Commercial Property
Business Income Coverage Forms
Coinsurance Clause - If a coinsurance percentage is shown in the
Declarations of the Business Income coverage form, the insured is
required to carry insurance in an amount equal to at least the stated
percentage times the sum of the net income and all operating expenses
that would have been earned in the 12 months following the inception
date of the policy. (If the policy is written for longer than one year, then
the 12-month period used in the calculation begins on the last
anniversary of the policy.)
If the insured carries less than this required amount, the company is liable
under its policy for no greater percentage of loss than the amount of
insurance carried bears to the stipulated coinsurance percentage of the
net income and operating expenses that would have been earned in the
12-month period following the inception of the policy or its last
anniversary.
If the net income and the operating expenses in the 12-month period of
the policy term would have been $100,000, and the insured elects to buy
business income insurance with a 50% coinsurance clause, he must
carry at least $50,000 of insurance. If he carries less, the insured will be
a coinsurer and will have to share in any loss.
Thus, if the insured carried $30,000 of insurance, he would be entitled to
receive only 3/5ths of any loss, no matter how small. This same insured
with an 80% coinsurance clause in his or her policy must carry not less
than $80,000 of insurance; if the coinsurance percentage is 70%, the
insured must carry at least $70,000, etc.
The Coinsurance clause is not applicable with respect to the Extra
Expense Additional coverage.
A coinsurance clause in a business income coverage form functions in
much the same way as in a property insurance policy.
In a policy insuring property, the Coinsurance clause establishes the
amount of insurance basing itself on the value of the property at the time
of the loss; in the Business Income coverage form, the figure is based on
the net income and the operating expenses that would have been earned
during the term of the policy, if written for one year, or the period since
the policy's last anniversary, if written for a longer term.
The "formula" used in applying the Coinsurance clause is:
P x L = % of loss paid
R
where: P is the amount of insurance in force at the time of the loss;
R is the amount of insurance, required, i.e., the stipulated percentage of
the net income and the operating expenses in the 12-month period
following the inception of the policy (or its last anniversary);
L is the amount of the loss.
EXAMPLE: (Underinsurance)
Net income and operating expenses for the 12-month period following the
inception of the policy or its last anniversary $400,000
The coinsurance percentage stated in the policy Declarations 50%
The amount of insurance in force at the time of the loss $150,000
The amount of the loss $80,000
Applying the formula cited above to this set of figures, we get
$150,000
$200,000 X $80,000 = ¾ X $80,000 = $60,000
The company's liability is limited to $60,000
EXAMPLE: (Adequate Insurance)
Using the set of figures as in the above example, except that the insured
carries $200,000 of insurance:
The insured is fully reimbursed for the loss.
$200,000
$200,000 X $80,000 = $80,000
Ordinary Payroll Limitation - If the operations of a business are
interrupted by a loss at the premises, and it appears that the suspension
will be of relatively minor duration, the insured is likely to want to continue
paying all of his or her employees so that the insured will be in a position
to resume activities without having lost any of the personnel. If,
however, the loss appears to be one that will prove to be more
protracted, the insured would tend to layoff the part of the staff that
would be less important to the resumption of the business after a
suspension, e.g., unskilled laborers, factory hands, maintenance crews.
A special endorsement is available under the Business Income policy
under which the insured can select the number of days during which he
will wish to be covered on "ordinary payroll." The endorsement provides
that in determining the operating expenses for coinsurance purposes,
payroll expenses will not include "ordinary payroll expense" for any
period beyond the number of days in the schedule. "Ordinary payroll" is
defined to mean all payroll expenses incurred except for executives,
department managers, and employees under contract. The insured may
specify additional employees or job classifications which are also to be
considered exempted. "Ordinary payroll" includes employee benefits,
FICA payments, union dues and premiums on Workers Compensation
insurance.
Business Income Coverage Forms
Coinsurance Clause - If a coinsurance percentage is shown in the
Declarations of the Business Income coverage form, the insured is
required to carry insurance in an amount equal to at least the stated
percentage times the sum of the net income and all operating expenses
that would have been earned in the 12 months following the inception
date of the policy. (If the policy is written for longer than one year, then
the 12-month period used in the calculation begins on the last
anniversary of the policy.)
