GROSS EARNINGS/BUSINESS INCOME AND EXTRA EXPENSE COVERAGE:
There are two basic types of Business Income and Extra Expense Coverage available under the CP 00 30 and CP 00 32, one with Extra Expense and the other without Extra Expense aka Expenses to Reduce Loss. These are the former Gross Earnings forms, now called Business Income, which include coverage with a coinsurance clause or the Monthly Period of Indemnity. Both options have their advantages and disadvantages.

I prefer the classic Gross Earnings coverage, now called Business Income, because it takes into account seasonality and has no time limit other than the Period of Restoration definition. On occasion, I hear that there is a one-year limit – which is not true. While the Monthly Limit of Indemnity Coverage can be too limited, the advantage is that there is no Coinsurance Clause.

INSUFFICIENT LIMITS ON BUSINESS INCOME COVERAGE:
With the Business Income coverage, we continue to find limits that are insufficient to comply with the coinsurance clause. This may happen because agents fail to provide clients with the Business Income Worksheet Form and/or the clients never fill it out. The latter can result from insureds who are just negligent or, perhaps, cannot understand it.

I prefer to think of the insurable value as plain old “Gross Profit”, which is generally defined as Sales less Cost of Goods Sold. In the case of a manufacturer, do not subtract the category of Manufacturing Expenses.

NEVER SUBTRACT ANY PAYROLL UNLESS YOU ARE EXCLUDING IT:
Never subtract payroll unless you are excluding it, because most losses are partial in nature and businesses tend to retain their employees during the Period of Restoration. If your clients are considering excluding Ordinary Payroll, I suggest that you show them the definition of Key Payroll. Key Payroll (which is very restrictive and could be interpreted to exclude key employees who are not departmental heads) and Office Staff are categories that usually continue regardless of the severity of a loss. This is especially true for all labor in today’s labor market.

DETERMINING INSURABLE VALUE - SALES LESS VARIABLE EXPENSES:
If you are talking to the insured’s accountant or financial executive, another simple definition of insurable value is sales less variable expenses. This would include but not be limited to such expenses as bad debts, credit & collection, freight-out, outside commissions. It is the variable expenses that you subtract to determine the insurable value, not the potential abated expenses in the case of a loss.

INCLUDE AN AGREED AMOUNT ENDORSEMENT:
The way to eliminate the potential coinsurance problem is to include an Agreed Amount Endorsement. When computing the loss, the policy defines the criteria for coverage by the formula of Net Income plus Continuing Normal Operating Expenses, including payroll. We “old-timers” continue to use the “Gross Earnings less Abated Expenses” as the measure because it is simpler and quicker to calculate. There are some insurers who fail to recognize that you will arrive at exactly the same amount with either definition, which ISO has confirmed.

WHEN TO OPT FOR BUSINESS INCOME AND/OR RENTAL VALUE:
The policy contains three options, (i) Business Income including "Rental Value", (ii) Business Income Other than "Rental Value", and (iii) "Rental Value".

• If you are insuring the building and business under the same policy, opt for (i) Business Income including "Rental Value". Be sure to include the name of both the realty owner and business owner, usually with an "ATIMA".
• If the insured’s business is just a tenant, then opt for (ii) Business Income Other than "Rental Value". If you are insuring the building under the same policy, never choose this option.
• If you are just insuring the building, then opt for (iii)"Rental Value".

There is a serious interpretation issue with “Rental Value”. Whereas the policy states “If option (iii) above is selected, the term Business Income will mean “Rental Value” only”, we interpret this to mean that abated expenses do not apply, which insurers generally resist. Since Rental Value is enclosed with quotation marks, you must read the definition that is included in the form.

Please note that the definition includes:

So make certain that your insured includes all of these components when calculating the insurable value for the year of the policy.

DOWNSIDES TO THE MONTHLY PERIOD OF INDEMNITY:
Because there is no coinsurance applicable, the Monthly Period of Indemnity appears attractive, however, there are a number of downsides.

When you select a basic Monthly Period, calculated by multiplying the Limit by the fraction shown, typically 1/3 and 1/4 in the Declarations, it is important that the resulting dollar limit be high enough to cover the peak months, i.e., November and December for retail businesses.

