Business income coverage omission prompts review

Rough Notes, May 2000 by McCormick, Roy C

"My store and inventory are insured, but I'm concerned about loss of business when the tourist season is just beginning." The owner of a popular gift store in a major resort area made this statement when his building, fixtures and merchandise were destroyed by fire.

Concerns caused by occurrences of this kind suggest that there should be frequent, careful reviews of commercial insurance accounts, with attention to the exposures of each and the coverages in effect for them. Loss of income can be devastating and proper coverage for it belongs at the top of the list in a review, although other needs and pertinent coverage should be double-checked.

When a vulnerable account does not include insurance for loss of earnings, it probably was not overlooked; rather, it is likely that the insured rejected a recommendationprobably for cost reasons. In any event, it is important to discuss with the insured the potential for loss and the protection available for it. Owners of moderate-sized businesses, in particular, have serious problems when income is cut off.

An important byproduct of a discussion with the buyer is a better understanding of the exposures and the scope of coverage. The best result is recognition by the insured of the importance of earnings insurance (or any other needed protection) and its being made effective.

Offering a significant coverage option and having the insured reject it can cause serious problems for the agent or broker. However, documenting the insured's rejection of a recommendation can minimize the potential for dispute over an uninsured loss. This can be accomplished by noting in an insured's file that additional coverage options or supplemental insurance was discussed but not wanted by the insured. That "not wanted" statementinitialed by the insured-is the best insurance for the agency when the insured rejects coverage which the insurance counselor thinks is essential.

It is important for an agent or broker to educate the buyer on business interruption/earnings/income insurance (as it is variously identified). Since the counselor's mastery of the subject is essential as a condition precedent, a brief review of the fundamentals, in language readily understood by the insured, could be helpful.

The businessowners policy, a credit to the insurance industry and its forms designers, has done much to minimize the omission of earnings protection for those who are eligible for the package. Employing the homeowners approach, it provides extensive building and business personal property coverages and broad liability insurance. It is unique in that it basically includes coverage for loss of earnings, due to insured hazard, on an "actual loss sustained" basis. (Some insurers optionally provide loss of income coverage for a limit specified in the declarations.)

Unless a dollar limit has been specified in the declarations, business income or loss of income coverage provided by a businessowners policy basically covers the actual loss sustained by interruption of operations during the period of restoration that occurs within 12 consecutive months following the date of direct physical loss or damage. Coinsurance does not apply.

BOP policies cover extra expenses, incurred during the restoration period, that reduce the earnings loss otherwise payable by contributing to the resumption of normal business activities. They include, for example: rent for operation at an alternative location; a friendly competitor's performance of services normally provided by the insured; the additional cost of expediting the delivery of materials for the resumption of business; cost to research, replace or restore information on valuable papers and records.

Businesses that don't fit the eligibility profile for businessowners policies because of classification limitations or underwriting considerations may be provided with protection that they need under commercial property policies (ISO), commercial output policies (AAIS) and comparable programs developed by insurers. They are adaptable to virtually all manufacturing, industrial, institutional and commercial operations. Because time element coverage is a portion of these commercial programs, eligibility for business income coverage is the same as that for other property coverages in the programs.

Major insurers use "all-purpose" time element forms (a significant product that addresses business interruption underwriting problems and loss experience) to provide the earnings protection needed by most businesses-thus eliminating a number of forms previously used for the purpose. As an automatic feature of coverage, this business income insurance includes rental value coverage by virtue of generalization of terms and extra expense coverage, without monthly limits. These forms are designed for the vast majority of businesses for which earnings loss is the primary time element risk.

Various insurers offer options for coverage limits to earnings only, earnings and extra expense, or rents and extra expense. A pure extra expense form (not covering loss of income) is available for activities that must continue despite loss of property at the described location. Publishers, broadcasters, dairies, heating oil suppliers, data processors and dry cleaners are examples of firms for which the coverage of extra expenses is essential for virtually uninterrupted operation.