Commercial Property
Business Income Coverage Forms
Optional Coverages
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.
Several options are made available, under the terms of which the basis
of recovery is modified.
Maximum Period of Indemnity - Under this option, the policy is not subject
to coinsurance. Instead, the policy will pay for the loss sustained during
the 120 days following the date of the loss, up to the amount of
insurance being carried.
Monthly Limit of Indemnity - Under this option, the policy is not subject to
coinsurance. Instead, the policy contains a fraction which establishes
the maximum coverage that will apply to any 30-day period after the loss.
EXAMPLE: The amount of insurance in force is $120,000; the fraction
shown in the Declarations is 1/4.
Amount of Loss Sustained
Maximum Payable By Company
30-Dav Period Loss Sustained (1/4 of Policy Amount)
Days 1-30 $40,000 $30,000
31-60 20,000 20,000
61-90 30,000 30,000
$90,000 $80,000
Fluctuating Values - Insureds whose earnings are subject to fluctuations
throughout the year may find it expedient to buy insurance under one of
two special forms-Agreed Value coverage or Premium Adjustment form.
Each is discussed below.
Agreed Value Coverage - Under this form, the insured and the company
agree on an amount of insurance which will be carried. If this amount of
coverage is in fact maintained, then the insured will be covered in full, up
to the amount of the policy. The effect of the Coinsurance clause is set
aside, if the agreed amount of insurance is in effect when the loss
occurs.
The application which is required of the insured when the coverage is
purchased is attached to, and becomes a part of, the policy. It is
important to remember that the Agreed Value coverage does not
increase the insurance above the limit stated in the policy.
Premium Adjustment Form - As was indicated above in the analysis of
the Agreed Value coverage an insured, particularly one whose business
reflects fluctuations through the year, or whose business is growing
fairly steadily, may be concerned about being penalized under the
policy's Coinsurance clause in the event of a loss. The Agreed Value
coverage discussed above is one method of avoiding such
consequences. A second form which offers possible protection against
such a contingency is the Premium Adjustment form.
Under this endorsement, the insured is free to have a policy written for
an amount larger than his or her estimate of future earnings. The insured
files a statement of his or her actual earnings at the end of the policy
year.
The actual premium is then adjusted on the basis of the true experience
during the policy term, and he can receive a refund of any premium for
insurance which exceeded the amount he required. On the other hand, if
his actual business had increased during the policy term, the insured
enjoyed the protection which he needed. It should be emphasized that
the insured is still bound by the Coinsurance clause of his or her policy
and is limited to a loss not exceeding the face amount of insurance. But
he has enjoyed the extra protection of the larger insurance amount and
received some latitude for the growth in business.
To illustrate: Assume that an insured has business income of $500,000.
If he buys a policy with a 50% coinsurance clause, he could purchase
$250,000 of insurance and comply with the requirements of the clause,
unless his business had increased and he found, at the time of a loss
some time after the policy inception, that he was required to be carrying
$300,000 because his business had increased to $600,000. He would
then be penalized and receive only partial indemnity for her loss.
On the other hand, if at the beginning of the year, he had bought
business income insurance in an amount of $300,000 in a policy with a
Premium Adjustment Form endorsement, he would be fully covered, in
compliance with the 50% Coinsurance clause of her policy. If his
business had not increased by the end of the policy term, he would be
entitled to a refund of premium for the "unused" amount of insurance.
As in the case of the Agreed Value coverage discussed above, an
insured cannot collect more than the amount of his policy and is still
bound by the provisions of the Coinsurance clause. Thus, in the example
above, if the insured's business had increased to $800,000 during the
policy year, he would have been required by the Coinsurance clause to
carry $400,000 of insurance to comply with the conditions of the clause.
Since he was carrying only $300,000, she would be entitled to recover
only 75% of her loss, calculated as follows:
Amount Insurance Carried $300,000 = (50% of estimated
Amount Insurance Required $400,000 business income = 3/4
loss for the 12-month
period of the policy term)
Building Ordinance - Increased Period of Restoration - As was pointed
out here, the basic Business Income coverage form does not cover loss
sustained during the "period of restoration" which is increased due to the
operation of any law regulating construction or repair. Once the time has
elapsed which should be required to rebuild or replace the damaged
property or premises, the "period of restoration" which is the measure of
loss in the policy, is considered at an end, even if the actual time to
rebuild is extended due to building ordinances.
Coverage against the loss suffered during this additional period of time
can be insured by special endorsement. The endorsement defines the
"period of restoration" as including the time required to replace the
property and premises to comply with the minimum standards of any law
in force at the time of the loss that regulates the construction or repair, or
requires the tearing down of any property.
Business Income From Dependent Properties - Many business
enterprises are organized in a manner that renders them highly
dependent on other firms for their supply of essential materials. In
modem industry, it is fairly standard practice to rely on contractors for
components of the products they manufacture or distribute. Then again,
a whole series of selling agencies such as commission merchants,
brokers and mail order houses as well as retail merchants are often
heavily dependent on other establishments for an uninterrupted flow of
the products they distribute.
An opposite picture is presented by producers whose major or entire
output is distributed or marketed through one or two outlets, or whose
major production is absorbed by a producer of a commodity assembled
or completed elsewhere. In either type of situation, interruption of
operations at some premises other than their own will severely reduce or
eliminate entirely the firm's earnings, even though its own premises is
completely untouched by any loss.
It is relatively common for one tenant of a shopping center to be
responsible for attracting into the center the majority of the shoppers
who patronize the different merchants in the center. If the "magnet" store
(leader property) were struck by a casualty which resulted in a
cessation or reduction of its normal operations, the neighboring stores,
themselves untouched by the loss, would suffer a reduction in income
which their own Commercial Property policy or even Commercial
Business Income coverage form would not cover.
A special endorsement is available to risks which face this exposure,
Business Income From Dependent Properties. The endorsement is
attached to the Business Income coverage form and adds coverage for
either Contributing Locations or Recipient Locations, or both, each of
which must be designated in the schedule. Coverage also is available
for designated manufacturing locations and "leader" locations. Coverage
is thereby afforded for loss or damage to "contingent business property"
at any location described in the policy. Such loss must be caused by a
covered cause of loss under the policy.
Note that in the types of situations described above, the insured is
dependent entirely on another business which he does not own, operate
or control. The form is not drawn to cover separate branches of a single
entity, even if they do in fact supply other departments of the same
enterprise exclusively.
The endorsement also extends the coverage to loss of "contingent
business property" at a premises not enumerated in the policy, but then
the maximum liability of the company is limited to one half of 1% of the
amount of insurance for anyone month of interruption, reduced
proportionately for periods of less than one month. It should be
emphasized that the policy affords no coverage for the income lost to the
contributing or recipient property at its own premises. It applies only to
the loss incurred by the insured at his or her location due to the failure to
receive "contributing property" from another business entity (listed in the
schedule) due to an interruption of operations at the contributing property
location. Similarly, if the insured sustains a loss of business income due
to being unable to receive income from a second entity to whom he
normally delivers his or her wares because the latter has sustained a
covered cause of loss at its premises, the endorsement would apply to
the insured's loss of business income.
By this endorsement, the "period of restoration" begins on the date of
direct physical loss or damage by a covered cause of loss at the
premises of the "contingent business property" and ends on the date
when the premises of the "contingent business property" should be
repaired, rebuilt or replaced with reasonable speed and similar quality.
Contingent Business Property - The policy defines "contingent business
property" as property operated by others on whom the insured depends
in any of the following ways:
NOTE: It is important to be clear on the fact that Contingent Business
Interruption is designed to cover where the insured's operation is
dependent on suppliers on other premises who are independent of the
insured. If the insured's activities involve operations that combine products
which the insured him/herself manufactures or processes at separate
locations, he is best advised to purchase blanket insurance covering in one
amount all the separate locations at which the insured conducts his or her
operations.
Order of Civil Authority - Like the basic Business Income policy which is
extended to cover for a period of two weeks, interruption of income
when such interference with normal business activity is due to a loss at
any other premises, the Business Income From Dependent Properties
endorsement also covers such loss. However, the coverage is
somewhat more restricted and requires that the contingent property be
adjacent to the insured premises.
Insurance on Loss of Rents
While the Business Income form can be used to insure against income
loss by manufacturing and mercantile risks of every description, it also is
written for owners of property who derive income for leasing these
facilities to others.
Business Income Coverage Forms
Optional Coverages
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.
Several options are made available, under the terms of which the basis
of recovery is modified.
