ISO TIME ELEMENT COVERAGES ARCHIVE

(December 2025)

This document is a repository of articles and analyses that relate to earlier editions of the above captioned subject.

Related Article: ISO Time Element Coverage Forms Analysis

Archive Index
Analysis	ISO Time Element Coverage Forms Analysis (04 02 edition)
Analysis	ISO Time Element Coverage Forms Analysis (06 07 edition)
Comparison	Compare: ISO Time Element Coverage Forms: 2007 Edition to the 2002 Edition
Special Analysis	CP 15 29–Electronic Media and Records (Time Element Coverage)
Special Analysis	CP 15 31–Ordinance or Law-Increased Period of Restoration (10 12 edition)
Special Analysis	CP 15 45–Utility Services–Time Element (10 12 edition)

ISO TIME ELEMENT COVERAGE FORMS ANALYSIS (04 02 EDITION)

The Insurance Services Office (ISO) time element forms are quite similar to one another and each is analyzed in this section. This analysis is based on the April 2002 edition date. Changes from the previous edition are expressed in bold face type. The forms evaluated are:

• CP 00 30–Business Income (and Extra Expense) Coverage Form
• CP 00 32–Business Income (without Extra Expense) Coverage Form
• CP 00 50–Extra Expense Coverage Form

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

The form begins by stating that certain provisions in the form restrict coverage and encourages the insured to carefully read the entire policy to determine its rights and duties and what is covered and not covered. It also refers the insured to Section F. Definitions because understanding the definitions is critical to understanding the coverage form, along with the Insuring Agreement and Exclusions sections.

This section also points out that the insurance company uses the terms you and your to refer to the insured and the terms we, us and our to refer to the insurance company.

A. COVERAGE

The policy construction changed with this edition to give Business Income and Extra Expense equal space. Both are now included in A. Coverage.

1. Business Income

Business income includes:

• Net income that would have been earned before income taxes. This includes the net sales value of production for manufacturing risks; plus
• Continuing normal operating expenses, including payroll.

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

In addition, this definition states that the net income figure can be either a net profit or a net loss. A time element loss can occur even in cases of a net loss because the other element of business income is the expenses that continue after a loss, such as payroll.

Example: Even though Marianne is caught in an economic downturn, she is determined to keep going. She has a dozen employees and knows that business will improve in the next quarter. Unfortunately, a fire badly damages her business before the upturn begins. Because she has business income coverage, she is able to continue paying her employees and other continuing expenses at the same time as the direct damage repairs are being made.

Net sales value of production as used with manufacturing risks is best understood by reviewing CP 15 15–Business Income Report/Work Sheet. It begins with gross sales, after which the difference between the beginning and ending inventory value is added. Finally, any item directly related to the inventory that would not continue if there were no inventory, such as returns, allowances, bad debts, discounts, collection expenses and prepaid freight is deducted.

Example:

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

A limit must be shown on the declarations next to one or more of the following selections. If more than one option is selected, the provisions of the coverage form apply separately to each one selected:

• Business Income including Rental Value;
• Business Income other than Rental Value; and/or
• Rental Value Only

Since the insured is in the best position to know the type of business income being insured, it must select the one that applies and provide a dollar limit. The selection made affects rating, loss payments and potential coinsurance penalties.

This is followed by a statement of what is paid by the terms of the coverage form. It pays the actual business income loss sustained by the insured as a result of the business operations being suspended during the period of repair or replacement. The suspension must result from direct loss or damage to covered property by a covered cause of loss at a location listed and described on the declarations and for which a business income coverage limit is provided. If the property damaged or destroyed is business personal property, it must be inside a building, in the open or in or on a vehicle within 100 feet of the premises. The time needed to rebuild is called the period of restoration and is a defined term.

Example: Overheated baking equipment causes an explosion that badly damages Lorenzo’s Bakery. The business is shut down while repairs are being made. Lorenzo’s policy includes a $50,000 business income limit at this location. Since the direct damage is the result of a covered cause of loss at a listed location with business income coverage, coverage applies up to the limit of insurance for the amount of time needed to repair the damage.

The business income coverage form was changed after the first bombing of the World Trade Center in New York City in the 1990's. This was done to recognize the fact that a tenant may not sustain any direct damage yet still have a substantial business income loss because the building occupied is damaged and the tenant's employees and customers do not have access to its premises. As a result of this change, business income coverage applies if the insured is not the sole occupant of a premises and either the insured’s portion of the premises, or the area used to gain access to the insured’s portion of the premises, is damaged.

Example: Pre-Legal Temporary Services occupies offices on the 9th floor of 19-story building. A major fire damages the building's basement and lobby. Since its customers and employees cannot enter the building or gain access to its premises, Pre-Legal's business income loss is covered by the revised terms in the coverage form referred to above.

2. Extra Expense

Extra expense coverage applies at each location listed and described on the declarations having a limit for business income insurance.

Extra expenses are costs beyond normal operating expenses that occur during the period of time that insured repairs are being made. These costs would not have been incurred without direct physical loss or damage to covered property due to a covered cause of loss. The extra expenses paid, other than costs to repair or replace property, are:

• To avoid or minimize business down time and to continue operations at the same or temporary locations, including relocation expenses and costs to equip and operate such locations;
• That minimize business down time if operations cannot be continued; and
• Extra expense to repair or replace property if it reduces the amounts paid under business income coverage.

Expenses to research or restore lost valuable papers or records are no longer included in this definition as of the 04/02 edition.

Example: Harvest Gold Florists sustains smoke damage five days before the start of the local prom season. Not wanting to disappoint its customers, Harvest Gold has flowers shipped in overnight and arranges for a refrigerated unit to store them. The cost greatly exceeds the prices previously quoted for the arrangements, but Harvest Gold keeps its customer base and this is the reason for incurring the expense. The added costs for shipping the flowers and leasing the refrigerated unit are considered extra expenses.

3. Covered Causes Of Loss, Exclusions, And Limitations

The causes of loss covered, exclusions and limitations that apply are not part of the coverage form. One of the causes of loss forms must be attached. It can be the same one that applies to direct damage coverage or it can be a different one.

4. Additional Limitation–Interruption of Computer Operations (04 02 addition)

There is no coverage for business income loss due to the destruction or corruption of electronic data, except as provided in Additional Coverage–Interruption of Computer Operations.

Extra expense coverage does not apply to losses due to the destruction or corruption of electronic data, except as provided for in Additional Coverage–Interruption of Computer Operations.

Electronic data is described in the policy. It includes, but is not limited to, items stored in computer programs or used in computer software programs. The items can be stored in the computer or on a drive, disk or other medium. Virtually any information, fact or program stored in a way that can be retrieved by a computer is considered electronic data and is not covered.

Example: Kollectitall's client mailing list is stored on the computer and is also backed up on disks in the office. A fire destroys the computer and every backup disk. Kollectitall sustains a business income loss and an extra expense loss as it attempts to recreate the lost information. Because of this limitation, none of this loss is covered.

5. Additional Coverages

Four coverages are included as part of the basic policy.

a. Civil Authority

If a covered cause of loss damages premises other than the insured's in such a way that the civil authority restricts access to the insured's premises, coverage applies for up to three consecutive weeks starting 72 hours after the restriction begins.

Example: A fire guts the coin laundry located adjacent to the insured’s package liquor store. The fire consumes the laundry's structural framing and the fire chief is concerned that the brick wall next to the liquor store might collapse. He prohibits access to the store until the wall can be torn down safely. The liquor store is closed for nine days. The insured's loss of business income is covered because fire is a covered cause of loss under its policy.

b. Alterations And New Buildings

As is the case with most property forms, this form includes a provision that provides the insured some automatic coverage for new buildings and alterations and additions to existing ones. The insured can collect income it would have earned from the time the new structure would have been ready had the covered loss or damage not occurred. Coverage also extends to time lost due to damage to or destruction of construction equipment or building materials within 100 feet of the premises. This amounts to the equivalent of builder’s risk coverage for loss of income. Coverage also applies if extra expenses are incurred because of the delay in occupancy.

c. Extended Business Income

This coverage applies to business income other than rental value and to rental value. Income generated by operations does not usually automatically get back to its pre-loss level immediately after repairs are complete and business operations resume. It usually takes some time to attract new tenants, regain shoppers who went elsewhere or return to the previous level of manufacturing output. This provision provides an additional 30 days to cover income lost between the times that operations resume and the previous level of income is restored. However, any reduction in income caused by unfavorable business conditions is excluded.

The Extended Business Income provision does not necessarily start when the business income coverage ends. It begins when the property, other than finished stock, is rebuilt, repaired or replaced and operations resume. Business income coverage ends when property should have been repaired, rebuilt or replaced without mentioning that operations are resumed. As a result, there might be a gap between the end of business income coverage and the start of the extended business income coverage.

Example: The covered loss at Bill’s Tin Snipping should have been repaired in 10 weeks. However, Bill takes one of those weeks as vacation, goes hunting and refuses to talk to the contractor during his vacation. He reopens 11 weeks after the loss date. Payments under business income end after 10 weeks and the Extended Business Income coverage starts on the date that Bill actually resumes operations, being 11 weeks after the direct loss.

This additional coverage extends business income for 30 days but coverage for additional periods can be purchased for an additional premium charge.

Example: Carl’s French Cookerie 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 over three months before sales return to the level that existed before the loss.

If the loss involves rental value, coverage begins on the date a tenant could move in and ends after 30 days or when a tenant actually moves in, whichever comes first. However, coverage does not apply if the lack of rental income is simply due to poor business conditions.

Example: A windstorm damages the Grace Place Apartments. Repairs are complete and the units ready for occupancy 180 days after the direct damage loss occurred. All 20 of the original tenants had to find other housing after the loss and only five of them return. Since the supply of apartments currently exceeds demand, Grace Place offers significant enticements to fill the apartments. Even then it takes over four months before all the units are occupied. Since the occupancy issue is related to business conditions, this coverage does not apply.

d. Interruption Of Computer Operations (04 02 addition)

This coverage provides nominal limits that apply to the same items discussed above in Additional Limitation–Interruption of Computer Coverage. Coverage applies in the amount of $2,500 for business income and/or extra expense due to direct damage to electronic data as defined in the coverage form.

Note: This additional coverage is not necessarily subject to the same causes of loss forms that might apply to other coverages. If other coverage is subject to the special causes of loss, the only coverages available under this additional coverage are the specified causes of loss and collapse. If coverage is provided by the broad causes of loss form, those causes of loss and collapse are covered. Coverage also includes virus and hacking but coverage does not apply for damage to computer systems through manipulation by any employee.

The $2,500 limit of insurance is unique and is similar to an annual aggregate. It applies to all losses sustained during the year for all occurrences at all locations. This coverage also ends when the period of restoration ends.