If the insured carries less than this required amount, the company is liable
under its policy for no greater percentage of loss than the amount of
insurance carried bears to the stipulated coinsurance percentage of the
net income and operating expenses that would have been earned in the
12-month period following the inception of the policy or its last
anniversary.
If the net income and the operating expenses in the 12-month period of
the policy term would have been $100,000, and the insured elects to buy
business income insurance with a 50% coinsurance clause, he must
carry at least $50,000 of insurance. If he carries less, the insured will be
a coinsurer and will have to share in any loss.
Thus, if the insured carried $30,000 of insurance, he would be entitled to
receive only 3/5ths of any loss, no matter how small. This same insured
with an 80% coinsurance clause in his or her policy must carry not less
than $80,000 of insurance; if the coinsurance percentage is 70%, the
insured must carry at least $70,000, etc.
The Coinsurance clause is not applicable with respect to the Extra
Expense Additional coverage.
A coinsurance clause in a business income coverage form functions in
much the same way as in a property insurance policy.
In a policy insuring property, the Coinsurance clause establishes the
amount of insurance basing itself on the value of the property at the time
of the loss; in the Business Income coverage form, the figure is based on
the net income and the operating expenses that would have been earned
during the term of the policy, if written for one year, or the period since
the policy's last anniversary, if written for a longer term.
The "formula" used in applying the Coinsurance clause is:
P x L = % of loss paid
R
where: P is the amount of insurance in force at the time of the loss;
R is the amount of insurance, required, i.e., the stipulated percentage of
the net income and the operating expenses in the 12-month period
following the inception of the policy (or its last anniversary);
L is the amount of the loss.
EXAMPLE: (Underinsurance)
Net income and operating expenses for the 12-month period following the
inception of the policy or its last anniversary $400,000
The coinsurance percentage stated in the policy Declarations 50%
The amount of insurance in force at the time of the loss $150,000
The amount of the loss $80,000
Applying the formula cited above to this set of figures, we get
$150,000
$200,000 X $80,000 = ¾ X $80,000 = $60,000
The company's liability is limited to $60,000
EXAMPLE: (Adequate Insurance)
Using the set of figures as in the above example, except that the insured
carries $200,000 of insurance:
The insured is fully reimbursed for the loss.
$200,000
$200,000 X $80,000 = $80,000
Ordinary Payroll Limitation - If the operations of a business are
interrupted by a loss at the premises, and it appears that the suspension
will be of relatively minor duration, the insured is likely to want to continue
paying all of his or her employees so that the insured will be in a position
to resume activities without having lost any of the personnel. If,
however, the loss appears to be one that will prove to be more
protracted, the insured would tend to layoff the part of the staff that
would be less important to the resumption of the business after a
suspension, e.g., unskilled laborers, factory hands, maintenance crews.
A special endorsement is available under the Business Income policy
under which the insured can select the number of days during which he
will wish to be covered on "ordinary payroll." The endorsement provides
that in determining the operating expenses for coinsurance purposes,
payroll expenses will not include "ordinary payroll expense" for any
period beyond the number of days in the schedule. "Ordinary payroll" is
defined to mean all payroll expenses incurred except for executives,
department managers, and employees under contract. The insured may
specify additional employees or job classifications which are also to be
considered exempted. "Ordinary payroll" includes employee benefits,
FICA payments, union dues and premiums on Workers Compensation
insurance.
 |  |  |  |  |  |
MY Insurance Agency
The materials on this website are meant to
be informative in nature. Due to the ever
changing and varying state laws, and the fact
some insurers offer coverage in slightly
different forms from the Insurance Services
Office (ISO) standard forms, we cannot
guarantee the accuracy of the materials on
this page.
be informative in nature. Due to the ever
changing and varying state laws, and the fact
some insurers offer coverage in slightly
different forms from the Insurance Services
Office (ISO) standard forms, we cannot
guarantee the accuracy of the materials on
this page.
| Next.... Business Income Coverage - Causes of Loss |