Risk Primer

Risk & Insurance, July, 2001 by Charles H. Cox

Business Interuption--Part 2

This month, we'll continue a review of the coverage limitations found in ISO's business income and extra expense coverage form when written in conjunction with ISO's causes of loss special form and ways to address these limitations and fine tune the coverage for your needs.

* Ordinance or law coverage. Exclusions are not always found in the exclusions section of a policy and this is the case when it comes to the exclusion of coverage for business interruption and extra expense losses caused by compliance with ordinances or laws.

If the reconstruction or repair of a building takes longer to accomplish in order to comply with ordinances or laws, ISO's time element coverage forms will not pay for the resulting loss of income or any extra expenses incurred above normal operating expenses to continue operations. This limitation of coverage is found in the definition of "Period of Restoration."

The period of restoration is the time during which business income and extra expense losses are paid. According to the ISO forms, for business income losses, the period begins after a specified number of hours (the deductible) following the physical damage or, in the case of extra expense, immediately after the physical damage (no deductible applies to extra expense coverage). The period of restoration then ends on whichever comes earlier: the date when the property "should be repaired, rebuilt or replaced with reasonable speed and similar quality or the date when business is resumed at a new permanent location." The period of restoration does not, however, include "any increased period required due to the enforcement of any ordinance or law that regulates the construction, use, or repair, or requires the tearing down of any property."

* ISO's ordinance or law. An increased period of restoration endorsement is available for an additional premium and it amends the definition of the period of restoration so that it specifically includes "any increased period required due to the enforcement of any ordinance or law that regulates the construction, use, or repair, or requires the tearing down of any property." It does not, however, include "loss caused by or resulting from the enforcement of any ordinance or law which requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of 'pollutants.'" This is the same exclusion that exists in ISO's time element coverage forms.

When selecting this optional coverage, it will be necessary to adjust the amount of business income coverage to reflect this extended period of indemnity. Some non-ISO forms include an extended period of indemnity in connection with ordinances or laws, but they may be subject to a specific sublimit.

* Dependent properties. Coverage under all of ISO's time element coverage forms is based on an actual loss of income due to the necessary suspension of named insured's operations. In some cases, however, a company's operations are dependent on another firm that is totally independent of the named insured.

Coverage is available for these situations under ISO's business income from dependent properties, broad form, or business income from dependent properties, limited form. The former provides coverage with the same limit that protects the named insured while the latter imposes a separate limit for the named insured's dependent location(s). In either case the form stipulates the type of dependent location(s) that are covered.

Such locations can be contributing locations (suppliers of the named insured); recipient locations (buyers of the named insured's product); or manufacturing locations (locations that manufacture products for delivery to the named insured's customers under a contract of sale).

These are just some of the coverage limitations and ways to address them. Business income and extra expense coverage can be fine-tuned to address the needs of virtually any business enterprise.

Charles H. Cox is president of Aldrich & Cox Inc., an independent risk management and employee benefit consulting company in Buffalo, N.Y.