6. Coverage Extensions

If the business income coverage provided is written at 50% or higher coinsurance, this coverage extension rewards the insured. It provides automatic coverage for business income and extra expense at newly acquired locations. The $100,000 limit provided applies for 30 days. It applies to covered property at all newly acquired locations other than fairs or exhibitions.

Note: The 30 day stated time period actually ends when the policy expires or the acquisition is reported to the insurance company. As a result, if a location is acquired just before the policy expiration date, it must be reported to the insurer promptly to avoid a possible lapse in coverage.

B. LIMITS OF INSURANCE

The most the insurance company pays is the limit shown on the declarations. Payments under the newly acquired locations extension of coverage are in addition to that limit but payments under the four additional coverages are part of, and not in addition to, the limit.

C. LOSS CONDITIONS

This section explains the duties owed by the insured and the insurance company to one another. The insurer can void coverage if the insured does not honor its duties and the insurance company is subject to suit or other punitive actions if it does not honor and carry out its duties. These conditions are in addition to the Common Policy Conditions and the Commercial Property Conditions.

1. Appraisal

If the insured and the insurance company disagree on the amount of a claim, either can make a written demand for an independent appraisal. Each party selects an appraiser and the two appraisers select an umpire or a judge in a court having jurisdiction appoints one. The appraisers submit their recommendations and the umpire only reviews the differences. A decision made by any two of these parties is binding on all parties. Each party pays its own appraiser and shares any other common costs. Remember that this condition applies only to the value of the claim and does not determine if the claim is covered.

2. Duties In The Event Of Loss

The coverage form requires certain actions on the part of the insured to minimize a loss or to assist in recovery efforts against parties that may be responsible for the loss. Coverage can be voided unless the insured:

• Notifies the police if a law has been broken;
• Promptly notifies the insurance company of the loss and describes the property involved;
• Describes how, when and where the loss occurred as soon as possible;
• Takes all reasonable steps to protect covered property from further loss and keeps records of the expenses incurred to do so;
• Permits the insurance company to inspect the property and the insured’s books and records as often as reasonably required in order to prove the loss;
• Sends a signed and sworn proof of loss containing the information requested by the insurance company within 60 days after it is requested;
• Cooperates in every way with the investigation or settlement of the claim; and
• Resumes operations as quickly as possible if the insured intends to continue in business.

The insurance company may examine any insured under oath, separately from any other insured, and as often as reasonably required, about any matter relating to the insurance coverage or the claim. The insured must sign for any answers given in an examination.

Note: Limitation–Electronic Media and Records is removed as a part of the 04 02 edition.

3. Loss Determination

This important part of the coverage form must be understood to purchase the correct amount of insurance and to keep from unpleasant surprises after a loss occurs. It consists of four parts.

a. The amount of a business income loss for a business 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 that the insured could not capitalize on because of the loss.

Example: The wildfires that raged throughout California destroyed over 2,500 homes and scores of businesses. One of these was John’s Hardware. As soon as people returned to their homes and began purchasing building materials to use in making repairs, all the hardware stores in the area scrambled to meet the demand and most doubled their normal sales. John’s Hardware could not include these windfall profits in the determination of its business income loss payment.

• All continuing and operating expenses needed to resume operations at the same level that existed before the loss.

Example: John’s Hardware employed ten people before the loss. John has to pay higher rates and salaries in order to keep them on or hire new employees because of the demand for help after the losses.

• Other pertinent information that applies to the loss. Since every loss is individual and different, the differences in operations and circumstances must be taken into account. The insurance company must have factual data from the insured to substantiate the value of the loss claimed. This includes items such as financial records, bills, invoices, deeds, contracts and any other information of the insured that affects the loss.

b. The amount of an extra expense loss for a business is based on the following:

• Expenses that exceed the normal operating expenses of the business, during the period of repairs, as if there had been no loss. The insurance company then deducts from this amount the salvage value of any property purchased for temporary use when repairs were being made after operations resume and any extra expense paid for by any other insurance written on the same basis as this insurance; and
• All necessary expenses that reduce the business income loss that would have been paid otherwise.

Example: John’s Hardware has an exclusive contract to supply liquid propane gas in the region and will lose that contract if its customers are not supplied. In order to keep the contract and comply with its terms, John rents a large tent from which to run the gas operation and arranges for emergency shipments. Since the loss rendered his trucks unusable, John rents trucks to deliver the fuel. The extra expense portion of the coverage form pays for the rental contracts in addition to the added cost for emergency shipments.

c. Resumption of Operations

• The insurance company reduces the amount of insured business income losses, to the extent that the insured resumes operations to any degree using damaged or undamaged property, including stock and merchandise, and extra expense losses to the extent that the insured can return to normal operations and discontinue using the extra expense coverage.

Example: John’s Hardware is finally repaired, restocked and ready to reopen but John decides to give his employees a week off to rest before the grand opening and to thank them for their hard work. The insurance company does not pay for this delay and it also reduces any business income loss payment. In a similar manner, the rental on the tent and the trucks for that week is not paid because John could have resumed normal operations but did not.

d. Not Resuming Operations

• The last part of this section deals with cases of businesses that do not resume operations promptly or at all. There are many reasons why this occurs and, while the loss is still paid, it is evaluated differently. The insurance company pays only the amount of loss it would have incurred if the insured had resumed operations promptly.

Example: Kenny reluctantly took over his dad's business but his dream was to be a stock car driver. Kenny saw his opportunity when a tornado destroyed the business' building and he took full advantage of it. He decided to use the insurance proceeds to assemble a racing team. The insurance company estimated the loss of income based on Kenny’s accounting records, determined the average length of time needed to rebuild in the community and paid a loss of business income amount that met with Kenny's approval.

4. Loss Payment

Covered losses are paid within 30 days after the insurance company receives the signed and sworn proof of loss, as long as the insured has met all the requirements of the coverage form and the parties have agreed on the amount of the loss or the amount has been determined by an appraisal award.

D. ADDITIONAL CONDITION–COINSURANCE

Coinsurance is a rating credit in the premium calculation and also a clause requiring the insured to maintain an insurance limit at least equal to a specific percentage of the full annual value in order to fully collect partial losses. It is also the penalty applied if the insured does not maintain the required limit. This concept is more difficult to apply to business income losses than to property losses because the loss amount determined is based on future earnings that are subject to a number of variables. Stated as simply and directly as possible, if the business income limit carried is less than the coinsurance percentage shown on the declarations, multiplied by the net income and all operating expenses for the 12 months following the inception of the policy, the actual loss is not paid.

If a coinsurance penalty applies, the formula or steps for determining it are:

• Determine and combine the net income and operating expenses for the 12 months after the inception date of coverage and multiply the combined amount by the coinsurance percentage shown on the declarations;
• Divide the limit of insurance for the location involved by the figure determined in the step above; and
• Multiply the amount of loss by the figure determined in the step above.

The insurance company pays the lesser of the limit of insurance or the amount determined in the last step.

An unusual feature of the form in determining coinsurance is that 12 separate items may be deducted from operating expenses. These are used for coinsurance purposes and are mentioned only in this section. Even if any of these items are deducted in this section, it does not necessarily mean that they are deducted in the section relating to loss determination. The twelve items are:

• Prepaid freight on outgoing shipments;
• Returns and allowances;
• Discounts;
• Bad debts;
• Collection expenses;
• Costs of raw stock and supplies consumed in manufacturing, including transit charges;
• Cost of merchandise sold, including transit charges;
• Cost of other supplies consumed, including transit charges;
• Cost of services from outside parties to resell merchandise that do not continue under contract;
• Power, heat and refrigeration expenses that do not continue under contract if Form CP 15 11 is attached;
• Various payroll expenses if Form CP 15 10 is attached; and
• Certain deductions, depletions and welfare and retirement fund charges based on tonnage.

Example: Priscilla’s Pretties purchases business income coverage on 01/01/06 with a limit of $100,000, subject to 80% coinsurance. Priscilla is having a very good year when a covered loss occurs on 05/01/06. This is because Priscilla entered into a contract on 03/01/06 that nearly doubles sales. While the business personal property limit is increased properly, the business income limit is completely overlooked. After reviewing all of the important factors, variables and deductions, the insurance company concludes that the combined 12-month business income and continuing operating expenses will be $175,000. Priscilla resumes operations on 11/01/06, after absorbing $22,880 of the $80,000 business income loss. In this case, the coinsurance penalty is determined and applied as follows:

• $175,000 (100% value) multiplied by .80 (coinsurance %) equals $140,000.
• $100,000 (limit carried) divided by $140,000 equals .714.
• $80,000 (value of loss) multiplied by .714 equals $57,120 loss payment.
• Priscilla is responsible for the remaining $22,880 not covered by insurance.

The 100% value multiplied by the 80% coinsurance requirement equals $140,000. This means the coinsurance penalty factor of .714 is determined by dividing $100,000 by $140,000. As a result, Priscilla’s Pretties receives only 71.4% of the amount of loss as determined.

Note: Coinsurance does not apply to extra expense and extra expense losses are not reduced because of any coinsurance penalty.

E. OPTIONAL COVERAGES

Three of the four optional coverages listed and described below are actually alternatives to coinsurance. The coverages selected are shown by the appropriate entries on the declarations.

1. Maximum Period Of Indemnity

This is a very simple valuation clause that states that the amount of business income loss and extra expenses incurred in the 120 days after the loss date are covered for up to the limit of insurance shown on the declarations. All other conditions of the policy are unchanged. The small businesses that can easily resume operations within 120 days are well aware of and understand that this approach means no coinsurance rating credit but also no coinsurance penalty. The rating in this approach is more expensive but the final premium may be lower because lower limits of insurance can be purchased.

2. Monthly Limit Of Indemnity

This is a more complicated approach than that of the Maximum Period of Indemnity but it is still not as complicated as the coinsurance method. The insured chooses a percentage represented by the fractions 1/3 for 33 1/3%, 1/4 for 25% or 1/6 for 16 2/3%. These represent the percentage of the limit of insurance available to pay losses for each 30 days that the loss continues. Once the percentage of the limit for the month is reached, payments for that month end and do not resume until the next month.

Example: Gustav’s Cards purchases a $100,000 limit with the 1/4 (25%) monthly limit of indemnity option. 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
Total: $75,000	Total: $75,000	$50,000

Gustav’s Cards absorbs $25,000 of the business income loss because of the timing and amounts of loss in each respective month and the recovery percentage selected.

Note: This penalty only applies to business income. It does not apply to any extra expenses or costs incurred by the insured in connection with a covered loss.