Since the fraction ultimately can determine the amount of time that the insurance will be available, it is important to estimate the worst case. In other words, "if the building in which this business is located suffers a severe or total loss, how long will it take to restore this property i.e, the insured location? A good example of this is the recent catastrophic fire in Chestnut Hill, MA.

It is difficult to imagine that most premises can be rebuilt within 3 or 4 months, which is inferred with a 1/3 and 1/4 fraction (by the denominator). Between the time to adjust, make funds available, and totally rebuild, six months is probably an absolute minimum in most, if not all, cases.

PERIOD OF RESTORATION CHANGES:
In January 1996, ISO made some major changes that included a 2^nd option to the Period of Restoration and the language "Ends on the earlier of". Below is the old definition (1) and the added definition (2):

If a business were able to move to a new, permanent location in less time than it would take to rebuild/repair the old location, the insurer now benefits by this shortened period. For those businesses that are unable immediately to return to both their normal revenue levels and operating expenses, they will be at a disadvantage. We have been in discussion with ISO for over a year, asking them to review this change.

If I were involved in a situation like this, I would first attempt to obtain the insurer's assent that the Period of Restoration be (1), the time to repair, rebuild or replace the damaged location. Otherwise it might be financially impractical for an insured to relocate. By agreeing to this, the insurer really has nothing to lose and everything to gain.

It has also been our experience that regardless of how much effort insureds expend resuming partial operations, (which is their obligation), the insurer always seems to find a way to argue that it should have taken less time. Insurers tend to ignore the adjustment and payment components, which should be considered in calculating the Period of Restoration. There is no legal precedent of which we are aware that supports the insurers' position. On the other hand, there are legal cases that include these components when the insurer is the cause of such delays.

CHANGE IN THE DEFINITION OF "PROPERTY" OR "PREMISES":
The other major change deals with the definition of "property" or "premises". It now reads as follows:

If you are a tenant, your premises is the portion of the building which you rent, lease or occupy, including:

1. All routes within the building to gain access to the described premises; and
2. Your personal property in the open (or in a vehicle) within 100 feet.

Your clients might be tenants in a building and suffer no damage to the portion of the building that they occupy and access routes might not be affected; yet the building is shut down. This would be true in the case of damage to the main utilities. Some insurers argue that Dependent Property Coverage remedies this problem. Does this mean that you must purchase Dependent Property Coverage against every tenant in the building? For example, if your customer has a restaurant on the ground floor and there is damage on the upper floor(s) that causes tenants to vacate, apparently no coverage. After talking to counsel, we believe that a Court might reject the intent of both of these changes.

RECOMMEND ADDITIONAL EXTENDED BUSINESS INCOME:
Most extended Business Income includes 30 extra days of coverage after reopening subject to the policy language. Most businesses and rental properties take longer to return to normal after reopening, so you might consider recommending buying extra Extended Business Income.

BLANKET COVERAGE FOR BUSINESSES WITH MORE THAN ONE LOCATION
For retail businesses with one or more locations and a separate distribution center or manufacturers with multiple locations, it is very important to blanket the coverage in order for the policy to respond to a loss of profit that is incurred at both locations.

ORDINANCE OR LAW - INCREASED PERIOD OF RESTORATION CP 15 31:
Last but not least… It is very common today to see Ordinance or Law, Demolition, and Increased Cost of Construction Coverages. Are you aware that the basic Business Income Coverage excludes the extra period of time associated with this phase of the repairs? Recently, we have been involved in a number of cases where this was a prime factor. There is an endorsement Ordinance or Law - Increased Period of Restoration CP 15 31 that deletes this exclusion. It must go hand-in-hand with Ordinance or Law Coverage.

THE BUSINESSOWNERS FORM:
A short comment about the BusinessOwners Form. Clearly, it has many advantages such as no coinsurance but with a 12-Month Limit of Liability. If there were a total loss to the insured property and it would take more than one year to replace, this is a disadvantage.

Think worst case! The most recent BP 00 02 01 96 now gives 30 days of Extended Business Income Coverage but provides only 60 days of coverage for Ordinary Payroll. Again, most losses cause the insured to be out of business for more than 60 days, and most businesses want to continue to pay their Ordinary Payroll! We call your attention to the revised language on defining the "described premises:

As previously stated, this still presents a problem to a tenant in a building who suffers very little or no damage to their premises and whose access is not affected. ISO has indicated that this language will be included in the next revision of the CP forms.