CO 1001–COMMERCIAL
OUTPUT PROGRAM INCOME COVERAGE PART
(June 2025)
This form is considered
complete only when it is attached to the CO 1000– Commercial Output
Program–Property Coverage Part, as there are multiple references to the
property coverage part within the income coverage form.
The CO 1050 and CO
1051–Schedules of Coverages used with the property coverage part are also used
with Income Coverage.
Related Article: Commercial
Output Program Declarations and Schedules of Coverages
Three coverage options
are available within the following four coverage selections. One option must be
checked on the schedule of coverages for coverage to apply.
Earnings include rents
when the option for earnings, rents, and extra expense is selected. However,
earnings means only rents when the option for only rents and extra expense is
selected.
This coverage protects
against the named insured losing income because business has been interrupted
by a direct physical loss. The loss or damage must be to covered property and due
to a covered peril. The damage must occur at a covered location or within 1,000
feet of a covered location. Property within that radius may be in the open or inside
a vehicle.
When the named insured occupies but does
not own a building, “covered location” includes access to its portion of the
building and its business personal property situated either within 1,000 feet
of the covered location in the open or within a vehicle.
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Example: Minx’s Office Network is located on
the 11th floor of a 20-story building. A fire occurs in the
building’s lobby. Access to the building and the lobby’s elevators are denied
during the two weeks required to make repairs. Because the elevators are the
only access to Minx's premises, coverage applies for Minx's income loss even
though it did not incur a direct physical loss. |
Coverage applies during
the restoration period, which begins when the interruption occurs and ends when
operations are actually resumed or should have been resumed. The restoration
period is defined in the Definitions section of the property coverage part.
Related Article: CO 1000–AAIS
Commercial Output Program – Property Coverage Part Analysis
NOTE: The interruption is
not covered if it is voluntary. It is covered only when the interruption is
deemed necessary.
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Example: A small fire
occurred at Patty’s warehouse. Scenario
1: With
a minimal amount of effort, Patty could have continued operations. However,
she decided it was a good excuse to give all of her employees a week off
without pay. This income loss would not be covered. Scenario 2: The fire
occurred in the central processing area of the warehouse. The most efficient
way to repair the damaged property and clean up the warehouse was to close
the warehouse for a week. This income loss would be covered. |
Coverage applies to
earnings, which consist of two separate components that are determined and then
combined. The first component is the loss of net income. Net income is the
profit or loss before income tax that would have been earned during the period of
restoration. Net income can be either negative or positive.
The second component is
the cost of expenses that continue during the restoration period. This is
important because during periods when operations are conducted at a loss,
certain expenses continue, including payroll expense, utility payments, and
other contractual obligations.
The two components (net
income and continuing expenses) are combined to determine the total amount of
earnings covered. If the result is less than zero, the insurance company does
not pay anything.
Related Court Case: Business
Interruption Insurance Held Not To Indemnify When Net Loss Exceeded Operating
Expenses
When the named insured is a manufacturer,
a third component is added. The sales value of any goods that would have been
produced during the restoration period must be added to the first component,
net income.
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Example: Red Ribbon Manufacturing,
Inc. typically operates at a loss until the fourth quarter of each year, as
it prepares for holiday sales. A loss occurs in May, and, thanks to numerous
expedited payments, Red Ribbon is back in operation by August. The net income during the restoration period is a
loss of $40,000. The sales value of the goods that would have been produced
is $25,000, and the continuing expenses were $20,000. The total earnings loss
is ($25,000 – 40,000) + $20,000 = $5,000. |
Extra expenses
incurred during the restoration period are covered if they are necessary and
would not have been incurred if not for the covered direct physical loss. Extra
expenses incurred to avoid or mitigate the interruption of business operations,
allowing them to continue at either the covered location or a substitute
location, are also covered.
Relocation expenses
and the costs to operate at a substitute location are considered extra expense.
If operations must be stopped, coverage applies to any extra expenses incurred
to minimize the duration of the interruption.
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Example: Red Ribbon is adamant that its business will not
shut down because it must fulfill contracts with a November delivery date. An
alternative building is located, and all employees are asked to report to
work. Red Ribbon locates all necessary equipment, contacts suppliers, and
arranges for expedited delivery. They post large signs around the damaged
location providing directions to the new location. Red Ribbon adds extra
staff to maintain contact with existing customers, ensuring all contracts
remain in place. Red Ribbon never ceases
operations, but does incur many extra expenses to keep going. All expenses
are covered, provided they are considered reasonable and are within the limit
of insurance. |
Extra expenses incurred to repair, replace,
or restore any property are covered, but only up to the amount that reduces the
amount of the loss of earnings claim. Similarly, extra expenses incurred to research,
replace, or restore information on damaged valuable papers or data records are covered,
but only to the extent that these extra expenses reduce the income loss.