3. Business Income Agreed Value

This option allows the insured to benefit from the coinsurance credit applied to the rating without being concerned about incurring a corresponding coinsurance penalty. The insured completes and signs a business income worksheet and submits it to the insurance company. It then reviews the worksheet and at some point agrees that the values and calculations are acceptable. Any loss that occurs during the policy year is adjusted without regard to the coinsurance condition. If a new worksheet is not provided every 12 months or as required, the agreed value clause lapses and the coinsurance condition reinstated.

4. Extended Period of Indemnity

The Extended Business Income portion of the Additional Coverages section of the coverage form extends coverage for 30 days after business operations resume. Since this may not be a sufficient amount of time for an insured, this optional coverage extends coverage for the number of days shown on the declarations. This option is attractive to and used by the insured that knows it will experience a continuing loss of business due to the loss of contracts and relationships. The insured must evaluate the difficulty of winning back customers after the business resumes operations and the amount of time needed to do so.

Example: Friend’s, Inc. developed a loyal clientele based on its demonstrated ability to provide excellent service on a timely basis. However, Friend's knows its clientele will go elsewhere if its business closes for even a short period of time and that it will take at least six months to resume normal operations and get those clients back. For this reason, Friend's purchases business income coverage with the Extended Period of Indemnity for 180 days.

F. DEFINITIONS

Always thoroughly review all definitions in a policy or coverage form. Coverage can be broadened, restricted or affected in other ways 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. It includes whiskey and alcoholic beverage products being aged unless the coverage form is subject to a coinsurance percentage that applies and is shown on the declarations. It does not include manufactured stock held for sale at a retail outlet insured under this coverage form. While this definition only appears in the Extended Business Income Additional Coverage section of the form, its significance is greater as referred to in the various causes of loss forms. Business income coverage does not apply to damage to finished stock or the time needed to reproduce it.

Example: Krissy Chrismas 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.

2. Operations refer to and include the business operations performed by the insured at the locations listed and described on the declarations. It also applies to the rental condition of a location if the business income coverage includes rental value.

3. Period of Restoration is the period of time that:

• Begins 72 hours after a covered direct loss or damage event that applies to business income coverage or immediately after the time of a covered direct loss or damage that applies to extra expense coverage occurs at a location listed and described on the declarations; and
• Ends on the earlier of the date the property at the listed and described location should be repaired, rebuilt or replaced reasonably quickly and with similar quality material or the date business operations resume at a new permanent location.

Note: Form CP 15 55 can be used to reduce the 72 hours waiting period to 24 hours. Form CP 15 56 can be used to completely eliminate the waiting period. 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 or that requires testing, monitoring, cleaning up, removal, containment, treatment, detoxifying, neutralizing or in any way responding to or assessing the effects of pollutants.

Note: The period of restoration is not cut short or affected by the expiration date of the policy to which this coverage form is attached.

4. Pollutants mean any solid, liquid, gaseous or thermal irritant or contaminant. This includes smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

5. Rental Value is the net income, either profit or loss, from rental income from tenants, including the fair rental value of the insured’s occupancy of its own premises. This also includes continuing expenses. These expenses may include the 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. (04 02 edition change)

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:

Rental income from five tenants	$10,000 ($2,000 per tenant)
Trey and Margo rental value	$2,000
Payroll	$1,500
Contracted utilities	$1,500
Total monthly rental value	$15,000

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

6. Suspension means that business activities slow down or stop completely or the portion of the premises that is untenable if rental value coverage applies.

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

This form is identical to the Business Income (And Extra Expense) Coverage Form except that nearly all references to extra expense are removed. The only extra expense coverage provided is for those expenses incurred that reduce the business income loss. Any such expense is paid in an amount equal to the amount by which it reduces the business income loss.

Example: An underground gas line explosion damages every building along a two-block section of Main Street. Lonnie’s Drug Store knows that its customers need to continue to have their prescriptions filled, so it rents an office trailer and is back in operation within two days. The extra expenses for the office trailer, emergency shipments of drugs and free delivery to customer totals $100,000. The business income loss is reduced by only $25,000 since Lonnie is only resuming part of the operation. Form CP 00 32 covers only $25,000 of the extra expenses. On the other hand, Form CP 00 30 covers the entire $100,000 of the extra expenses.

CP 00 50–EXTRA EXPENSE COVERAGE FORM

Some types of businesses do not actually lose income after experiencing a direct damage loss. They plan to spend any amount necessary to continue their operations, stay in touch with their customers and suppliers and take any other emergency measures necessary to maintain their income stream. Form CP 00 50 covers those expenses. This form is available to the business that does not need the loss of business income coverage offered by Form CP 00 30. Using this form allows the insured to establish a contingency plan, price out the extra expenses needed to operate that plan and then purchase the exact amount of coverage for the period of time required as determined in the plan. However, such an insured might want to consider purchasing coverage under Form CP 00 30, Business Income (And Extra Expense) Coverage Form for a limit that represents 125% coinsurance before purchasing this coverage, paying a higher price and still having a limited loss payment. Since this type of business does not have an actual business income loss, it does not have to be concerned about a coinsurance penalty. In this case, the entire limit of insurance is available to apply to the extra expenses. Note that all the limitations in Form CP 00 30 apply to business income issues and none to extra expense. On the other hand, since Form CP 00 50 is specifically designed to cover the extra expense exposure, the insured is burdened with the restrictions of the Limits of Loss Payment.

CP 00 50 coverages are similar to those of CP 00 30 but a few sections are different. This analysis addresses only the sections that are different.

A. COVERAGE

All references to business income are removed but the insuring agreement is similar. The remaining coverage items are identical except that extended business income is not covered.

B. LIMITS OF INSURANCE

This section is identical to Section B. in CP 00 30.

C. LOSS CONDITIONS

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

3. Limits On Loss Payment is the method used to determine the amount of extra expense and how it is paid out. The basic coverage form pays out the extra expense over a 90-day period in any of three different ways. The insured also has the option to select customized methods with payments extending to as many as 12 months. The method selected is shown on the declarations as a percentage of payment. For example, if the option selected is 40/80/100, payment for the first 30 days is limited to 40% of the limit of insurance. In the second month, the insured is limited to not more than 80% of the limit for the total amount of the loss incurred in the first 60 days. In the third and final month, the insured is limited to 100% of the limit for the total amount of the loss incurred in the entire 90-day period. Note that this approach limits the loss payment. If business operations are suspended for only 45 days, a maximum of 80% of the limit is available. On the other hand, if operations are suspended more than 60 days, the entire limit is available.

Example: Farley Office Supplies has a contract with its top customer that requires Farley to immediately respond to them at any time. Farley has a contingency plan and reciprocal arrangement to share facilities with Infuse Supplies if a loss occurs and to operate out of their location during night hours. When a fire occurs at Farley's location, it activates the contingency plan. During the next 90 days, it pays its employees a 10% bonus to work a third shift. Farley also pays Infuse rent for the use of their equipment and space and 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
First 90 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 is changed slightly because all references to business income are removed.

D. ADDITIONAL CONDITION–COINSURANCE

This condition is removed because coinsurance does not apply to this coverage form.

E. OPTIONAL COVERAGES

Optional Coverages is removed because there are no optional coverages.

F. (D in this form) DEFINITIONS

Section F. Definitions becomes D. Definitions in this form. It is different because the definitions for finished stock and rental value are removed because neither of these terms is used in this coverage form.

ISO TIME ELEMENT COVERAGE FORMS ANALYSIS (06 07 EDITION)

Index

CP 00 30–Business Income (and Extra Expense) Coverage Form Analysis

A. Coverage

1. Business Income

2. Extra Expense

3. Covered Causes of Loss, Exclusions, and Limitations

4. Additional Limitation–Interruption of Computer Operations

5. Additional Coverages

6. Coverage Extension–Newly Acquired Locations

B. Limits of Insurance

C. Loss Conditions

D. Additional Condition–Coinsurance

E. Optional Coverages

F. Definitions

CP 00 32–Business Income (without Extra Expense) Coverage Form Analysis

CP 00 50–Extra Expense Coverage Form Analysis

CP 00 60–Leasehold Interest Coverage Form Analysis

INTRODUCTION

The Insurance Services Office (ISO) time element coverage forms are similar to one another. This article analyzes each of them. The coverage forms evaluated are:

• CP 00 30–Business Income (and Extra Expense) Coverage Form
• CP 00 32–Business Income (without Extra Expense) Coverage Form
• CP 00 50–Extra Expense Coverage Form
• CP 00 60–Leasehold Interest Coverage Form

Note: This analysis is based on the 06 07 edition of these coverage forms. ISO introduced them in most states with an effective date of 11 08. Changes from the previous edition are in bold print.

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

This coverage form begins by stating that certain provisions in it restrict coverage and encourages careful reading of the entire policy to determine all parties’ rights and duties, what is covered, and what is not covered. It also refers to Section F. Definitions. Understanding the definitions is critical to understanding the coverage form, along with the Insuring Agreement and Exclusions sections.

This section also points out that the insurance company uses the terms you and your to refer to the named insured and the terms we, us, and our to refer to the insurance company.

A. COVERAGE

1. Business Income

This section explains that business income consists of two components.

a. The first component is net income that would have been earned. Net income is considered net profit or loss before taxes are paid. It is important to recognize the term “would.” Unlike a physical damage loss, business income is based on assumptions of what would have happened if there was no loss. This term typically causes disputes about the amount of a business income loss.

Example: Paul’s Pony Supplies earned $120,000 during the past 12 months. However, a contract he just signed guarantees a minimum of $250,000 for the next 12 months. If a business income loss occurs, it is based on the current situation (including the signed contract).

Net income can be either a net profit or a net loss. A time element loss can occur even if there is a net loss because the other component of business income is the expenses that continue after a loss (such as payroll).

Example: Marianne is caught in an economic downturn but she is determined to keep going. She has a dozen employees and knows that business will improve in the next quarter. Unfortunately, a fire badly damages her business before the upturn begins. Because she has business income coverage, she is able to continue paying her employees and other continuing expenses at the same time as the direct damage repairs are being made.

b. The second component is net sales value of production. This applies to only manufacturing risks. This term is best understood by reviewing CP 15 15–Business Income Report/Work Sheet. It begins with gross sales. The difference between the beginning and ending inventory value is then added. Finally, any item directly related to the inventory that does not continue if there was no inventory is deducted. Some examples are returns, allowances, bad debts, discounts, collection expenses, and prepaid freight.

Example:

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

There must be a limit on the declarations next to one or more of the following selections. If more than one option is selected, the provisions of the coverage form apply separately to each one selected:

• Business Income (including Rental Value)
• Business Income (other than Rental Value)
• Rental Value Only

The selection made affects rating, loss payments, and potential coinsurance penalties.

This is followed by the coverage form’s statement of what is paid. It pays the actual business income loss the named insured sustains as a result of its business operations being suspended during the period of repair or replacement. The suspension must result from direct loss or damage to property by a covered cause of loss. The loss must occur at a premises and described on the declarations that has a business income coverage limit.

The property can be either building or personal property. However, coverage is triggered only by damage to personal property that is inside a building or outside a building (but within 100 feet of the premises). Such business personal property can be in the open or in or on a vehicle. The time needed to rebuild is the period of restoration as defined.

Example: Overheated baking equipment causes an explosion that badly damages Lorenzo’s Bakery. The business is shut down while repairs are being made. Lorenzo’s policy has a $50,000 business income limit at this location. The direct damage is the result of a covered cause of loss at a listed location that has business income coverage. As a result, coverage applies up to the limit of insurance for the amount of time needed to repair the damage.

Note: The business income coverage form was changed after the first bombing of the World Trade Center in New York City in the 1990s. This was done to recognize the fact that a tenant may not sustain any direct damage yet still have a substantial business income loss because the building occupied is damaged and the tenant's employees and customers do not have access to its premises. As a result of this change, business income coverage applies if the named insured is not the sole occupant of a premises and either the named insured’s portion of the premises (or the area used to gain access to the named insured’s portion of the premises) is damaged.

Example: Pre-Legal Temporary Services’ offices are on the ninth floor of a 14-story building. A major fire damages the building's basement and lobby. Pre-Legal’s customers and employees cannot enter the building or gain access to its premises resulting in a business income loss. The loss is covered because there was damage to the means of access.

2. Extra Expense

a. Extra expense coverage applies at each location listed and described on the declarations that has a business income limit of insurance.

b. Extra expenses are costs beyond normal operating expenses that would not have been incurred unless there was direct physical loss or damage to covered property by a covered cause of loss.

Extra expenses are eligible for reimbursement when they:

• Help avoid or minimize business down time and continue operations at the same or temporary locations. This includes relocation expenses and costs to equip and operate such locations.
• Minimize business down time if operations cannot be continued
• Act to repair or replace property but only when the payment results in reducing the amounts this coverage form pays

Example: Ashland Floral sustains heavy smoke damage five days before the start of the prom season. Not wanting to disappoint its customers, Ashland has flowers shipped in overnight and arranges for a refrigerated unit to store them. The cost greatly exceeds the prices previously quoted for the arrangements but Ashland keeps its customer base (and this is the reason it incurs the expense). The added costs to ship the flowers and lease the refrigerated unit are considered extra expenses.

3. Covered Causes of Loss, Exclusions, and Limitations

The causes of loss covered, exclusions, and limitations that apply are not part of this coverage form. One of the causes of loss forms must be attached. It can be the same one that applies to direct damage coverage or it can be a different one.

4. Additional Limitation–Interruption of Computer Operations

a. There is no coverage for business income loss related to the destruction or corruption of electronic data. However, there is an exception under Additional Coverage–Interruption of Computer Operations.

b. There is no coverage for extra expenses related to the destruction or corruption of electronic data. However, there is an exception under Additional Coverage–Interruption of Computer Operations.

c. This coverage form describes electronic data. It includes (but is not limited to) items stored in computer programs or used in computer software programs. The items can be stored in the computer or on a drive, disk, or other media. Virtually any information, fact, or program that can be stored in and retrieved by a computer is considered electronic data.

Example: Kollectitall's client mailing list is stored on the computer and is also backed up on disks in the office. A fire destroys the computer and every backup disk. Kollectitall sustains a business income loss and an extra expense loss as it attempts to recreate the lost information. None of this loss is covered because of this limitation.

5. Additional Coverages

This coverage form has four additional coverages:

a. Civil Authority (06 07 change)

A covered cause of loss may damage premises other than the named insured's to an extent that the civil authority restricts access to the insured premises. In that case, coverage applies for up to four consecutive weeks. Business income coverage begins 72 hours after the restriction begins. Extra expense is not subject to a waiting period and ends after four weeks or when the civil authority business income coverage ends, whichever is later.

Example: A fire guts Charlie’s Coin Laundry located adjacent to Polly’s Package Liquors. The fire consumes Charlie’s structural framing and the fire chief is concerned that the brick wall next to Polly’s store might collapse. He prohibits access to Polly’s store until the wall can be torn down safely. Polly’s Package Liquors is closed for nine days. Her loss of business income is covered because fire is a covered cause of loss.

However, the only properties to which this additional coverage applies are those located within one mile of the damaged property. (06 07 addition)

Example: Mytell Chemical has a fire. Civil authorities are concerned about the chemical release and evacuate everything within two miles of Mytell. A business within the one mile radius has immediate extra expense coverage and business income coverage after 72 hours. However, a business located beyond the one mile radius (but within the two mile radius) does not have coverage.

Note: This is a significant reduction of coverage that is probably a result of the 09/11/01 Twin Towers collapse business income claims. One mile in a densely populated urban setting may seem to be a large area but is a very small area in less populated suburban and rural settings. The impact could be significant for businesses located in any disaster area where civil authorities may close certain sections in order to maintain control even though many properties may not be damaged. Examples to consider are coastline communities following a hurricane or rural communities following a tornado. Some businesses or communities may be relatively undamaged following a storm but civil authorities prohibit entering them in order to maintain control of the more seriously damaged larger area.

Adding CP 15 32–Civil Authority Changes should be considered. Part B of the endorsement schedule has the flexibility to expand the radius beyond one mile. Insurance companies may not be open to adding the word “unlimited” but may be open to a radius that could include the county where the business is located.

b. Alterations and New Buildings

As with most property coverage forms, this coverage form gives the named insured some automatic business income coverage for new buildings. It also extends coverage for damage to alterations and additions to existing buildings. The named insured can collect income it would have earned from the time the new structure would have been ready if the covered loss or damage did not occur. Coverage also extends to time lost due to damage to (or destruction of) construction equipment or building materials within 100 feet of the premises. This is basically the equivalent of builder’s risk coverage for loss of income. Coverage also applies if extra expenses are incurred because occupancy is delayed.

c. Extended Business Income

(1) Income that operations generate does not usually return to its 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 extra 30 days to cover income lost during the time between resuming operations and reaching the previous level of income. However, there is no coverage for any reduction in income caused by unfavorable business conditions.

This additional coverage does not necessarily begin when the business income coverage ends. It begins when the property (other than finished stock) is rebuilt, repaired, or replaced and operations resume. Business income coverage ends when property should have been rebuilt, repaired, or replaced without stating that operations are resumed. As a result, there might be a gap between the time that business income coverage ends and the extended business income coverage begins.

Example: The covered loss at Bill’s Tin Snipping should have been repaired in 10 weeks. However, Bill takes one of those weeks as vacation, goes hunting, and refuses to talk to the contractor during that time. He reopens 11 weeks after the date of loss. Payments under business income end after 10 weeks and Extended Business Income coverage begins on the date that Bill actually resumes operations (being 11 weeks after the direct loss).

This additional coverage extends business income for 30 days. However, coverage for additional periods can be purchased for an additional premium charge.

Example: Carl’s French Cookerie 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) If the loss involves rental value, coverage begins on the date repairs are complete and ends after 30 days or when the tenant actually moves in, whichever is first. However, coverage does not apply if the lack of rental income is simply due to poor business conditions IF those business conditions were caused by the same cause of loss that caused the policyholder’s damage.

Example: A windstorm damages the Grace Place Apartments. Repairs are complete and the units are ready to be occupied 180 days after the date of the direct damage loss. All 20 of the original tenants had to find other housing after the loss and only five of them return.

• Scenario one: Grace Place offers significant enticements to fill the apartments because the number of units currently available exceeds demand. Even then, it takes over four months before all the units are occupied. Extended Business Income coverage applies because the occupancy issue is related to business conditions that are not directly related to the cause of loss that produced the damage.
• Scenario two: Grace Place offers significant enticements to fill the apartments because the number of units currently available exceeds demand. Even then, it takes over four months before all the units are occupied. 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 that apply to the same items in Additional Limitation–Interruption of Computer Coverage. Coverage applies for business income and/or extra expense due to direct damage to electronic data as the coverage form defines. The limit is $2,500.

Note: This additional coverage is not subject to the same causes of loss forms that apply to other coverages.

• 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. However, coverage does not apply to damage to computer systems manipulated by any employee. This includes temporary or leased employees. Coverage also does not apply if an outside entity specifically hired to work on the system causes the damage.

The $2,500 limit of insurance is an annual aggregate. It applies to all losses sustained during the year for all occurrences at all locations.

Example: Jay’s policy period is 06/01 to 06/01 and there are 10 locations on the policy. Jay’s computer operations sustain a loss at location 1 on 09/01. The total amount of the loss is $2,400. An identical loss occurs at location 2 on 10/01. Only $100 is available to pay for the second loss.

This additional coverage ends when the period of restoration ends.

6. Coverage Extension

This coverage extension rewards the named insured if business income coverage is written at 50% coinsurance (or a higher percentage). It automatically covers business income and extra expense at newly acquired locations. The $100,000 limit per location applies to covered property at all newly acquired locations (other than fairs or exhibitions) for up to 30 days. Premium for the new acquisition is calculated as of the date the property is acquired.

Coinsurance does not apply to this coverage extension.

Note: The 30 day time period ends when the policy expires or the acquisition is reported to the insurance company. As a result, a location acquired just before the expiration date must be reported to the company promptly to avoid a possible lapse in coverage.

B. LIMITS OF INSURANCE

The most the insurance company pays for a single occurrence is the limit on the declarations. Extra expense coverage, alterations and new buildings, civil authority, and extended business income additional coverages are all part of the business income limit on the declarations and do not increase that limit.

Note: Coverage Extension–Newly Acquired Locations and Additional Coverage–Interruption of Computer Operations have their own limits. These limits apply in place of the business income limit. (06 07 change)

C. LOSS CONDITIONS

This section explains the duties the named insured and the insurance company owe to one another. The company can void coverage if the named insured does not honor its duties. The insurance company can be sued or incur other sanctions if it breaches the contract. These conditions are in addition to the Common Policy Conditions and the Commercial Property Conditions.

1. Appraisal

If the named insured and the insurance company disagree on the amount of a claim, either can make a written demand for an independent appraisal. Each party selects an appraiser and the two appraisers select an umpire (or a judge in a court that has jurisdiction appoints one). The appraisers submit their recommendations to the umpire who then reviews only the differences. A decision that any two of these three parties makes is binding on all parties. Each party pays its own appraiser and shares any other common costs. This condition applies only to the value of the claim. It does not determine if the claim is covered.

Note: The insurance company retains its right to deny a given claim.

