In this Weblog the we provide an analysis of the contract provisions and illust
rate the measurements that are often required in the Business Income (and Extra Expense) Form CP 00 30. Although the form and close variations thereof represent a significant portion of the business interruption coverage provided in the United States today, there are many other coverage forms offered. Forms are often tailored to specific industries or are unique to the insurance companies providing the coverage, or both. Most customized forms, however, borrow heavily from the language of the basic (ISO) coverage analyzed in this Weblog.Although an in-depth analysis of each and every form available is not practical, through study of the language contained in the business income form, useful insight can be gained to better understand and interpret the other policies.
There are certain contractual provisions common to most business interruption (actual loss sustained) coverage forms. The following paragraphs discuss typical contract provisions.
Loss Must Result From:
Business Income Form: Physical loss of, or damage to property
Gross Earnings Form: Damage to, or destruction of real or personal property
The business income coverage is provided in addition to coverage for property and is integrally related to property coverage. It is damage to insured property that triggers the business income loss coverage. It is the income producing utility (use or occupancy) of damaged or destroyed property for which coverage is intended.
Business Income Form: Caused by or resulting from any covered cause of loss
Gross Earnings Form: By the peril(s) insured against
The business income coverage is not intended to cover all losses an insured may incur, but only those resulting from a covered cause of loss, e.g., fire. An uninsured cause of loss, such as flood damage, would not result in coverage for the loss of property; nor would it trigger business income coverage.
Business Income Form: Due to the necessary suspension of operations
Gross Earnings Form: Resulting directly from necessary interruption of business
The damage to property must result in the necessary suspension of operations. Monetary business income losses must result from damage to covered property.
Business Income Form: During the period of restoration
Gross Earnings Form: During the interruption of business
Losses are calculated only during the period of restoration, which begins on the date of the loss occurrence (now modified in the Business Income Form) and generally ends with the restoration of covered property to the pre-loss condition. There are also provisions in the policy which require that operations be resumed as quickly as possible.
Exclusions
Certain items which may extend the period of restoration (such as interference by strikers) are excluded from coverage, either on the cause of loss form or on other related forms.
Other exclusions may limit recovery resulting from damage to specified items of property, e.g., damage or destruction of finished goods.
Coverage Definition
The coverage provided is generally expressed in one of two ways:
Business Income
The business income form provides that the applicable loss should be measured by computing the sum of the net income or loss that would have been earned or incurred and the continuing normal operating expenses incurred, including payroll.
Gross Earnings
The gross earnings form provides that the applicable loss should be measured by computing the reduction in gross earnings less charges and expenses which do not necessarily continue during the interruption of business. Gross earnings for this purpose would be the sum of the net sales value of production, sales value of merchandise and other earnings, less the cost of raw stock from which production is derived, supplies consumed in conversion to finished goods, cost of merchandise sold, and services purchased from outsiders for resale which do not continue under contract.
Loss calculations under either coverage definition should always lead to the same result.
Expenses to Reduce Loss and Resumption of Operations
All actual loss sustained policies include a policy condition that requires an insured to mitigate (reduce) the loss to the extent possible, through the use of other facilities, equipment, or stock. The costs in excess of normal operation costs incurred for this purpose would increase the computed business interruption loss. The costs incurred, however, are normally limited and can be no greater than the loss that otherwise would have been payable under the policy without the expenditures.
Extra Expenses
Although expenses incurred for the above purpose are often referred to as extra expenses,
they should not be confused with extra expense coverage. Extra expense coverage would
indemnify an insured for certain extra expenses without the limitation described in the preceding paragraph, although extra expenses incurred outside of the period of restoration may be limited.
Endorsements
The basic policy provisions discussed in the preceding paragraphs may be modified by policy endorsements that may alter the policy provisions. An endorsement is an attachment to the policy that has the effect of changing the basic policy provisions. Where electrical power is interrupted, for example, an off-premises service interruption endorsement may trigger business income coverage even when insured property was not damaged or destroyed.
Limitations
The policy may place an overall limitation on the amount of recovery (policy limit) or may limit recovery to a specific time period, e.g., twelve months, without a policy limitation.
Further limitation may be imposed in addition to the policy limit by policy conditions requiring that a minimum amount of insurance be maintained (coinsurance) or recoverable loss may be limited by other selected coverage options, i.e., agreed value, monthly limits, etc.
Actual Loss Sustained
Business Income Form: We will pay for the actual loss of business income you sustain
Gross Earnings Form: This company shall be liable for the actual loss sustained
by the insured
It is the actual loss sustained provisions that indicate the measurement objective of the business interruption indemnity contract. That objective is to find the amount that would restore an insured to the financial condition that likely would have been achieved without the suspension of business, subject to all other policy provisions, exclusions, conditions, and other limitations.
Consequently, the business interruption form and declarations, along with all other related coverage forms and endorsements, must be carefully reviewed in order to determine the applicable coverage and resulting liability under the business interruption policy.