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Example: Red Ribbon hired researchers to recreate the
valuable papers and records. Having these records will assist them with the
workflow and manufacturing processes. These recreated records enable the new
operation to quickly get started and reduce income loss by $12,000. Red
Ribbon paid $10,000 to the researchers, so this extra expense is paid in
full. |
All of the exclusions
and limitations in the Coverage Property Part apply to this coverage. In
addition to those, the following apply only to this coverage:
Loss or damage to stock
the named insured manufactured is not covered if it is ready to pack, sell or
ship. The time needed to reproduce such stock is also not covered. However,
finished stock awaiting sale at an owned retail location is not excluded.
NOTE: CO 1000–Commercial
Output program–Property Coverage Part, Manufactured Stock Valuation is based on
the net selling price of manufactured goods. That valuation basis offsets this
exclusion. Having this exclusion in place prevents duplication of coverage.
If the termination,
suspension, or lapse of lease agreements, licenses, contracts, or orders
lengthens the time it takes for a business to resume operations after a covered
loss, there is no coverage for that extended period. However, if the
suspension, lapse, or cancellation results directly from the interruption of
the insured's business, that extended period is covered.
Once the restoration
period ends, any coverage granted in this section also ends.
Any extension of the
period during which the business remains non-operational, caused by strikers or
other individuals at a covered location disrupting rebuilding or efforts to
resume operations, is not covered.
NOTE: This applies only to
such interference at the covered location. There is no mention of coverage
exclusion if the interference occurs elsewhere and hampers the rebuilding
process.
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Example: Minx Office Network looks forward to
getting back to its offices and resuming operations. However, contract
negotiations between the city and the sanitation workers union break down. Scenario 1: The union workers picket Minx's
building. Union contractors refuse to cross the picket line, and the final
repairs to the lobby are delayed by an extra week. Minx Office Network is not
paid for the week lost as a result of the strike. Scenario 2: The union workers picket Minx’s
contractor’s location. Union contractors refuse to cross the picket line to
pick up their needed tools and contractor’s equipment. Minx Office Network is
paid because the strike is not at its location. |
These extensions are
listed on CO 1050—Schedule of Coverages or CO 1051—Schedules of Coverages with
Equipment Breakdown and Spoilage Coverage. Each has a limit or limitation that
may also be displayed on the Schedule of Coverages. If a different limit or
limitation appears on the Schedule of Coverages, it supersedes and replaces the
limit or limitation shown in this coverage part. These extensions are part of
the Income Coverage limit and not in addition to it.
When a civil authority
will not permit access to a covered location or a dependent property location,
there is both earnings and extra expenses coverage, subject to the following
conditions:
·
The
access denial is due to a direct physical loss to property not located at a
covered location.
·
The
property at the other location must experience direct physical loss due to a
peril covered under the policy.
·
The
maximum duration is 30 consecutive days, starting from the day the order is
issued, which counts as the first day. The period can be extended beyond 30
days with an entry on the Schedule of Coverages.
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Example: Wildfires pose a significant threat to Quartro's
business district, leading the fire marshal to issue an evacuation order for
all buildings. Initially, Ling Manufacturing resisted the evacuation;
however, after three days, the company complied and left the area. During the
evacuation period, Ling's loss of earnings is covered, along with the
additional expenses incurred when it rents space in a neighboring town to
continue operations. Ling has only 27 days of coverage because it chose not
to leave immediately. |
Earnings coverage
extends for an additional 90 days after business operations resume or until the
date the insured's operations reach the same level that existed before the loss
occurred. The length of time can be increased on the Schedule of Coverages.
NOTE: This extension is important. Typically, income coverage ends when business
operations resume; however, most businesses do not immediately return to their
pre-loss income level. This extension provides some breathing room, allowing
business operations to return to their pre-loss level.