2. Duties in the Event of Loss

a. This coverage form requires the named insured to take certain actions to minimize a loss or to assist in recovery efforts against parties that may be responsible for the loss. Coverage can be voided unless it complies with all of the following:

• Notify the police (but only if it is possible that a law has been broken).
• Promptly notify the insurance company of the loss and describe the property involved.
• Give the insurance company a description of how, when, and where the loss occurred. This must be done as soon as possible.
• Take all reasonable steps to protect damaged covered property from further loss and keep records of the expenses it incurs to do so. These expenses are paid as a part of the final settlement. However, they do not increase the limit of insurance.

Note: The term “Covered Property” is used only in 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 the expenses paid only if they reduce the loss of income claim?

Example: Jeremy spends $50,000 to protect his property after a windstorm destroys the roof of his building. This is a reasonable amount considering the value of the equipment inside. The Business Income limit is $100,000. Jeremy’s business income loss is calculated at $75,000. This leaves only $25,000 to apply to the expenses he incurred to protect the property.

• Give the insurance company permission to inspect the damaged property and examine the named insured’s books and records. These can be done as often as the insurance company requires (but only if it the inspections and examinations are considered reasonable and not harassment). This may involve taking samples of the damaged property for analysis and making copies of the books and records.
• Send a signed and sworn proof of loss that contains the information the company requests within 60 days following the request.
• Cooperate with the insurance company as it investigates or settles the claim.
• Resume operations as soon as possible if it plans to remain in business.

b. The insurance company has the right to examine any and all insureds. It can examine each insured individually, outside the hearing of other insureds. All answers in response to examination questions must be signed. There may be multiple requests for examination but such requests must be reasonable.

3. Loss Determination

This is a key section that must be understood in order to purchase the correct limit and to prevent surprises after the fact. It is broken into four parts:

a. The business income 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 that 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 was one of those businesses. As soon as people returned to their homes and began to purchase building materials to repair them, every hardware store in the area scrambles to meet the demand and most double 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 needed to resume operations at the same level that existed before the loss

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

• Other pertinent information that applies to the loss. Every loss is unique and differences in operations and circumstances must be taken into account. The named insured must give the insurance company factual data to substantiate the value of the loss claimed. This includes items such as financial records, bills, invoices, deeds, contracts, and any other information that affects the loss.

b. The extra expense loss amount is based on the following:

• Expenses the named insured incurs that are more than normal operating expenses. Any salvage value of property purchased for temporary use (and any expense any other insurance written on the same basis as this insurance paid for) is deducted from any payment.
• Any other expense that is both necessary and that reduces the business income loss

Example: John’s Hardware has the exclusive contract to supply liquid propane gas in the region. John will lose that contract if its customers are not supplied. In order to keep the contract (and comply with its terms), John rents a large tent he uses to run the gas operation and arrange for emergency shipments. John rents trucks to deliver the fuel because the loss made his trucks unusable. The extra expense portion of the coverage form pays for the tent and truck rental contracts in addition to the added cost for emergency shipments.

c. Resumption of Operations

If the named insured can resume operations (even partially) but does not, the business income loss is reduced accordingly. Similarly, if it is determined that the business can resume normal operations, the extra expense loss is reduced.

Example: John’s Hardware is finally repaired, restocked, and ready to reopen. However, John decides to give his employees a week off to rest before the grand opening and to thank them for their hard work. The insurance company does not pay for this delay and it also reduces any business income loss payment. Similarly, the rental on the tent and the trucks for that week is not paid because John could have resumed normal operations but did not.

d. Not Resuming Operations

This section deals with cases of businesses that do not resume operations promptly or at all. There are many reasons why this occurs and, while the loss is still paid, it is evaluated differently. The insurance company pays only the amount of loss it would have incurred if the named insured had resumed operations promptly.

Example: Greg reluctantly took over his dad's business but he dreamed of being a stock car driver. He saw his opportunity when a tornado destroyed the business' building and he took full advantage of it. He decided to use the insurance proceeds to assemble a racing team. The insurance company estimated the loss of income based on Greg’s accounting records, determined the average length of time needed to rebuild in the community, and paid a loss of business income amount that Greg approved.

4. Loss Payment

The insurance company must pay the loss amount within 30 days after it receives the signed and sworn proof of loss. The named insured must have complied with all the coverage form’s requirements and the parties must have either agreed on the amount of loss or an appraisal award determined the amount.

D. ADDITIONAL CONDITION–COINSURANCE

Coinsurance is a rating credit in the premium calculation that the named insured receives in exchange for its promise to maintain a certain limit. It is also the penalty applied if the required limit is not maintained. Coinsurance is a common concept with respect to direct damage property coverages.

Coinsurance is more difficult to apply to business income losses. This is because any loss payment is based on future earnings that are subject to a number of variables. This means that the limit of insurance must be forward looking.

Coinsurance applies because the named insured agrees to accept a premium credit in exchange for its promise to maintain a certain limit. The promised limit must equal the net income and all operating expenses for a 12-month period multiplied by the coinsurance percentage selected. The named insured can obtain higher coinsurance credit by insuring to higher percentages (and correspondingly higher limits of insurance).

The coinsurance percentages available are 50%, 60%, 70%, 80%, 90%, 100%, or 125%. The 125% option reflects the fact that the business income limit must also include a limit for extra expense. 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.

This additional condition explains how the penalty is determined if the named insured’s limit is less than the limit required to comply with the coinsurance condition. The coinsurance limit is determined by multiplying the coinsurance percentage by the net income and operating expenses for the 12 months following the policy inception date. Losses are subject to a penalty if the limit of insurance is less than the limit required to meet the coinsurance condition.

This coverage form allows 12 separate items to be deducted from operating expenses when determining compliance with the coinsurance condition. These are used for coinsurance purposes and are stated in only this section. Any items in this section that are deducted are not necessarily or automatically deducted in the section that relates to loss determination. The twelve items are:

• Outgoing prepaid freight
• Allowances and returns
• Discounts
• Bad debts
• Collection expenses
• *Raw stock (along with factory consumable costs)
• *Merchandise sold costs
• Other consumed supplies costs
• **Services purchased from others that that were intended to be resold
• **When CP 15 11 is attached, power, heat and refrigeration expenses
• **When CP 15 10 is attached, payroll expenses
• The following mining property depletion deductions:
• Royalties
• Actual calculated depletion (not based on percentages)
• Retirement and welfare fund charges based on tonnage
• Costs of hired trucks

*Transportation charges are part of these items.

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

There are four steps to determine the penalty:

Step 1. Determine the net income and operating expenses for the 12 months after the inception date of the policy.

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

Step 3. Divide the limit of insurance by Step 2.

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

The insurance company pays the lesser of the limit of insurance or the amount determined in the last step.

Example: Lana’s Boutique purchases business income coverage with a $100,000 limit on 01/01. This limit is subject to 80% coinsurance. Lana is having a very good year because she entered into a contract on 03/01 that nearly doubled sales. She increases the business personal property limit correctly but completely overlooks increasing the business income limit. Unfortunately, a hailstorm seriously damages her building and its contents and she must cease operations for three months. After reviewing all of the important factors, variables, and deductions, Frugal Insurance Company determines that the combined 12-month business income and continuing operating expenses amount to $175,000.Lana’s amount of loss is $80,000. A coinsurance penalty is assessed because her limit of insurance is only $100,000. The coinsurance penalty is determined as follows:

Step 1. The business income and operating expenses is $175,000.

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

Step 3. $100,000 divided by $140,000 equals .714.

Step 4. $80,000 multiplied by .714 equals $57,120.

As a result, Lana incurs a $22,880 coinsurance penalty.

Note: Coinsurance does not apply to extra expense. Extra expense losses are not reduced because of any coinsurance penalty. If the named insured does not anticipate a business income loss (but could sustain a significant extra expense loss), choosing a high coinsurance percentage in order to reduce the rate could provide a price advantage with little or no coverage penalty.

E. OPTIONAL COVERAGES

Three of the four optional coverages listed and described below are actually alternatives to coinsurance. The coverage or coverages selected are entered on the declarations.

1. Maximum Period of Indemnity

This valuation clause states that a business income loss and extra expenses incurred in the 120 days after the date of loss are covered for up to the limit of insurance on the declarations. All other conditions are unchanged. Most small businesses understand this method because there are no coinsurance penalties. However, it should not be used if the business cannot resume operations within 120 days. The rating in this approach is more expensive but the final premium may be lower because the named insured can purchase lower limits of insurance.

2. Monthly Limit of Indemnity

This approach is more complicated than the Maximum Period of Indemnity but less complicated than the coinsurance method. The named insured chooses a percentage represented by the fractions 1/3 (for 33 1/3%), 1/4 (for 25%) or 1/6 (for 16 2/3%). These are the percentages of the limit of insurance available to pay losses for each 30 days that the loss continues. Upon reaching the percentage of the limit for the month, payments end and do not resume until the following month.

Example: Gustav’s Cards purchases a $100,000 limit with a 1/4 (25%) monthly limit of indemnity. 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 because of the timing, amounts of loss in each respective month, and the recovery percentage selected.

Note: This limitation applies to only business income. It does not apply to any covered extra expenses or costs the named insured incurs.

3. Business Income Agreed Value

This option allows the named insured to benefit from the coinsurance credit applied to the rating without being concerned about incurring a corresponding coinsurance penalty. The named insured completes and signs a business income worksheet and submits it to the insurance company. The company’s underwriter reviews the worksheet and agrees to accept the values and calculations. Any loss that occurs during the policy year is adjusted without regard to the coinsurance condition. However, the agreed value clause lapses and the coinsurance condition reinstates if a new worksheet is not provided every 12 months (or as required).

If the limit of insurance 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.

4. Extended Period of Indemnity

This optional coverage amends Additional Coverages–Extended Business Income. It changes the 30 days after business operations resume to the number of days entered on the declarations. It is designed for businesses that expect to continue to experience a continuing loss as they work toward rebuilding their client and contract bases. Under this optional coverage, the named insured must evaluate the difficulty of winning back customers after the business resumes operations and the amount of time needed to do so.

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 of time. It also knows that it will take at least six months to resume normal operations and get those clients back. This is why Friend's purchases business income coverage with an Extended Period of Indemnity of 180 days.

F. DEFINITIONS

Defined words are used throughout the coverage form. Restricting their meaning to the definition in the coverage form gives all parties a clearer understanding of the coverage intended. The Business Income (And Extra Expense) Coverage Form has six definitions.

1. Finished Stock

This is stock the named insured manufactures. However, there are two exceptions:

• Whiskey and other alcoholic products are considered stock unless there is a coinsurance percentage for business income on the declarations.
• Stock that the named insured manufactured and that is held for sale at any retail location premises that this coverage form insures is excluded.

Note: This term is used in only Additional Coverage–Extended Business Income. This section states 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 that exclude business income loss due to damage to finished stock and the time to reproduce it.

Example: Krissy Chrismaz has a retail outlet adjacent to its manufacturing plant that has $200,000 in finished stock on its premises. The manufacturing plant itself has $500,000 in finished stock. A tornado damages stock at both locations. Coverage applies for the time needed to replace the stock at the manufacturing plant. There is no coverage for the time needed to replace the stock at the retail outlet. The building and personal property coverage form covers the direct damage to the finished stock. Extended Business Income coverage begins when Krissy resumes operation, although it needs 180 days just to replace the damaged finished stock.

2. Operations

a. These are the business activities that occur at the premises described on the declarations.

b. It also means whether or not a tenant can occupy the premises (if business income includes rental value).

3. Period of Restoration

This is the period of time that coverage applies. This begins either:

a. 72 hours after the time of covered loss or damage (with respect to business income coverage)

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 completely eliminate it.

b. Immediately after the time of covered loss or damage (with respect to extra expense coverage)

Note: Under either of these, coverage ends on either the date when property at the described premises should be repaired, rebuilt, or replaced or the date 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 or replacing must be done on a timely basis and with substantially similar materials.

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 because of enforcing any ordinance, regulation, or law that regulates construction, use, repair, or demolition of any structure.

Note: This can cause a significant gap in coverage.

The period of restoration also does not include any increased time period required for testing, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, or in any way responding to or assessing the effects of pollutants.

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

4. Pollutants

These are irritants and contaminants such as smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste of a solid, liquid, gaseous, or thermal nature. Waste includes property to be disposed of, as well as property to be recycled, reconditioned, or reclaimed.

5. Rental Value

a. This is the net income (either profit or loss) from tenant(s) that occupy the premises. It is also the fair rental value of the named insured’s occupancy of its own premises.

b. It is also that premises’ normal operating expenses that continue. They include (but are not limited to) payroll and amounts that tenants are legally obligated to pay that become the owner’s obligation during the period the premises cannot be occupied.

Example: Trey and Margo own a strip shopping center. They have five tenants in addition to their own shop in the center. Heavy ice and snow accumulations cause the roof to cave in and everyone must vacate during the 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	$1,500
Total monthly rental value	$15,000
Trey and Margo have a rental value loss of $15,000 per month until the roof collapse damage is repaired.

6. Suspension

This is either of the following:

a. Cessation (or slowdown) of the named insured’s business operations

b. If rental value coverage is included, it means when tenants cannot occupy all or any portion of the insured premises.

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

This form is identical to CP 00 30–Business Income (And Extra Expense) Coverage Form except that nearly all references to extra expense are removed. The only extra expense coverage provided is for expenses incurred that reduce the business income loss. Any such expense is paid for an amount equal to the amount by which it reduces the business income loss.

Example: An underground gas line explosion damages every building along a two-block section of Main Street. Mallory O’Donovan at The Corner Drug Store knows that his customers must have their prescriptions filled. For this reason, Mallory rents an office trailer and is back in operation within two days. The extra expenses for the office trailer, emergency shipments of drugs and free delivery to customer totals $100,000. The business income loss is reduced by only $25,000 since Mallory resumes only part of the operation.
CP 00 32 covers only $25,000 of the extra expenses. If CP 00 30 had been used, all $100,000 of the extra expenses would have been covered.

CP 00 50–EXTRA EXPENSE COVERAGE FORM ANALYSIS

Some types of businesses do not actually lose income after they experience a direct damage loss. They must spend any amount necessary to continue their operations, stay in touch with their customers and suppliers, and take any other emergency measures needed to maintain their income stream. CP 00 50 covers those expenses. It is available to businesses that do not need the loss of business income coverage that CP 00 30 offers. Using this form allows the named insured to establish a contingency plan, price out the extra expenses needed to operate it, and then purchase the exact amount of coverage for the period of time the plan requires.

However, such insureds might think about purchasing coverage under CP 00 30, Business Income (And Extra Expense) Coverage Form for a limit that represents 125% coinsurance. This is in place of purchasing CP 00 50, paying a higher premium, and still having a limited loss payment. These types of business do not have an actual business income loss and do not have to be concerned about a coinsurance penalty. In this case, the entire limit of insurance is available to apply to the extra expenses.

Note: All limitations in CP 00 30 apply to business income issues, not to extra expense. However, CP 00 50 is specifically designed to cover the extra expense exposure so the named insured is burdened with the restrictions of the Limits of Loss Payment.

CP 00 50 is similar to CP 00 30 except for four sections that are different. This analysis addresses only the differences in the four sections.

A. COVERAGE

The insuring agreement is similar but all references to business income are removed. The Covered Causes of Loss and Additional Limitation–Interruption of Computer Operations and Coverage Extensions are unchanged. Additional Coverages is changed only by removing 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 is the method used to determine the amount of extra expense and how it is paid. The basic coverage form pays extra expense over three time periods: 30 days, 60 days, and over 60 days. The named insured can have 40% paid during the first 30 days, a total of 80% paid over the first 60 days, and a total of 100% when the period of restoration extends beyond 60 days. This is entered on the declarations as 40/80/100. The other basic options are 35/70/100 or 100/100/100.

The named insured also has the option to customize the way payments are made and extend them to up to 12 months. CP 15 07–Expanded Limit of Loss Payment must be attached and an increasing sequence of payouts entered on the endorsement schedule. The first month cannot be more than 40%. Each 30 day period percentage must be higher than the previous percentage until reaching 100. The final percentage must be 100%. The maximum number of entries is 12. For example, a 12 month option could be 10/20/30/40/50/60/70/80/90/100/100/100. A four month option could be 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 periods.

Example: Farley Office Supplies has a contract with its top customer that requires Farley to immediately respond to it at any time. Farley has a contingency plan and reciprocal arrangement to share facilities with Infuse Supplies if a loss occurs and to operate out of their location during night hours. A fire occurs at Farley's location that activates the contingency plan. During the next 105 days of the period of restoration, it pays its employees a 10% bonus to work a third shift. Farley also pays Infuse rent for the use of its equipment and space and 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 is changed slightly because all references to business income are removed.

D. DEFINITIONS

This is Section F in CP 00 30 because coinsurance does not apply and CP 00 50 does not have provisions for “Additional Condition–Coinsurance.” The only difference is that the definitions for finished stock and rental value are removed because this coverage form does not use either of those terms.

E. OPTIONAL COVERAGES

Optional Coverages is removed because there are no optional coverages.

CP 00 60–LEASEHOLD INTEREST COVERAGE FORM ANALYSIS

This coverage form was not updated with the 06 07 edition. This analysis is of the 06 95 edition.

INTRODUCTION

This coverage form begins by pointing out that the insurance company uses the terms you and your to refer to the named insured and the terms we, us, and our to refer to the insurance company. It also refers to Section F. Definitions. Understanding the definitions is critical to understanding the coverage form.

This coverage form pays the financial loss the named insured incurs when a covered cause of loss damages the property it leases and causes a favorable lease to be cancelled.

Note: Financial loss includes more than just the loss of an advantageous lease.

A. COVERAGE

The statement of coverage clearly expresses that it pays for loss of the named insured's leasehold interest in a given property. Coverage applies only if the lease is cancelled because of direct damage to property on the premises due to a covered cause of loss. Coverage does not apply if another reason causes the favorable lease to be cancelled, even if the named insured sustains a financial loss.

Examples:

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

· Oldskool Dance Studio loses its fantastic lease agreement after a city building inspector closes down the building it rents until Oldskool complies with a mandatory safety ordinance. This financial loss is not covered.

1. Covered Leasehold Interest

This means the following:

a. Tenants' lease interest

This is the difference between the rent the named insured pays and the actual rental value of the described premises it leases.

b. Bonus payments

These are the unamortized portions of a cash bonus that the named insured does not receive as a refund. A cash bonus is money the named insured pays to acquire the lease. However, it does not include any form of rent or security.

c. Improvements and Betterments

These are the unamortized portions of payments the named insured made for any improvements or betterments. It does not include any value for improvements and betterments that other insurance covers (to the extent of that other insurance). They are fixtures, alterations, installations, or additions the named insured made to the part of the building it occupies that it does not own (or that it acquired at its expense) that it cannot legally remove.

d. Prepaid rent

This is the unamortized part of any advance rent payment that will not be refunded. However, this does not include regular rent payments due at the beginning of each month or for any other designated rental period.

2. Covered Causes of Loss

This is based on the covered causes of loss form on the declarations. The named insured can choose from any of the causes of loss forms available under the Commercial Property Program.

B. EXCLUSIONS AND LIMITATIONS

This is the same as in CP 00 30. Any of the causes of loss forms can be applied.

C. LIMITS OF INSURANCE

1. Applicable to Tenants Lease Interest

a. When the lease is cancelled, payment is limited to the named insured’s net leasehold interest as of the date of the 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. The net leasehold interest amount is lower each month because it is based on the gross leasehold interest multiplied by the leasehold interest factor for the remaining period of the lease. A proportionate share applies to less than monthly time periods.

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

Example: Carrie has a 10-year lease on an artist’s loft. She paid a $1,000 bonus payment, paid $15,000 for the landlord to put in improvements, and received a preferred lease of $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 that she must execute a new lease if she wishes to return. Comparing her loft to others in the area, the rental value 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	= $700
8% Leasehold interest factor	71.4531
Calculated net leasehold interest loss	= $50,017
Calculated difference between new lease and 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. When the lease is cancelled, 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 named insured to sign and continue at the same location. If the named insured agrees to the new terms, the most paid is the named insured’s loss or the net leasehold interest, whichever is less.

b. The net leasehold interest amount is lower each month because it is based on the gross leasehold interest multiplied by the leasehold interest factor for the remaining period of the lease. The leasehold interest factor is part of a schedule on an endorsement attached to the policy.

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 sustain a loss if she takes the new lease because the landlord has offered to renew the lease without requiring a bonus payment or new improvements or betterments. Since her loss payment is the lesser of the loss sustained and the net leasehold interest, she receives nothing. Carrie is upset! Without the offer, she would have received $50,017 for part 1 plus $12,799.68 for part two, or a total of $62,816.68 for her loss. Because of the landlord’s lease offer, the most paid for this loss is $48,000.

D. LOSS CONDITIONS

The Appraisal, Insured’s Duties When a Loss Occurs, and Loss Payments Loss Conditions are the same as in
CP 00 30. The Loss Determination condition in CP 00 30 is not part of 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 on the premises to conduct the tenant’s customary operations. Buildings under construction or being renovated or constructed are not vacant.

b. Vacancy Provisions–Subleased Premises

If the named insured 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 is protected against freezing)
• Breakage of building glass
• Water damage
• Theft (or attempted theft)

The limit of insurance that applies is reduced by 15% for any losses from other covered causes of loss.

