A proportional share applies to periods shorter than a month.

The leasehold interest factor is part of the schedule attached to the policy endorsement.

*Example:* Carrie has a 10-year lease on an artist’s loft. She paid a $1,000 bonus, $15,000 to have the landlord make improvements, and received a preferred lease at $500 per month. At the end of her third year in the loft, a fire in the unit next to her causes significant smoke damage to her unit. Carrie must move out for one month while the loft is cleaned and repaired. The landlord notifies Carrie that her lease is cancelled and she must execute a new lease if she wishes to return. Compared to other lofts in the area, this rental is $1,200 per month. Her landlord offers her a new lease at $1,000 per month. If Carrie decides to leave the existing lease, her loss is adjusted as follows:
Unit’s Monthly Rental Value	$1,200
Actual Monthly Rent	$500
Gross Leasehold Value	$1,200 + $500 = $700
8% Leasehold interest factor	71.4531
Calculated net leasehold interest loss	= $50,017
Calculated the difference between the new lease and the old lease	(1,000 - 500) X 96 = $48,000
As a result, the maximum payment for part 1 of this loss is $48,000.

2. Applying to Bonus Payments, Improvements and Betterments, and Prepaid Rent

a. the most paid

Upon cancellation of the lease, the payment is limited to the named insured’s net leasehold interest as of the date of loss. In some cases, the landlord may provide a new lease for the insured to sign and continue at the same location. If the insured agrees to the new terms, the most paid is the insured’s loss or the net leasehold interest, whichever is less.

b. automatic monthly decrease

The net leasehold interest amount decreases each month because it is calculated by multiplying the gross leasehold interest by the leasehold interest factor for the remaining lease period. The leasehold interest factor is included in a schedule attached to the policy endorsement.

*Example:* Let’s stay with Carrie’s loss. Her loss is determined as follows:
Bonus Payment	$1,000
Improvements and Betterments	+$15,000
Total part 2	=$16,000
Number of months in lease	120
Monthly Leasehold Interest	= $133.33
Number of months remaining	X 96
Loss payment for part 2	= $12,799.68
However, Carrie does not face a loss if she accepts the new lease, since the landlord has agreed to renew it without requiring a bonus payment or new improvements or betterments. Because her loss payment is the lesser of the actual loss and the net leasehold interest, she receives nothing. Carrie is upset! Without the offer, she would have received $50,017 for part 1 and $12,799.68 for part 2, for a total of $62,816.68, but because of the landlord’s lease offer, the most she is paid for this loss is $48,000.

D. Loss Conditions

The Appraisal, Insured’s Duties When a Loss Occurs, and Loss Payments Conditions are consistent with those in CP 00 30. However, the Loss Determination condition in CP 00 30 is not included in this coverage form.

The following Vacancy Condition is added.

4. Vacancy

a. description of terms

This coverage form applies only to tenants. As a result, “building” refers to the unit the tenant rents or leases. It is considered vacant only when there is not enough business personal property in the building to conduct customary operations. Buildings under construction or being renovated are not considered vacant.

b. vacancy provisions–subleased premises

If the named insured had arranged for a sublease and the property is vacant for more than 60 consecutive days, coverage does not apply to loss or damage due to:

· Vandalism

· Sprinkler leakage, unless the system was protected against freezing

· Breakage of building glass

· Water damage

· Theft or attempted theft

The insurance limit is reduced by 15% for any other cause of loss not listed above.

c. vacant property

There is no coverage if the property is vacant for more than 60 days, and there is no sub-lease in place.

E. Additional Condition

The coinsurance condition in CP 00 30 does not apply to CP 00 60, and the following condition applies only to CP 00 60.

Cancellation

This condition replaces the cancellation provision in IL 00 17–Common Policy Conditions. The two cancellation provisions are identical, except that item 6 explains how to calculate the earned premium in a leasehold interest situation. If this coverage is canceled, the earned premium is determined by the following steps:

Step 1: Calculate the average of the net leasehold interest based on its value as of the inception date and the cancellation date.

Step 2: Multiply Step 1 by the coverage period's rate.

Step 3: Subtract Step 2 from the premium paid at inception.

The insurance company refunds the named insured the amount calculated in Step 3, as long as the coverage is canceled by the insurance company. The refund could be less if the named insured requests cancellation.

F. Definitions

None of the Definitions in CP 00 30 apply to this coverage form, but three definitions are added.

1. Gross Leasehold Interest

This is the difference between the monthly rental value of the leased premises and the actual rent paid. The actual rent may also include services, taxes, and insurance. The gross leasehold interest amount remains the same whether the named insured occupies the entire premises or subleases all or part of it.

Example: Jamie's rental payment is $6,000 per month, but the rental value (the amount that others pay for the same unit) is $10,000 per month. Jamie's gross leasehold interest is $4,000.

2. Monthly Leasehold Interest

This is the monthly amount of covered bonus payments, improvements and betterments, and prepaid rent. It is calculated by dividing the original cost of these items by the remaining months on the lease at the time of expenditure.

Example: Jamie makes a $30,000 bonus payment at the beginning of a 10-year lease. The monthly leasehold interest is $30,000 divided by 120 months, or $250.

3. Net Leasehold Interest

This consists of two parts:

a. tenants’ lease interest

The Net Leasehold Interest is the current value of the insured's gross leasehold interest, based on the remaining lease months and the rate in the Leasehold Interest Coverage Schedule. The net leasehold interest rate listed on the schedule is the amount that would generate income equal to the monthly Gross Leasehold Interest for the remainder of the lease term.

It is calculated by multiplying the gross leasehold interest by the remaining lease's interest factor term.

Example: A fire damages the building with only 24 months remaining on Jamie’s 10-year lease, leading to the lease being forfeited. The calculation of Jamie’s tenant interest payment is as follows:

· The effective interest rate selected was 10%.

· The difference between the rental value and the rent paid is $4,000.

· $4,000 multiplied by 21.7646 (the interest factor in CP 60 10) equals $87,058.

b. bonus payments, improvements and betterments or prepaid rent

The formula is simpler for bonus payments, improvements, betterments, and prepaid rent. The monthly leasehold interest is multiplied by the number of months that remain in the lease.

Example: Continuing our example, Jamie’s bonus payment loss is calculated by multiplying the monthly leasehold figure of $250 by 24 months, for a total loss of $6,000.