TIME ELEMENT COVERAGE
UNDERWRITING CONSIDERATIONS
(December 2025)
Underwriting time
element coverage begins with underwriting direct damage commercial property
exposures.
Related Article: ISO
Commercial Property Program Underwriting Considerations
The time element analysis
must then focus on factors related to the duration of an operation being shut
down or operating at suboptimal capacity.
The first step in
analyzing time element exposures is to determine the type of coverage needed.
A business that must
keep operating at all costs needs extra expense coverage more than business
income protection. This coverage is vital for companies that need to quickly
resume operations at their current location or relocate to another facility
within a very short timeframe. These businesses have commitments to fulfill;
failing to do so could result in the loss of most of their clients and
customers and may even lead to breach-of-contract issues. Examples include
hospitals, banks, insurance agents, "just-in-time" suppliers,
newspapers, radio and television stations, and other media-related
organizations.
Service and contracting
businesses often require extra expense coverage in addition to business income
protection. These operations need the ability to rapidly resume full operations
at a different location once the essential equipment and supplies are replaced.
Businesses operating
without time pressure but requiring a specific location need business income
coverage. These businesses are heavily invested in plant, equipment, and stock,
and cannot simply resume operations at another location with only minimal
investment.
Most businesses require
both business income coverage and extra expense coverage. For example, a small
retail store needs extra expense coverage to cover costs like relocating or
developing a website to maintain operations. It also requires business income
coverage to compensate for lost income during the rebuilding process. In
contrast, some risks, such as shopping centers and apartment complexes, have
little need for extra expense coverage since rebuilding the structure is the
only step needed to resume operations.
Leasehold coverage is a
frequently overlooked form of time element coverage that might need to be
combined with business income and/or extra expense coverage to ensure complete
time element protection for an insured. When a loss results in the cancellation
of a favorable lease, the named insured might not realize that neither business
income nor extra expense coverage covers the difference between the current
costs and the benefits of the lease.
The named insured must
determine their course of action after a loss before they can accurately
identify the specific type and amount of coverage required. They should consider
the following key points.
No business is immune
to the possibility of serious or catastrophic loss or damage. No building is
totally "fire-proof," "earthquake-proof," or unaffected by other
natural or man-made disasters. Successful businesses take the time to evaluate
the potential for natural, business, and catastrophic disasters that could impact
them.
Every business should
understand the key factors involved in resuming normal operations and create
contingency plans for various “what if" scenarios, from minor to major
disruptions. The initial step is to carefully analyze the entire workflow of all
components and processes. Typically, this analysis should cover at least the
following points:
o
The
number of suppliers.
o
The
availability of raw materials or stock.
o
The
number and types of distributors available, including their skills and markets
served.
o
The
customers/customers served and their ability to find another market.
Following a thorough
risk assessment, the business will clearly identify the contingency plans
needed to address possible income losses or extra expenses.
Businesses needing to
quickly restart operations should identify potential relocation sites.
Establishing contingency agreements in advance that allow damaged operations to
use another site or facility during off-hours can help. Taking these steps
ahead of time ensures faster and more efficient recovery after a loss.
Planning for even
remote loss scenarios provides a significant advantage, greatly influencing
whether the business can continue or will fail. Additionally, the business
should identify which types of direct property damage are most likely to cause
business income interruptions, additional expenses, or both.
The following sections
examine important factors when evaluating the risk of various time-related
losses, regardless of their size.
Does the named
insured’s building, where it conducts operations, have any unique or unusual
features that may increase the length of time needed to repair or rebuild it?
If so, do these features need to be present to conduct operations, or are they
purely aesthetic? Is highly skilled or specialized construction labor needed?
If so, are such laborers readily available locally?
Special, required building
features and the need for skilled labor substantially increase both the costs
incurred and the time needed to make repairs and resume normal operations. They
also affect the amount and type of coverage needed. The same features and
conditions are also issues for the insurance company to consider when evaluating
risk, making underwriting decisions, and setting premium charges.
|
Example:
ClearView Glass
manufactures plate glass for a variety of applications. It requires large,
insulated tanks and underground lines to facilitate the flow of molten glass,
which is then poured and floated in special vats of quenching liquids. The
buildings that house these operations feature specially designed features to
support both floating and cooling operations. If a fire destroys ClearView’s plant,
operations cannot simply be resumed at just any large manufacturing facility.
The features ClearView’s operations require, such as large tanks, lines, and
special vats, would need to be duplicated. Doing so would add weeks, perhaps
even months, to the time needed to repair or rebuild its plant. |
On the other hand,
businesses that can essentially reopen at a new facility with few or only minor
modifications experience less serious time element losses. These businesses can
reopen and resume normal operations more quickly.
Both the named insured
and the insurance company must have a complete understanding of the time
required to rebuild or complete repairs.
Another area significantly impacting
time-related losses is the operation’s processes. Some processes take a long
time to complete. Others require specific types of raw materials, which are
available only at certain times of year. In operations involving such
processes, even a relatively minor direct damage loss can result in significant
business income or extra expense losses.
|
Examples:
Custom recently spent nearly eleven months building
one of these machines. After a fire destroys the building, it takes Custom
nine months to fully restore its operations to their previous level.
|
Assessing a process to identify time-element
exposure can highlight another critical aspect. Is there a specific stage vital
to the entire operation? Is there a bottleneck—a single machine, step, or
component—that all flow through, and if it shuts down or malfunctions, could it
cause a major disruption to the business?
|
Example: General Codependence Corporation manufactures
several different products. Each production line is separate and largely
independent of the others. However, each line's final stage involves a
chemical sealing process, which could pose a bottleneck due to the
availability of only one sealing machine. All of General’s production would stop
if it were damaged or shut down. |
When evaluating the
type and extent of potential time-element losses, production aspects,
circumstances, and peculiarities, such as the example above, must be considered.
Certain business operations, such as
manufacturing or processing, depend on specialized machinery, equipment, or
other vital assets that are difficult or impossible to replace or would require
significant time to do so.
|
Example:
KuttingEdgeKorp specializes in painting
and coating metal parts for other manufacturers. The company utilizes a
modern, highly efficient, and environmentally safe process conducted in a
controlled atmosphere. Its production line, designed, customized, and
manufactured in Germany, incorporates many safety features. When a tornado damaged the KuttingEdgeKorp plant,
the company placed an order for a new production line, which is currently on
a 22-month waiting list. Additionally, it will take another eight months to
manufacture the new equipment. This situation results in significant
production downtime and costs. |
Modern or high-tech
equipment is not the only type that needs careful examination. Old, outdated,
or obsolete equipment can lead to frequent downtime and partial losses.
Additionally, there is an increased moral hazard associated with using outdated
equipment.
Another key factor is
the number and availability of local suppliers who can provide the necessary
goods and raw materials for operations. If raw stock is hard to obtain, or if
supplier options are limited and their goods are already committed elsewhere,
it could lead to significant delays. In these situations, direct property
losses from damaged raw materials and supplies may cause a much longer
disruption to operations.
Once a business
estimates or determines its potential downtime, it needs to calculate the
financial loss. This involves projecting income and expenses for the current and
next years. ISO provides two comprehensive forms to assist with these
calculations.
Related Articles: