Commercial Property
Business Income Coverage Forms
Extra Expense Insurance
The Business Income form is available to virtually any manufacturing or
mercantile risk. As outlined earlier, that policy also covers extra expense
assumed by the insured to minimize the loss of income by accelerating
the "period of restoration."
Certain risks, mostly in the service industries, cannot afford a cessation
of the service they provide without facing destruction of their business.
Some examples of such entities are a newspaper which would suffer a
loss of the revenue from Public Notices if it could not show an unbroken
regularity of publication; a hospital supply house, etc. Such risks, as well
as many others, will be insufficiently indemnified if they rely on the
Expense to Reduce Loss feature of their Business Income policy
because that policy covers only such extra expense to the extent the
loss is actually reduced. Since a business enterprise of this kind will be
ready to undergo almost any expense in order to be in a position to
continue its business without interruption, it needs special insurance to
cover its extra expenses.
This type of enterprise has available to it a form that addresses itself
directly to the Extra Expense to Reduce Loss. The form parallels the
basic Business Income form which was discussed earlier, but
addresses itself only to Extra Expense. It should be read in conjunction
with the analysis of that form.
The policy is written with a limit of insurance but provides further that no
more than specified percentages of the limit are recoverable in 30-day
intervals. A frequently used set of percentages is 40%, 80%, 100%.
Under a policy incorporating this set of percentages, the company is
liable for no more than 40% of the policy limit if the period of recovery is
30 days or less; 80% when the period of recovery is over 30 days but
less than 60 days; and 100% of the limit when the period of recovery
exceeds 60 days.
NOTE: New Extra Expense forms have been introduced in the various
states which provide extra expense coverage without limiting such
indemnity to any percentage for periods of recovery.
Business Income For Educational Institutions Insurance
(Formerly Called Tuition And Fees Insurance)
Colleges, universities, private and parochial schools and other
educational institutions which depend on tuition fees usually require a
special form of business income insurance. Since arrangements for
school attendance are usually made for an entire school year, a loss that
causes a comparatively short suspension of classes (with a relatively
limited "period of restoration") might result in the loss of an entire year's
revenue. The form also is available to camps whose situation is similar to
that of educational institutions which make charges for tuition.
Thus, if fire damaged a college or private school building on September 1,
and it took two months to restore the building, most of the students would
arrange to attend other schools, and the entire year's income would be
lost to the school. The standard business income coverage form, which
limits the period of recovery to the time to "rebuild, repair or replace" the
property, would not meet the needs of such institutions.
Business Income Changes -Educational Institutions is tuition and fees
insurance designed to meet the needs of schools that depend on tuition
for all or part of their support. The insuring clause does not limit the
recovery to the time to rebuild. The endorsement modifies and adapts the
basic Business Income coverage form. It provides that if a covered loss
is actually rebuilt or replaced on a date which is 60 days or less before
the scheduled opening of the next school term, the policy will pay the
actual loss of business income during the school term following.
EXAMPLE: A university suffers damage by fire on August 31, 2008. The
premises is restored on November 10, 2008. Business Income
Changes-Educational Institutions insurance will cover the loss of tuition
fees during the entire school term.
Two options within the endorsement are offered: broad coverage and
limited coverage. The endorsement covers broad form coverage unless
the limited option is triggered on the schedule. Not only are tuition and
fees covered, but also loss of laboratory fees, research grants, income
from bookstores and athletic events. When the limited coverage is
triggered, the limited form covers only loss of tuition and fees.
Leasehold Interest Insurance
Many leases contain a clause that permits the landlord or lessor to cancel
the lease if fire or other peril destroys or seriously damages the property.
This option to cancel becomes operative in some leases only if the
premises is rendered totally unfit for occupancy; other clauses stipulate
that the premises must be substantially damaged, or more than half
destroyed, etc. Such a clause in a lease may create a Leasehold
Interest which a tenant will need to insure.
A tenant is said to possess a Leasehold Interest in property when the
rent paid under a lease is less than the normal rental value of the
premises. It can be seen that cancellation of a lease of this kind could
subject the tenant to loss because he might have to pay higher rent than
under the former lease for similar premises, or even to the same landlord
to continue in possession of the premises under a new lease. In any
event, whether the tenant does in fact have to pay higher rent in new
premises or removes to cheaper quarters or even if he retires from
business, the Leasehold Interest policy will be liable for the difference
between the rent he had been paying and what comparable
accommodations would cost at the time of the loss.
There are many situations which create Leasehold Interest. Some of the
more common types of Leasehold Interest are:
1. When the tenant occupies premises under a lease entered into before
large-scale improvement of the neighborhood enhanced the value of the
premises and the lease is subject to cancellation in the event of damage
to the premises.
2. When the tenant paid a bonus at the time of entering into the lease, and
the bonus will be forfeited if the lease is canceled.
3. When the tenant has invested large sums in improvements and
betterments which he had hoped to enjoy throughout the term of the
lease, and the lease may be canceled in the event of the loss.
4. When a tenant sublets the premises held under a lease at a higher
figure than he is paying for the premises.
The Leasehold Interest policy is designed to protect an individual or firm
against losses of the kind outlined above. The policy insures the
difference between the actual rent being paid under the lease and the
normal rental value of the premises when the premises is damaged by a
covered cause of loss and the landlord exercises the option to cancel
the lease, or when the lease is canceled by operation of state law.
It can be seen that the potential loss decreases each month that elapses
without the occurrence of a loss at the premises. The amount of
insurance under the policy decreases accordingly, a factor which is
taken into account when the policy is written.
If a covered loss results in cancellation of the lease, the company pays
the insured in a single sum the discounted value of all the leasehold
interest value which the insured forfeits. An interest factor which is
used to compute the present value (single sum) of these future losses is
stated in the policy.
The policy also makes provision for covering the loss of any bonus
payments made by the insured at the time of signing the lease, any
prepaid rent and the value of any improvements and betterments made
by the insured.
The form sets forth the inception and expiration dates of the lease, the
number of months remaining at the time the policy is written and the
interest rate being used to discount the value of the future payments
which are being paid at the time of the loss, in a single sum.
EXAMPLE: The insured occupies the premises under a lease which was
entered into on January 1, 2005, to expire on January 1, 2015, at a
monthly rental of $1,000. The current rental value of the premises (or
comparable space) is $2,000 per month. He comes to the insurance
company on January 1, 2006, for a Leasehold Interest policy. Under the
set of facts assumed above, the lease has nine years to run, or 108 months.
If a casualty destroyed or damaged the premises to the extent that would
cause cancellation of the lease, the tenant would stand to lose $1,000 a
month (the difference between the true rental value of the premises,
$2,000, and the rent being paid under the lease, $1,000) for 108 months,
or $108,000.
However, since the policy will pay the Leasehold Interest loss in a single
sum at the time of the loss, the company discounts the future payments
at the interest rate specified in the policy. The insured may select
various interest discount schedules from 5% to 15%. If this interest
were set at 6%, the company will pay in a single sum $83,841.30 (the
present value of $1,000 payable over 108 months). If the interest factor
were 8%, the payout would be $77,673.10.
If the landlord does not cancel the lease, the policy is liable for the
Leasehold Interest during the period that it takes to rebuild, repair or
replace the property.
While less common than the situation in which a tenant has a Leasehold
Interest in the premises he rents, a landlord would be in the market for
leasehold insurance if the rent he is collecting from a tenant under a
lease is higher than he would normally be able to expect in the open
market, and a loss would relieve the tenant of liability to pay rent under a
lease. In a situation of this kind, the landlord could purchase a Leasehold
Interest policy to cover this exposure.
Business Income Coverage Forms
Extra Expense Insurance
The Business Income form is available to virtually any manufacturing or
mercantile risk. As outlined earlier, that policy also covers extra expense
assumed by the insured to minimize the loss of income by accelerating
the "period of restoration."
Certain risks, mostly in the service industries, cannot afford a cessation
of the service they provide without facing destruction of their business.
Some examples of such entities are a newspaper which would suffer a
loss of the revenue from Public Notices if it could not show an unbroken
regularity of publication; a hospital supply house, etc. Such risks, as well
as many others, will be insufficiently indemnified if they rely on the
Expense to Reduce Loss feature of their Business Income policy
because that policy covers only such extra expense to the extent the
loss is actually reduced. Since a business enterprise of this kind will be
ready to undergo almost any expense in order to be in a position to
continue its business without interruption, it needs special insurance to
cover its extra expenses.
This type of enterprise has available to it a form that addresses itself
directly to the Extra Expense to Reduce Loss. The form parallels the
basic Business Income form which was discussed earlier, but
addresses itself only to Extra Expense. It should be read in conjunction
with the analysis of that form.
The policy is written with a limit of insurance but provides further that no
more than specified percentages of the limit are recoverable in 30-day
intervals. A frequently used set of percentages is 40%, 80%, 100%.
Under a policy incorporating this set of percentages, the company is
liable for no more than 40% of the policy limit if the period of recovery is
30 days or less; 80% when the period of recovery is over 30 days but
less than 60 days; and 100% of the limit when the period of recovery
exceeds 60 days.
NOTE: New Extra Expense forms have been introduced in the various
states which provide extra expense coverage without limiting such
indemnity to any percentage for periods of recovery.
Business Income For Educational Institutions Insurance
(Formerly Called Tuition And Fees Insurance)
Colleges, universities, private and parochial schools and other
educational institutions which depend on tuition fees usually require a
special form of business income insurance. Since arrangements for
school attendance are usually made for an entire school year, a loss that
causes a comparatively short suspension of classes (with a relatively
limited "period of restoration") might result in the loss of an entire year's
revenue. The form also is available to camps whose situation is similar to
that of educational institutions which make charges for tuition.
Thus, if fire damaged a college or private school building on September 1,
and it took two months to restore the building, most of the students would
arrange to attend other schools, and the entire year's income would be
lost to the school. The standard business income coverage form, which
limits the period of recovery to the time to "rebuild, repair or replace" the
property, would not meet the needs of such institutions.
Business Income Changes -Educational Institutions is tuition and fees
insurance designed to meet the needs of schools that depend on tuition
for all or part of their support. The insuring clause does not limit the
recovery to the time to rebuild. The endorsement modifies and adapts the
basic Business Income coverage form. It provides that if a covered loss
is actually rebuilt or replaced on a date which is 60 days or less before
the scheduled opening of the next school term, the policy will pay the
actual loss of business income during the school term following.
EXAMPLE: A university suffers damage by fire on August 31, 2008. The
premises is restored on November 10, 2008. Business Income
Changes-Educational Institutions insurance will cover the loss of tuition
fees during the entire school term.
Two options within the endorsement are offered: broad coverage and
limited coverage. The endorsement covers broad form coverage unless
the limited option is triggered on the schedule. Not only are tuition and
fees covered, but also loss of laboratory fees, research grants, income
from bookstores and athletic events. When the limited coverage is
triggered, the limited form covers only loss of tuition and fees.
Leasehold Interest Insurance
Many leases contain a clause that permits the landlord or lessor to cancel
the lease if fire or other peril destroys or seriously damages the property.
This option to cancel becomes operative in some leases only if the
premises is rendered totally unfit for occupancy; other clauses stipulate
that the premises must be substantially damaged, or more than half
destroyed, etc. Such a clause in a lease may create a Leasehold
Interest which a tenant will need to insure.
A tenant is said to possess a Leasehold Interest in property when the
rent paid under a lease is less than the normal rental value of the
premises. It can be seen that cancellation of a lease of this kind could
subject the tenant to loss because he might have to pay higher rent than
under the former lease for similar premises, or even to the same landlord
to continue in possession of the premises under a new lease. In any
event, whether the tenant does in fact have to pay higher rent in new
premises or removes to cheaper quarters or even if he retires from
business, the Leasehold Interest policy will be liable for the difference
between the rent he had been paying and what comparable
accommodations would cost at the time of the loss.
There are many situations which create Leasehold Interest. Some of the
more common types of Leasehold Interest are:
1. When the tenant occupies premises under a lease entered into before
large-scale improvement of the neighborhood enhanced the value of the
premises and the lease is subject to cancellation in the event of damage
to the premises.
2. When the tenant paid a bonus at the time of entering into the lease, and
the bonus will be forfeited if the lease is canceled.
3. When the tenant has invested large sums in improvements and
betterments which he had hoped to enjoy throughout the term of the
lease, and the lease may be canceled in the event of the loss.
4. When a tenant sublets the premises held under a lease at a higher
figure than he is paying for the premises.
The Leasehold Interest policy is designed to protect an individual or firm
against losses of the kind outlined above. The policy insures the
difference between the actual rent being paid under the lease and the
normal rental value of the premises when the premises is damaged by a
covered cause of loss and the landlord exercises the option to cancel
the lease, or when the lease is canceled by operation of state law.
It can be seen that the potential loss decreases each month that elapses
without the occurrence of a loss at the premises. The amount of
insurance under the policy decreases accordingly, a factor which is
taken into account when the policy is written.
If a covered loss results in cancellation of the lease, the company pays
the insured in a single sum the discounted value of all the leasehold
interest value which the insured forfeits. An interest factor which is
used to compute the present value (single sum) of these future losses is
stated in the policy.
The policy also makes provision for covering the loss of any bonus
payments made by the insured at the time of signing the lease, any
prepaid rent and the value of any improvements and betterments made
by the insured.
The form sets forth the inception and expiration dates of the lease, the
number of months remaining at the time the policy is written and the
interest rate being used to discount the value of the future payments
which are being paid at the time of the loss, in a single sum.
EXAMPLE: The insured occupies the premises under a lease which was
entered into on January 1, 2005, to expire on January 1, 2015, at a
monthly rental of $1,000. The current rental value of the premises (or
comparable space) is $2,000 per month. He comes to the insurance
company on January 1, 2006, for a Leasehold Interest policy. Under the
set of facts assumed above, the lease has nine years to run, or 108 months.
If a casualty destroyed or damaged the premises to the extent that would
cause cancellation of the lease, the tenant would stand to lose $1,000 a
month (the difference between the true rental value of the premises,
$2,000, and the rent being paid under the lease, $1,000) for 108 months,
or $108,000.
However, since the policy will pay the Leasehold Interest loss in a single
sum at the time of the loss, the company discounts the future payments
at the interest rate specified in the policy. The insured may select
various interest discount schedules from 5% to 15%. If this interest
were set at 6%, the company will pay in a single sum $83,841.30 (the
present value of $1,000 payable over 108 months). If the interest factor
were 8%, the payout would be $77,673.10.
If the landlord does not cancel the lease, the policy is liable for the
Leasehold Interest during the period that it takes to rebuild, repair or
replace the property.
While less common than the situation in which a tenant has a Leasehold
Interest in the premises he rents, a landlord would be in the market for
leasehold insurance if the rent he is collecting from a tenant under a
lease is higher than he would normally be able to expect in the open
market, and a loss would relieve the tenant of liability to pay rent under a
lease. In a situation of this kind, the landlord could purchase a Leasehold
Interest policy to cover this exposure.
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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.