Commercial Insurance Chapter 3

insurance that covers the reduction in an organization's income when operations are interrupted by damage to property caused by a covered peril

the difference between revenues (such as money received for goods and services) and expenses (such as money paid for merchandise, rent, and insurance)

net income that results when revenues exceed expenses

net income that results when expenses exceed revenues

expenses that continue to be incurred during a business interruption

expensesthat will not continue during a business interruption

expenses,in addition to ordinary expenses, that an organization incurs to mitigate the effects of a business interruption

the largest loss that an insured is likely to sustain

Measurements of business income loss:

Business income insurance covers the decrease in a business’s income when operations are stopped by a loss or damage to property caused by a covered peril. The process of recovery is determined by the termsand conditions of the policy. 

Effect of business interruption on expenses:

When business has stopped producing, some of the organizations will continue (continuing expenses) and some will not (non-continuing expenses). The business may also incur extra expenses due to the covered cause of loss and all the changes in the expenses of the business need to be considered when measuring a business income loss.

Property and perils involved in business income losses:

A business that occurs a loss results from physical damage to the business’s building or personal property. A loss at one location can affect another location of the same business. The causes of a loss for business income losses are associated with the property exposures are usually the same as those for physical losses. In order for a business income insurance policy to apply, an interruption of operations, caused by property damage from a covered peril, to property at locations or situations described in the policy, resulting in a loss of business income and/or extra expense (all four must occur).

Insurance for most business income exposures can be provided under either of the two ISO coverage forms for providing coverages; they are BIC with Extra Expenses and BIC without Extra Expenses. The BIC with Extra Expenses covers business income and extra expense losses even if the extra expenses don’t reduce the business income loss. The BIC without Extra Expenses covers business income loss, but does not cover extra expenses unless those extra expenses reduce the business income loss. The BIC allows the insured to pick any of three options for business income coverage: business income including rental value, business income other than rental value, and rental value only. There are key requirements for a business income claim to be covered under BIC and these are: actual loss of business income, due to the necessary suspension of your operations, during the period of restoration, caused by the direct physical loss of or damage to property at the described premises, and loss or damage caused by a covered cause of loss.

The BIC form includes additional coverages and a coverage extension that supplements the basic insuring agreement(s) in ways that are often vital to the insured when the insured is recovering from business income losses.

Sometimes when a loss occurs, the limits of insurance, loss conditions, and additional conditions are overlooked and these can be crucial in determining how much will be paid for a business income loss. The sections of ISO forms guide the insured and insurer when determining the amount payable for a business income loss. The loss conditions address the issues of: appraisal, duties in the event of a loss, loss determination, and loss payment. The limits of insurance is the maximum amount that the insurer will pay when a covered loss occurs, but extra expenses, expenses to reduce loss, civil authority, alterations and new buildings, and extended business income will not increase the amount paid.

The BIC includes four optional coverages that modify the basic coverage and these are: maximum period of indemnity, monthly limit of indemnity, business income agreed value, and extended period of indemnity. The first three optional coverages eliminate or suspend the coinsurance condition. The fourth optional coverage covers loss of business income that continues after the extended business income additional coverage ends.