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Example: Michel’s Restaurant was closed for two months
because of damage caused by a wind loss. When the restaurant reopened, Michel
discovered that many of his regular customers were going to other
restaurants. It took two months of advertising, coupons, and dinner specials
to entice the regulars to return. This income coverage extension made up the
difference between the net income before and after the loss for those two
months. |
The following six
Supplemental Income Coverages apply separately to each insured location. Each
coverage has its own limit as specified in this coverage form, but can be
adjusted to the limit stated on the Schedule of Coverages. The adjusted limit
will apply in lieu of the limit indicated below. All limits for the
Supplemental Income Coverages are separate from the Income Coverage limit and
are not part of it. This is the only limit available for the supplemental
coverage.
When computer hacking
or a virus causes a direct physical loss or damage to computers or the named
insured’s computer network or its website, and a loss of earnings or extra
expense occurs because of it, there is coverage. There is also coverage when
the virus or hacking results in access to the named insured’s website, computer,
or network being denied.
The following limits the
coverage provided when data records or proprietary programs:
NOTE: Examples of
confidential information include customer information, processing methods, and
trade secrets.
The waiting period for
the insured's loss of earnings under this supplemental coverage is 12 hours
after the direct physical loss or damage to computers, networks, or websites.
The waiting period can be changed on the schedule of coverage. Extra expense
coverage is not subject to a waiting period.
The limit of insurance
is $25,000 in a single occurrence. However, there is an aggregate limit of
$75,000 applying to each 12-month policy period.
If
the named insured incurs a business interruption because of a covered loss at a
dependent location, earnings and extra expense coverage is provided for up to
$100,000 in a single occurrence.
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Example: Here & Gone is a discount gift
retail operation. First Warehouse provides over 70% of the goods Here &
Gone sells. A severe windstorm destroys all the stock at First Warehouse. Here
& Gone experiences a dramatic reduction in business because its supplier
is shut down. Here & Gone’s loss of earnings is covered by this
supplemental income coverage. |
NOTE: CO 1204–Income
Coverage From Dependent Locations–Separate Limits and CO 1298–Income Coverage from Dependent Domestic and Foreign Locations
endorsements are available to specifically schedule dependent coverage
locations and limits specific to them. When they are used, this supplemental
coverage is replaced.
Earnings and extra
expenses are covered when the business is interrupted due to direct physical
damage to an off premises utility covered property. The utility must not be
owned by the named insured, and it must be located off premises. The
interruption must be caused by a covered peril. The utility services can
include power, gas, water, or telecommunications.
The coverage includes
damage to overhead transmission lines unless checked as excluded on the
Schedule of Coverages.
The waiting period for
the insured's loss of earnings is 12 hours after the direct physical loss or
damage to the property owned by the supplier, unless a different period of time
is entered on the Schedule of Coverages. No waiting period applies to extra
expenses incurred by the insured.
The limit of insurance is $10,000 in any
one occurrence.
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Example: A truck hits a transformer, resulting in the loss
of all electricity at Colby’s Restaurant. The accident occurs at 4:00 a.m.,
two blocks away from the restaurant. The electric utility works as quickly as
it can to repair the damage, but it takes 24 hours to restore full electric
power to Colby's. Colby’s receives payment for its loss of income beginning
at 4:00 p.m., 12 hours after the time of the accident. |
If the period of
restoration is increased because of the enforcement of any law or ordinance that
requires the removal of pollutants from land or water at a covered location,
this coverage applies subject to the following:
·
The
applicable law or ordinance is in effect at the time of loss.
·
The
pollution is at a covered location.
·
The
pollutant release was caused by a covered peril.
·
The
pollutant release occurs during the policy period.
There is no extension
of coverage if the increased time is caused by the enforcement of any law or
ordinance requiring the named insured to test for or record the presence of
pollutants unless the testing is directly related to the extraction of
pollutants from land or water.
The most paid in a single occurrence or
at a single location is $25,000.
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Example: A fire occurs at Gleeful Motors. Due to the fire,
various oils and other products seeped into the soil and the retention pond
behind the business. Local ordinances hold businesses responsible for
cleaning up any pollutant spills. The cleanup extends the restoration period
by two weeks. There is coverage for the two weeks, but for no more than
$25,000. Testing is required to verify the cleanup is complete. This extends
the restoration period by an additional three days. Coverage continues to
apply, but only if the total earnings and extra expense pollutant loss is
less than $25,000. |
If the named insured is
assessed contract penalties because it cannot complete a project or fill an
order in the manner prescribed in a contract, earnings coverage is extended to
pay that penalty. The reason for the penalty must be the direct result of
physical loss or damage to covered property caused by a covered peril at a
covered location.