E. ADDITIONAL CONDITION

The coinsurance condition in CP 00 30 does not apply. The following applies to only 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 cancelled, 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 on the cancellation date.

Step 2: Multiply Step 1 by the rate for the coverage period.

Step 3: Subtract Step 2 from the premium paid.

The insurance company pays the named insured the refund determined in Step 3 but only if the insurance company cancels the coverage. However, the refund may be less if the named insured requests cancellation.

F. DEFINITIONS

None of the Definitions in CP 00 30 apply to this coverage form. Three new definitions are added.

1. Gross Leasehold Interest

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

Example: The named insured'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. The named insured's gross leasehold interest is $4,000.

2. Monthly Leasehold Interest

This is the monthly portion of the total of covered bonus payments, improvements and betterments, and prepaid rent divided by the number of months that remain on the lease when the expenditure is made.

Example: A $30,000 bonus payment is made 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. For a tenant’s lease interest, net leasehold interest is the present value of the named insured's gross leasehold interest for the months that remain on the lease (at the rate of interest on the leasehold interest coverage schedule). It is calculated by multiplying the gross leasehold interest by the selected interest factor for the remaining period of the lease.

Example: 24 months remain on a 10-year lease. The effective interest rate selected is 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. The formula is simpler for bonus payments, improvements and betterments, and prepaid rent. The monthly leasehold interest is multiplied by the number of months that remain in the lease.

Example: Using the example above, multiply the monthly leasehold figure of $250 by 24 months for a loss amount of $6,000.

COMPARE: ISO TIME ELEMENT COVERAGE FORMS: 2007 EDITION TO THE 2002 EDITION

INTRODUCTION

Insurance Services Office (ISO) filed the 2007 edition of the commercial property program in most states with an effective date of 11 08. This edition includes several significant changes. The following highlights some of them.

CP 00 30–BUSINESS INCOME (WITH EXTRA EXPENSE) COVERAGE FORM

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

CP 00 50–EXTRA EXPENSE COVERAGE FORM

Coverage Restriction

Additional Coverage–Civil Authority is changed in two ways:

1. The damaged property (to which civil authority restricts access to the undamaged insured property) must be within one mile of the insured property. The prior edition did not have such a restriction.

2. The coverage period is extended to four weeks (from three weeks).

Coverage Enhancement

The limit for Additional Coverage–Interruption of Computer Operations is considered a limit separate from any other time element limit. As a result, it provides additional coverage limits.

CP 10 30–CAUSES OF LOSS–SPECIAL FORM (compare 04 02 edition to 06 07 edition)

Exclusion 1.

e. Utility Services

This exclusion has a number of important changes:

• Communication and water are added as specifically listed utility services.
• The definition of communication includes Internet, cellular, satellite, and similar services.
• Power surge that results from power failure is excluded.
• Coverage is excluded even if the utility services equipment that fails is on the insured premises.
• This exclusion now applies to business income and extra expense coverage.

g. Water

CP 10 32–Water Exclusion Endorsement is a mandatory endorsement that replaces g. Water. This was introduced with a 08 08 edition date but is listed here because it is significant.

Exclusion 2.

a. Artificially Generated Power

This exclusion is broader. It lists magnetic and electromagnetic energy in addition to electricity. Cellular, satellite, and similar services are added as disrupted devices that are excluded.

k. Collapse

This exclusion is rewritten to clarify what is actually excluded. Previous editions required reading the exclusion in conjunction with the section on Additional Coverage–Collapse to fully understand it. It is now an exclusion that stands on its own but without any change in coverage intent.

Exclusion 4.

a. Business Income (And Extra Expense) Coverage Form, Business Income (Without Extra Expense) Coverage Form, and Extra Expense Coverage Form

The utility services exclusion [formerly item (1)] is deleted. However, this does not mean that utility services are covered. This exclusion was eliminated because Utility Services item 1. e. now applies to business income and extra expense. The lead in language to exclusion 1.e. means that this exclusion is now more restrictive than the old one.

Exclusion 5–Additional Exclusion

An exclusion is added for Loss or Damage to Products. It excludes loss or damage to any product that occurs because of any error or omission made throughout the life of a product (including while it is at outsourced locations).

Additional Coverage–Collapse

This coverage is completely rewritten to be clearer. There are no significant changes within the wording but it uses additional paragraphs that utilize an easier-to-read sentence structure.

CP 10 30–CAUSES OF LOSS–SPECIAL FORM (compare 06 07 to 10 12 edition)

Changes to Exclusion 1

a. Ordinance or Law

The 06 07 edition excluded the enforcement of ordinance or laws. This version also excludes compliance with an ordinance or law.

b. Earth Movement

Tremors and aftershocks are added to the list of events that the term “earthquake” includes.

An explanatory note is added that earth movement is excluded, regardless of how it is caused. Earth movement may be caused by nature or by any other force.

g. Water

CP 10 32–Water Exclusion Endorsement was previously a mandatory endorsement. Its language is now incorporated into CP 10 30.

1. The first part of this exclusion has four terms that are unchanged, three that are modified, and one new term compared to the exclusion being replaced. The terms that are unchanged are "flood," "surface water," "tides," and "overflow of any body of water." The new term is ‘’tidal water." The modified terms are:

• "Waves" is broadened to be "waves, including tidal wave and tsunami." "Tidal wave" was included in the previous version but as a stand-alone term not as part of the term "waves."
• "Or their spray" is broadened to "or spray from any of these."
• "All whether driven by wind or not" is broadened to "all whether or not driven by wind, including storm surge."

Note: "Tsunami" and "storm surge" are new terms. Judicial interpretation will be based on common usage and dictionary definitions because the endorsement does not define either term.

2. The second part of this exclusion is unchanged. Mudslide or mudflow is excluded. The previous edition also excluded mudslide and mudflow.

3. The third part of the exclusion is broadened in two ways. The first is the how and the second is the what. In the
06 07 edition, water had to back up or overflow. In the 10 12 edition, the water can be discharged in other ways (and those other ways are not described). Secondly, in the 06 07 edition, the water came from a sewer, drain, or sump. In the 10 12 edition, it can also come from a sump pump or related equipment.

4. The fourth section is unchanged and describes the exclusion of damage from underground water seeping into doors, foundations, basements, etc.

5. This is a new section. It introduces the term "waterborne material." Damage caused by this material carried by waters described in sections 1, 3, and 4 above (or by any material moved or carried by mudslides or mudflow described in section 2 above) is excluded.

ISO adds a paragraph that explains when this entire exclusion applies. It states that it applies whether any of the events are caused by an act of nature or "otherwise." In order to clarify the term "otherwise," ISO provides an example that uses the terms "dam," "seawall," "levee," "boundary" or "containment system" and states that failure of any of them to contain the water is an "otherwise" type situation. However, it is important to note that by using this example format, ISO does not limit the exclusion to failure of only those specific items. The goal is to define the term "otherwise" as broadly as possible.

Change to Exclusion 2

h. Internal Dishonest Acts

The term employee is broadened to also include temporary workers. This means that previously acts by temporary workers could have been covered, but now they are excluded.

The phrase “dishonest or criminal acts” explicitly includes theft.

Damage by authorized representatives who destroy property is added.

Changes to C. Limitations

1.g. Vegetated Roofs

This new limitation is added because lawns, trees, shrubs, and plants that are part of vegetated roofs are now covered property. This limitation excludes coverage for lawns, trees, shrubs, or plants within the vegetated roof that sustain any of the following damage:

• The atmosphere or the soil is too damp or too dry.
• The temperature changes too often or is considered extreme.
• Disease
• Hail, frost, rain, snow, ice, or sleet

3. Limited Theft Coverage for Specific Type of Property

The sub-limits for theft can be increased.

Change to E. Additional Coverage–Limited Coverage for Fungus, Wet Rot, Dry Rot, and Bacteria

This coverage is not available for trees, shrubs, plants, or lawns that are part of vegetated roofs.

Change to G. Definitions

The water damage portion of the definition of specified causes of loss is changed significantly.

Water damage is broadened to include damage caused by accidental water discharge or leakage damage caused by wear, tear, and breakage of off premises water and sewer pipes. The pipes must be part of a municipal system.

This definition must work with the Water Exclusion. There is no coverage if flood causes the breakage or if flood makes a breakage worse.

CP 15 29–ELECTRONIC MEDIA AND RECORDS (TIME ELEMENT COVERAGE)

Important: This form was withdrawn with the introduction of the 04 02 edition. This endorsement modifies a section of the CP 00 30 and CP 00 32 that no longer exists. We continue to offer this brief analysis since it still applies to prior program editions.

INTRODUCTION

Both Business Income Coverage Forms (CP 00 30 with Extra Expense and CP 00 32 without Extra Expense) have an important limitation on loss caused by damage to electronic media and records.

Recovery for consequential loss is limited to the period between the occurrence of the direct damage and the date when restoration, repair, rebuild, or replacement has been completed with reasonable speed and similar property. However, coverage for consequential loss due to damage to Electronic Media and Records is further limited to a maximum of 60-days from the date of direct damage.

Many businesses are increasingly dependent upon electronic records, networks and the Internet. Hopefully, they are taking care to have backups. But for insureds that make extensive use of electronic media and records, this limitation may severely curtail the protection provided by the Business Income coverage. Vulnerable businesses that come to mind are organizations that rely on computerization that aids much manufacturing and design equipment.

ELECTRONIC MEDIA AND RECORDS

Electronic Media and Records are defined in the underlying coverage forms to mean any electronic data processing, recording or storage media (such as tapes, films, discs, drums, or cells), the data stored on such media, or the programming records used for electronic data processing and electronically controlled equipment. For those who need more time to recover from an interruption, the endorsement, Electronic Media And Records CP 15 19, offers the insured the option to either increase the number of days in the time limitation or to delete the entire limitation completely.

SCHEDULE

If the first block is checked, the endorsement eliminates the underlying limit on Electronic Media and Records entirely. There is a space to schedule the premises and buildings and to indicate the number of days if the insured wishes to increase the 60-day period.

If no premises or buildings are scheduled on the CP 15 29, coverage will be triggered through the Declarations. Of course, if the option to increase the number of days has been selected, the new number must be indicated. There is no minimum or maximum number of days allowed. However, the pricing for the extension only provides two factors. One is for increasing the number of days from 60 to 180. The other is for eliminating the limitation entirely.

CP 15 45–UTILITY SERVICES–TIME ELEMENT

(June 2016)

INTRODUCTION

Most businesses depend on utilities that provide water, electricity, heat, air conditioning, and communication services to conduct their operations. Many experience a major indirect loss of income or incur substantial extra expenses to continue operations in different ways or at other locations when any of these critical utility services is interrupted.

Many businesses incur extra expenses to resume operations quickly in an attempt to reduce the amount of their business income loss. They may change to an auxiliary power source or physically move to a temporary location to continue operations or provide services.

