9.8 Business Income and Extra Expense Coverage Forms

Definitions

These coverages are often referred to as time element coverages or business interruption coverages. They insure certain indirect losses that occur when the insured’s business operations must be suspended because of a covered property loss. These coverages are designed to address two main types of financial loss:

• Loss of business income, which is the income the business loses because it cannot operate normally after the covered property damage
• Extra expenses, which are additional costs the insured incurs to reduce the suspension of operations, continue business activities, or recover more quickly after the loss

Unlike direct property coverage, which pays for physical damage to covered property, time element coverage responds to the financial consequences that result from that physical damage.

Business income means the net income the business would have earned if the covered loss had not occurred. Net income includes profit or loss before income taxes. Business income also includes normal continuing operating expenses, such as payroll, that continue after the loss. Coverage for loss of business income applies during the period of restoration. The period of restoration begins 72 hours after the time of loss and ends on the earlier of:

• The date the damaged property should be repaired, rebuilt, or replaced with reasonable speed and similar quality
• The date the business resumes operations at a new permanent location

This coverage is important because it helps replace income lost while the business is unable to operate normally because of covered property damage.

Extra expenses are necessary expenses the insured incurs during the period of restoration that would not have been incurred if the covered loss had not occurred. These expenses are intended to help reduce or avoid a suspension of business operations. Extra expense coverage may apply when the insured continues operations at the described premises or temporarily relocates to another location. When the business operates from a temporary replacement location, covered extra expenses may include relocation costs and the cost to equip the temporary location. For extra expense coverage, the period of restoration begins immediately after the covered loss occurs.

Example

A fire damages part of a commercial building. Several businesses that rent units in the building are forced to suspend operations, including an accounting firm that uses one of the units as its office. If the accounting firm has business income coverage, the policy may pay for income the firm loses while it is unable to provide services to clients. It may also cover normal continuing operating expenses, such as rent for the damaged unit and employee payroll, while repairs are being made. Business income coverage begins 72 hours after the time of loss. The accounting firm may also decide to temporarily move its operations to another location so it can continue serving clients and reduce the length of the business suspension. This move could require the firm to rent temporary office space, set up equipment, and prepare the temporary location for business use. If the firm has extra expense coverage, the policy may pay for necessary costs related to the temporary relocation, including set-up expenses and rent at the replacement location. Extra expense coverage begins immediately after the covered loss occurs.

Coverage Forms

Three coverage forms are available to provide time element coverage:

• Business Income and Extra Expense Coverage Form
• Business Income Without Extra Expense Coverage Form
• Extra Expense Coverage Form

Each form addresses financial losses that may occur when a covered property loss causes the insured’s business operations to be suspended or disrupted.

The Extra Expense Coverage Form may be purchased by businesses that would not suffer a significant loss of business income after a covered property loss but would incur additional expenses to continue operating. This form is useful for businesses that must remain open or resume operations quickly, even if their income is not expected to decrease substantially. It helps pay the necessary extra costs the insured would not have incurred if the covered loss had not occurred.

Conditions

On the time element coverage forms, coinsurance applies only to business income coverage. It does not apply to extra expense coverage. The coinsurance percentage is typically 50% of the sum of the insured’s net income and operating expenses for the 12 months following the policy inception date or the last policy anniversary date, whichever is later. This requirement is used to encourage the insured to carry an adequate amount of business income insurance based on the business’s expected income and continuing expenses.

Because time element coverages apply to indirect losses, a standard property deductible does not apply. Instead of reducing the claim by a deductible, coverage is controlled by the policy’s waiting periods, limits, coinsurance requirements, and the applicable period of restoration.

Optional Coverages

The following Optional Coverages apply only to business income coverage. These coverages are not automatically included. They apply only when they are selected and shown on the Declarations page.

Maximum Period of Indemnity

Under this Optional Coverage, the most the insurer will pay for loss of business income is the amount of loss sustained during the first 120 days of the period of restoration. When this Optional Coverage applies, the coinsurance provision does not apply. This allows the insured to recover covered business income losses during the 120-day period without being subject to a coinsurance penalty.

Monthly Limit of Indemnity

Under this Optional Coverage, the most the insurer will pay for loss of business income is a specified portion of the limit of insurance for each 30-day period during the period of restoration. The percentage or fraction used to calculate the payment is shown in the Declarations page. This limits how much business income coverage is available during each 30-day period, even if the total policy limit is higher. When this Optional Coverage applies, the coinsurance provision does not apply.

Business Income Agreed Value

Under the Agreed Value Optional Coverage, the insurer uses a report of the insured’s financial data to determine an agreed value for the business income exposure. If the limit of insurance is equal to the agreed value, the standard coinsurance provision does not apply. However, if the limit of insurance is less than the agreed value, the insurer uses that percentage to determine the portion of the loss for which the insured is responsible. This percentage replaces the policy’s standard coinsurance percentage and is used to calculate the insured’s share of each covered business income loss.

Extended Period of Indemnity

A suspension of operations may continue to affect the insured’s business income even after the damaged property has been repaired or rebuilt and operations have resumed. If this occurs, the policy may continue to pay for the resulting loss of business income for a specified number of days after operations resume. Coverage ends on the earlier of:

• The end of the number of days shown for this coverage
• The date the business income returns to the level that would have existed if no loss had occurred

This coverage recognizes that a business may need time to regain customers, restore normal sales, and return to its pre-loss income level after reopening.