The most paid in a single occurrence is
$25,000. However, the most paid for all losses over a 12-month period is
$100,000.
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Example: Moyer Tire has a contract with Ready Truckers to
supply Ready with tires within 12 hours of it placing an order. Moyer incurs
a $1,000 penalty each time it fails to meet the contract's terms. A fire at
Moyer keeps it out of business for four weeks, and it fails to meet the contract
terms ten separate times during this period. This Supplemental Income
Coverage covers the total of $10,000 in penalties incurred by Moyer. |
If direct physical loss to covered property
in transit, on exhibition or in the possession of sales representatives is
caused by a covered peril and causes an earnings loss, there is coverage.
Coverage applies only during the restoration period and is limited to $10,000
per single occurrence.
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Example: Pam typically receives 25% of her
orders during the Beekeepers Association's annual meeting. Instead of
transporting the booth and exhibition material on her own, Pam hires a
trucking firm to do it for her. The transporting vehicle is stolen, and Pam
has nothing to exhibit; as a result, she experiences a significant loss of
earnings. This Supplemental Income Coverage provides $10,000 to apply to her
loss of earnings. |
The property coverage part,
What Must Be Done In Case of Loss condition, applies to the Income Coverage
Part. The following additional condition applies only to this coverage part.
The named insured must resume all or
part of its business operations as soon as possible after a covered loss if it
intends to continue in business.
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Example: Heavy February snow causes the roof of Mavis'
factory to collapse. The factory is in St. Paul, Minnesota, so Mavis gives
her staff a winter vacation and travels to Florida to contemplate her next
move. Because Mavis does not resume business operations as soon as possible,
the insurance company may not pay any of the earnings lost. |
The following three
areas are considered when determining the value of an earning loss:
NOTE: Earnings losses are
based on projections, estimates and certain assumptions. As a result, if the
loss is relatively short in duration, the named insured and the insurance
company usually agree on the value of the loss fairly quickly. On the other
hand, losses of greater duration can become contentious, especially if the business
experiences seasonality or volatility.
The insurance company
anticipates that all efforts will be made to resume operations promptly. If the
insured delays or fails to restart operations, the insurer will only cover
income losses for the period the insurer estimates was necessary for the business
to recover.
Related Court Case: Trade Center
Firm's Business Measured By Resumption There
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Example: Continuing the example
above, Mavis went to Florida instead of
resuming operations immediately, but once she returned, she worked
diligently. The roof was replaced, and the plant was in full operation on
July 1. The insurance company maintained that operations could have resumed
on May 1 if Mavis had stayed in town, attended to business, and not gone to
Florida. Mavis maintained that installing a roof in Minnesota during the
winter is difficult and that the time required was not related to her being
in town. |
If the income loss is a dependent
location loss, the earnings are reduced by the amount that could have been saved
by resuming operations using other customer or supplier sources.
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Example: Owen’s Store relies on Mavis’ factory for 60% of
its inventory. When Mavis' factory was shut down for five months, Owen was
unable to restock his supplies, resulting in a dependent location income loss
of $15,000. However, the insurance company discovered that Owen could have
sourced the necessary supplies from any of three alternative suppliers if he
had chosen to do so. Consequently, the insurance company reduced the payment
for the dependent location loss to $5,000. |
The insurance company considers the
salvage value of any property purchased for temporary use during the
restoration period and deducts its value from the amount of loss determined for
extra expense when evaluating the extra expenses incurred by the insured.
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Example: Polly’s Drug Store purchased a trailer to use as a
temporary pharmacy so she could continue serving her pharmacy customers after
a covered loss. The total extra expense loss was $50,000, but the $20,000
salvage value of the trailer was deducted from that amount. Polly was paid
only $30,000. |
The property coverage part
“How Much We Pay” condition applies to the Income Coverage Part. In addition, the
most the insurance company will pay for the combination of earnings, extra expense,
and rents arising from a single loss is the Income Coverage limit of insurance
on the Schedule of Coverages.
The property coverage part
“Loss Payment” condition applies to the Income Coverage Part.
The property coverage part
“Other Conditions” applies to the Income Coverage Part. The following
additional condition applies only to this coverage part.
If the named insured
and the insurance company cannot agree on the loss amount, net income, payroll,
or operating expenses, either party may request a determination through the
appraisal process outlined in the property coverage section, Other Conditions,
Appraisal.