The Insurance Services Office (ISO) time element coverage forms do not insure these indirect (and often costly) exposures to loss when the interruption of power is due to a cause of loss that occurs off premises. However, coverage can be added by including CP 15 45–Utility Services–Time Element. It can apply to the Business Income Coverage Forms CP 00 30 or CP 00 32 or CP 00 50–Extra Expense Coverage Form.

Note: The 06 07 changes to the utility services exclusion in CP 10 10, CP 10 20, and CP 10 30 should cause more businesses to consider attaching this endorsement. The separate utility exclusion that applied to business income and extra expense utility services was eliminated and merged into the direct damage utility services exclusion. This exclusion eliminates coverage for off premises utility failure. It also excludes coverage if power failure originates on premises but involves equipment the utility supplies. As a result, without this endorsement, if lightning damages a transformer a utility owns, there is no coverage for utility services, even if the transformer was on the insured’s premises.

SCHEDULE

This endorsement is very flexible and offers several options the named insured can select to cover the type or types of utility interruption coverage it desires. The options available are:

• Water Supply Property
• Communication Supply Property
• Power Supply Property
• Wastewater Removal Property (10 12 addition)

Communication Supply Property or Power Supply Property coverage requires that the named insured choose if it wants coverage for damage to overhead transmission lines. Downed power lines are frequently the reason for communications and power being interrupted. However, there is a significant premium charge to insure them.

The causes of loss that apply to this endorsement can differ from the causes of loss that apply to the basic time element coverage form. The named insured may decide that the basic causes of loss form is sufficient for this coverage even though the special causes of loss form applies to the basic time element coverage form.

Coverage applies only if there is a limit of insurance entered for the coverage selected and only at the scheduled location and building. This limit applies to each type of utility service and should be based on reasonable estimates of the length of time that a service interruption will result in lost income, extra expense, or both. Coinsurance does not apply to this coverage. As a result, the limit selected is not subject to a coinsurance penalty.

This coverage cannot be written on a blanket basis.

A. Coverage

CP 15 45 extends the coverage the Business Income or Extra Expense Coverage forms provide to apply to interruption or suspension of operations at the covered premises due to interruption of a covered utility service to that premises. The interruption must result from direct physical loss or damage from a covered cause of loss on the endorsement schedule. As noted above, these causes of loss do not have to be the same causes of loss that apply to the time element coverage form that applies. The direct physical loss or damage must be to utility property located outside a covered building listed on the endorsement schedule.

Examples:

• Priority Ducks schedules one location on CP 15 45 and selects Causes of Loss–Basic Form. The option selected is for Power Supply Property not including overhead transmission lines. Lightning strikes Priority’s building, resulting in a power outage. This endorsement does not apply because the property damaged is not the designated utility property located outside the covered building.
• Priority Ducks asks for a review and second opinion on the cause of loss. It is determined that strong winds blew down power transmission lines and that caused the outage. However, CP 15 45 does not provide coverage because Priority did not purchase coverage to include overhead transmission lines.
• Priority Ducks learns its lesson and beefs up its utility interruption coverage. It changes the covered causes of loss to Causes of Loss–Special Form. It adds Water Supply Property coverage. It also adds Communication Supply Property coverage including overhead transmission lines. It changes Power Supply Property coverage to also include overhead transmission lines. When a tornado damages the main water pumping station and blows down telephone and electrical transmission lines, Priority’s coverage applies to the resulting loss of income and extra expense to its location up to the limit of insurance.

B. Exception

The coverage provided does not apply if the utility service interruption damages, destroys, or corrupts electronic data, as the basic coverage form defines it. Coverage for electronic data is available in Electronic Data Processing coverage forms or policies.

C. Utility Services (10 12 change)

This section of the endorsement lists and describes eligible covered property for each utility service.

1. Water Supply Services

This means water mains and pumping stations that supply water to the covered premises.

2. Wastewater Removal Property (10 12 addition)

This is not a system whose primary function is to drain storm water. It is utility property such as sewer mains, pumping stations, and other facilities that remove wastewater and sewage from the premises this endorsement lists and describes. This term includes any facility that holds, treats, or disposes of wastewater or sewage.

However, heavy rainfall or flooding may cause water or sewage discharge that results in service to the premises being interrupted. In that case, there is no coverage for that interruption.

3. Communication Supply Property

This is property that supplies communication services to the covered premises. Examples are telephone, radio, microwave, or television services. Communication (including fiber optic) transmission lines, coaxial cables, and microwave radio relays (excluding satellites) are also covered.

Overhead transmission lines are included only if checked as covered on the endorsement schedule.

4. Power Supply Property

This means property that supplies electricity, steam, or gas to the covered premises. It includes transformers, transmission lines, utility generating plants, substations, and switching stations but is not limited to just these.

Overhead transmission lines are included only if checked as covered on the endorsement schedule.

D. Transmission Lines

A line used to transmit communication service or power is a transmission line. When a term such as “distribution line” is used to describe a line, it is a transmission line according to this endorsement’s terms.

E. Coinsurance

The Coinsurance Additional Condition in the time element coverage form that applies does not apply to the coverage this endorsement provides.

F. Limit of Insurance

The limit of insurance on the endorsement schedule is the only limit that applies to the coverage this endorsement provides.

Note: The limit of insurance is part of, (not an addition to) the limit of insurance the basic time element coverage form provides. It is a sub-limit within the total limit of insurance. As a result, a given business may have to determine if its overall business income limit is sufficient.

Example: Priority Ducks' business income coverage limit is $100,000. CP 15 45’s limit is $25,000. A major loss that results from a covered cause of loss includes an on-premises business income loss and an off-site utility services business income loss in addition to direct damage to the location. The claim investigation reveals that the total amount of business income loss to the location is $115,000. Priority is sure that this loss is fully covered because of the two limits of insurance. It is very unhappy when it learns that the $25,000 limit is part of the $100,000 business income limit, not in addition to it, and receives a check for only $100,000.

RATE AND PREMIUM CALCULATION

ISO publishes loss costs for water supply property, wastewater removal property, power supply property, and communications supply property coverage. It also publishes loss costs for overhead transmission lines. These loss costs apply to only public utilities. Each insurance company develops its own loss costs and rates when this coverage is written on private utility services property. All loss costs are multiplied by the specific insurance company’s loss cost multiplier to determine the final effective rate. The limit of insurance for the coverage options selected is multiplied by the final effective rate for the covered causes of loss and added together to arrive at the final premium for the endorsement.

CP 15 31–ORDINANCE OR LAW–INCREASED PERIOD OF RESTORATION

(June 2016)

INTRODUCTION

The common understanding of business income coverage is that it provides the insured with the income lost while the damaged covered property is being repaired. It begins when the property is damaged and ends when the property is fixed. Unfortunately, as with most common understandings, an insured may be very surprised with the coverage gaps revealed when a loss actually occurs.

PERIOD OF RESTORATION DEFINED

The definition of period of restoration in CP 00 30–Business Income (and Extra Expense) Coverage Form, CP 00 32–Business income (without Extra Expense) Coverage Form, and CP 00 50–Extra Expense Coverage Form provide a time boundary for coverage. Under all of these forms, coverage ends on either the date when property at the described premises SHOULD BE repaired, rebuilt, or replaced, or when the business reopens at a new location. This wording becomes even more problematic with the requirement that repairs, rebuilding, or replacing must be accomplished at a reasonable pace and with materials of similar quality.

A further limitation in the definition of the period of restoration is that if the period is extended because of a need to comply with ordinances or laws that regulate construction, use, or repair of the building there is no coverage during that extended time. This applies even if property must be torn down.

Example: Muesling Medical Group occupies a 90-year-old building. Vandals start a fire that damages half of it. Muesling applies for a building permit and is informed that all hallways must be widened and bathrooms brought up to current A.D.A. guidelines. There is coverage for the building upgrades thanks to CP 04 05–Ordinance or Law Coverage. However, Muesling is surprised when it learns that there is no coverage for the additional six weeks of lost income.

CP 15 31–ORDINANCE OR LAW–INCREASED PERIOD OF RESTORATION

CP 15 31–Ordinance or Law–Increased Period of Restoration can fill the ordinance or law gap in coverage within the definition of period of restoration. The form has two parts.

A. The first part of the endorsement explains the coverage being added.

1. There must be a physical damage loss that triggers the business income and/or extra expense coverage. This endorsement does not provide additional coverage or eliminate any exclusion. The other terms of the coverage form must be in force and there must be a loss based on those terms before this endorsement can be used.

Example: Replicated, Inc. owns a three-story frame building in the town of Middlebury. A windstorm destroys the upper two stories but the bottom floor can be salvaged.

2. There must be an ordinance or law in force at the time of loss that either regulates building construction or requires tearing down a structure even though it is not damaged.

Example: A Middlebury town ordinance requires that all buildings in the downtown area be built of at least masonry noncombustible construction. This means that Replicated must tear down the entire building based on the ordinance.

3. Enforcing the law or ordinance must increase the amount of time that the named insured’s operations are suspended.

Example: The estimated time to repair Replicated’s building as it was is five months. Complying with the ordinance will add two additional months to the building time.

4. Ordinances or laws that this endorsement covers do not include any that relate to pollutants, fungus, wet or dry rot, or bacteria.

Example: The Middlebury town ordinance requires that all buildings be tested to determine if lead or asbestos is present before they can be demolished. This endorsement does not cover the additional time for such testing.

5. The named insured must sustain a loss due to the increased period of restoration.

Example: Replicated, Inc. cannot continue operations until the building is rebuilt. As a result, it sustains an additional two months loss due to having to comply with the ordinance.

B. The second part of the endorsement replaces the definition of period of restoration.

Items a. and b. are identical to those in the coverage form. The change is at the end. It provides a positive statement of coverage instead of stating what the period of restoration does not include. While reaffirming Part A’s information, its coverage applies only to the time needed to meet the ordinance’s minimum standards.

Example: Replicated, Inc. decides to rebuild the building with fire resistant material instead of the minimum required masonry noncombustible. The upgrade increases the building time by two weeks beyond the 2 months needed to simply upgrade to meet code. The additional two weeks of lost income is not covered because it exceeds the minimum standards.

OTHER CONSIDERATIONS

This endorsement is totally dependent on the coverage to which it is attached. It does not have a unique limit or time extension. This means that modifications to the basic coverage may be needed in order to utilize this endorsement effectively.

Example: Replicated, Inc. has coverage with a $100,000 limit on a 1/6 monthly limitation form. When the loss occurs, Replicated cannot use the building for six months plus two more months because it must comply with the town ordinance. Even though it has coverage for the extended time period, Replicated uses its full limit in the first six months and there is nothing left to pay for the additional two months.