BUSINESS INCOME
ALTERNATIVES TO COINSURANCE
(December 2025)
The Insurance Services Office (ISO)
Business Income Coverage Forms CP 00 30 and CP 00 32 are subject to the
coinsurance additional condition. The named insured receives a rate credit for
insuring the property at its value. However, at the time of loss, it is penalized if the selected limit is
less than the limit that would satisfy the coinsurance additional condition.
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Example:
Poppy’s Pop Sticks had net income and
continuing operating expenses of $150,000 last year. Poppy doesn’t anticipate
any major changes and estimates his sales will increase to $160,000 this
year. As a result, he tells his agent to use a 50% coinsurance limit of
$80,000. The summer is unusually hot, and sales far exceed
expectations. A tornado destroys the roof of the pop stick manufacturing
plant at the beginning of August, and Poppy is out of business for three
months. Based on the eight months of actual figures available, Poppy’s
projected annual net income and continuing operations expenses for the year are
$200,000. The loss for the three affected months is $50,000. The coinsurance
penalty is calculated as follows:
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In this example, Poppy
increased the business income limit to match estimated sales but still faced a
penalty because even the most accurate estimates do not guarantee the
coinsurance penalty can be avoided. ISO identified this issue and developed
three alternative coinsurance options within the business income coverage
forms, offered as Optional Coverages.
This option removes the coinsurance
requirement by allowing the named insured to choose a specific insurance limit.
If a covered loss occurs, the insured receives payment for up to 120 days of
the loss or the insurance limit, whichever is less.
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Example:
Poppy’s Pop Sticks selects
the Maximum Period of Indemnity option. He selects a limit by dividing his
projected net income and continuing operating expense amount by 365 days,
then multiplying the result by 120 days. This results in a limit of $52,603. Alternatively, he could choose the
months with the highest sales and insure the anticipated net income during
those times. The sales were as follows: ·
$20,000
in June ·
$25,000
in July ·
$30,000
in August ·
$20,000
in September The sales totaled $95,000. Poppy could
select a limit of $95,000 since loss payments cease once this limit is
reached or after 120 days, whichever comes first. |
This option has a
substantial rating surcharge but is a good choice when downtime is limited and
predictable. It is activated when there is an entry in the box next to 'Maximum
Period of Indemnity' on the declarations.
This option removes the coinsurance
requirement, allowing the named insured to choose the business income limit in
increments of 1/3, 1/4, or 1/6, with payments made every 30 days. The payout
continues every thirty days until the entire limit is exhausted or the
restoration period ends, whichever occurs first.
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Example: This option requires
Poppy to know the maximum duration he might be unable to operate and the
highest amount needed within any 30-day span. He estimates he can restore
operations within four months, with August being his most profitable month.
If he selects the 1/4 option and stays with his key months—June, July, and
August—the limit is $75,000. The payment for August's loss will be as follows:
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Poppy is adequately
insured if the loss to the manufacturing plant occurs in any month except
August. However, because of the timing of the loss, he cannot recover the full
amount, as the chosen monthly limit was too low to cover the actual loss. If
Poppy’s loss persists for more than 4 months, the insurance policy remains
active until either the business resumes or the coverage limit is exhausted,
whichever occurs first. The 1/4 recovery limitation does not restrict coverage
to a four-month period.
This option is subject
to a rating surcharge but is an excellent selection when the month with the
largest loss can be identified and a limit and recovery basis selected to cover
it. This option is triggered when the box next to Monthly Limit of Indemnity is
checked on the declarations.
Related Article: Business
Income–Sample Monthly Limitation Worksheet
This option eliminates
the coinsurance condition for 12 months or until the policy's end date. It is
triggered when the most recent Business Income Report/Worksheet is entered
below the Agreed Value Optional Coverage on the declarations. This is subject to
the insured submitting a Business Income Report/Worksheet at policy inception,
whenever the business income insurance limit is adjusted, and at each 12-month
anniversary. Both parties—insured and insurer—must agree on the appropriate
insurance limit based on the Business Income Report/Worksheet.
Related Article: CP 15
15–Business Income Report/Worksheet
The estimated value on the worksheet
should be multiplied by the coinsurance percentage. The chosen insurance limit
must be at least equal to the estimated value and must be listed on the
declarations, including the coinsurance percentage. The coinsurance percentage applies
if the insured breaches any provision of this optional coverage.
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Example: Poppy’s Pop Sticks always completes the Business
Income Report/Worksheet on time. Poppy submits the worksheet to the insurance
company, and both parties agree to the $80,000 limit; as a result,
coinsurance is suspended. The $50,000 loss that occurred in August is paid in
full. |
A penalty similar to a coinsurance penalty is
applied if the insured limit is lower than the agreed amount. The limit is
divided by the agreed value, and the resulting ratio is multiplied by the
actual loss.
This option incurs a
10% rating surcharge and requires the annual completion of the Business Income
Report/Worksheet. Due to the challenge in estimating revenues, it may be the
best choice for many insureds.
The insurance company's
profitability depends on providing coverage with appropriate insurance to
value. This enables the "law of large numbers" and statistics to
function more accurately and efficiently.
While the first two
options above encourage the named insured not to insure to value, significant
rate surcharges compensate for the premium shortfall caused by inadequate
limits and serve as stabilizing or leveling devices.
The third option places
a greater burden on the underwriter. The named insured submits a worksheet
based on actual figures and then estimates the corresponding figures for the
upcoming year. The underwriter insures based on the projected figures for the upcoming
year and must be aware of general economic trends, especially within the
specific industry involved. It is also important to review worksheets from
previous years to determine if the named insured tends to make accurate
estimates.
Furthermore, the
obligation to submit a worksheet at least once a year or whenever the limit
changes should never be waived.