Maximum Period of Indemnity - Under this option, the policy is not subject
to coinsurance. Instead, the policy will pay for the loss sustained during
the 120 days following the date of the loss, up to the amount of
insurance being carried.
Monthly Limit of Indemnity - Under this option, the policy is not subject to
coinsurance. Instead, the policy contains a fraction which establishes
the maximum coverage that will apply to any 30-day period after the loss.
EXAMPLE: The amount of insurance in force is $120,000; the fraction
shown in the Declarations is 1/4.
Amount of Loss Sustained
Maximum Payable By Company
30-Dav Period Loss Sustained (1/4 of Policy Amount)
Days 1-30 $40,000 $30,000
31-60 20,000 20,000
61-90 30,000 30,000
$90,000 $80,000
Fluctuating Values - Insureds whose earnings are subject to fluctuations
throughout the year may find it expedient to buy insurance under one of
two special forms-Agreed Value coverage or Premium Adjustment form.
Each is discussed below.
Agreed Value Coverage - Under this form, the insured and the company
agree on an amount of insurance which will be carried. If this amount of
coverage is in fact maintained, then the insured will be covered in full, up
to the amount of the policy. The effect of the Coinsurance clause is set
aside, if the agreed amount of insurance is in effect when the loss
occurs.
The application which is required of the insured when the coverage is
purchased is attached to, and becomes a part of, the policy. It is
important to remember that the Agreed Value coverage does not
increase the insurance above the limit stated in the policy.
Premium Adjustment Form - As was indicated above in the analysis of
the Agreed Value coverage an insured, particularly one whose business
reflects fluctuations through the year, or whose business is growing
fairly steadily, may be concerned about being penalized under the
policy's Coinsurance clause in the event of a loss. The Agreed Value
coverage discussed above is one method of avoiding such
consequences. A second form which offers possible protection against
such a contingency is the Premium Adjustment form.
Under this endorsement, the insured is free to have a policy written for
an amount larger than his or her estimate of future earnings. The insured
files a statement of his or her actual earnings at the end of the policy
year.
The actual premium is then adjusted on the basis of the true experience
during the policy term, and he can receive a refund of any premium for
insurance which exceeded the amount he required. On the other hand, if
his actual business had increased during the policy term, the insured
enjoyed the protection which he needed. It should be emphasized that
the insured is still bound by the Coinsurance clause of his or her policy
and is limited to a loss not exceeding the face amount of insurance. But
he has enjoyed the extra protection of the larger insurance amount and
received some latitude for the growth in business.
To illustrate: Assume that an insured has business income of $500,000.
If he buys a policy with a 50% coinsurance clause, he could purchase
$250,000 of insurance and comply with the requirements of the clause,
unless his business had increased and he found, at the time of a loss
some time after the policy inception, that he was required to be carrying
$300,000 because his business had increased to $600,000. He would
then be penalized and receive only partial indemnity for her loss.
On the other hand, if at the beginning of the year, he had bought
business income insurance in an amount of $300,000 in a policy with a
Premium Adjustment Form endorsement, he would be fully covered, in
compliance with the 50% Coinsurance clause of her policy. If his
business had not increased by the end of the policy term, he would be
entitled to a refund of premium for the "unused" amount of insurance.
As in the case of the Agreed Value coverage discussed above, an
insured cannot collect more than the amount of his policy and is still
bound by the provisions of the Coinsurance clause. Thus, in the example
above, if the insured's business had increased to $800,000 during the
policy year, he would have been required by the Coinsurance clause to
carry $400,000 of insurance to comply with the conditions of the clause.
Since he was carrying only $300,000, she would be entitled to recover
only 75% of her loss, calculated as follows:
Amount Insurance Carried $300,000 = (50% of estimated
Amount Insurance Required $400,000 business income = 3/4
loss for the 12-month
period of the policy term)
Building Ordinance - Increased Period of Restoration - As was pointed
out here, the basic Business Income coverage form does not cover loss
sustained during the "period of restoration" which is increased due to the
operation of any law regulating construction or repair. Once the time has
elapsed which should be required to rebuild or replace the damaged
property or premises, the "period of restoration" which is the measure of
loss in the policy, is considered at an end, even if the actual time to
rebuild is extended due to building ordinances.
Coverage against the loss suffered during this additional period of time
can be insured by special endorsement. The endorsement defines the
"period of restoration" as including the time required to replace the
property and premises to comply with the minimum standards of any law
in force at the time of the loss that regulates the construction or repair, or
requires the tearing down of any property.
Business Income From Dependent Properties - Many business
enterprises are organized in a manner that renders them highly
dependent on other firms for their supply of essential materials. In
modem industry, it is fairly standard practice to rely on contractors for
components of the products they manufacture or distribute. Then again,
a whole series of selling agencies such as commission merchants,
brokers and mail order houses as well as retail merchants are often
heavily dependent on other establishments for an uninterrupted flow of
the products they distribute.
An opposite picture is presented by producers whose major or entire
output is distributed or marketed through one or two outlets, or whose
major production is absorbed by a producer of a commodity assembled
or completed elsewhere. In either type of situation, interruption of
operations at some premises other than their own will severely reduce or
eliminate entirely the firm's earnings, even though its own premises is
completely untouched by any loss.
It is relatively common for one tenant of a shopping center to be
responsible for attracting into the center the majority of the shoppers
who patronize the different merchants in the center. If the "magnet" store
(leader property) were struck by a casualty which resulted in a
cessation or reduction of its normal operations, the neighboring stores,
themselves untouched by the loss, would suffer a reduction in income
which their own Commercial Property policy or even Commercial
Business Income coverage form would not cover.
A special endorsement is available to risks which face this exposure,
Business Income From Dependent Properties. The endorsement is
attached to the Business Income coverage form and adds coverage for
either Contributing Locations or Recipient Locations, or both, each of
which must be designated in the schedule. Coverage also is available
for designated manufacturing locations and "leader" locations. Coverage
is thereby afforded for loss or damage to "contingent business property"
at any location described in the policy. Such loss must be caused by a
covered cause of loss under the policy.
Note that in the types of situations described above, the insured is
dependent entirely on another business which he does not own, operate
or control. The form is not drawn to cover separate branches of a single
entity, even if they do in fact supply other departments of the same
enterprise exclusively.
The endorsement also extends the coverage to loss of "contingent
business property" at a premises not enumerated in the policy, but then
the maximum liability of the company is limited to one half of 1% of the
amount of insurance for anyone month of interruption, reduced
proportionately for periods of less than one month. It should be
emphasized that the policy affords no coverage for the income lost to the
contributing or recipient property at its own premises. It applies only to
the loss incurred by the insured at his or her location due to the failure to
receive "contributing property" from another business entity (listed in the
schedule) due to an interruption of operations at the contributing property
location. Similarly, if the insured sustains a loss of business income due
to being unable to receive income from a second entity to whom he
normally delivers his or her wares because the latter has sustained a
covered cause of loss at its premises, the endorsement would apply to
the insured's loss of business income.
By this endorsement, the "period of restoration" begins on the date of
direct physical loss or damage by a covered cause of loss at the
premises of the "contingent business property" and ends on the date
when the premises of the "contingent business property" should be
repaired, rebuilt or replaced with reasonable speed and similar quality.
Contingent Business Property - The policy defines "contingent business
property" as property operated by others on whom the insured depends
in any of the following ways:
- Contributing Locations-Locations that deliver materials or
services to the insured or his or her accounts; - Recipient Locations-Locations that accept the insured's products
or his or her accounts; - Manufacturing Locations-Locations that manufacture products
for delivery to the insured's customers under contract of sale; - Leader Locations-Locations that attract customers to the
insured's business.
NOTE: It is important to be clear on the fact that Contingent Business
Interruption is designed to cover where the insured's operation is
dependent on suppliers on other premises who are independent of the
insured. If the insured's activities involve operations that combine products
which the insured him/herself manufactures or processes at separate
locations, he is best advised to purchase blanket insurance covering in one
amount all the separate locations at which the insured conducts his or her
operations.
Order of Civil Authority - Like the basic Business Income policy which is
extended to cover for a period of two weeks, interruption of income
when such interference with normal business activity is due to a loss at
any other premises, the Business Income From Dependent Properties
endorsement also covers such loss. However, the coverage is
somewhat more restricted and requires that the contingent property be
adjacent to the insured premises.
Insurance on Loss of Rents
While the Business Income form can be used to insure against income
loss by manufacturing and mercantile risks of every description, it also is
written for owners of property who derive income for leasing these
facilities to others.
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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.