AINS Ch. 3

Explain a danger to an insured covered by the Business Income (without extra expense) Coverage Form regarding expenses incurred to reduce loss.

An insured can incur the the same types of expenses that are covered under the BIC (and extra expense) Coverage Form, but they're only covered to the extent that they reduce business income loss. - danger that the insured may incur extra expenses other than the reduction in business income loss - result could be a large, uninsured extra expense loss

How is the denominator of the business income coinsurance formula calculated?

Multiplying the coinsurance % by the sum of the insured's net income plus all operating expenses Coinsurance * (Net income + Operating expenses)

Give 3 examples of extra expenses that might be incurred to continue operations after a physical loss.

1. Cost to rent temporary office space 2. Overtime wages to employees 3. Overnight air shipment of needed repair parts

Describe the 2 steps necessary to activate the Business Income Agreed Value coverage option.

1. Insurer must secure from the insured a completed business income report - which contains data for the most recent 12 month accounting period before the date of the report - which contains estimated data for the 12 months following the inception of the coverage 2. Insurer must enter the agreed value into the declarations - must be at least equal to the product of the coinsurance % and the net income and operating expenses

ID the 3 optional business income coverages that eliminate or suspend the Coinsurance condition.

1. Maximum Period of Indemnity 2. Monthly Limit of Indemnity 3. Business Income Agreed Value

Give 3 examples of normal operating expenses that could continue during a short business interruption.

1. Payroll of key employees 2. Debt repayments 3. Taxes

What are the different coinsurance percentages that can be used with the BIC?

50, 60, 70, 80, 90, 100, 125, or no coninsurance

Explain how the definition of premises is broadened if the insured is a tenant.

Broadened to include, "any area within the building or on the site... if they area services, or is used to gain access to, the described premises"

Describe how the amount of a business income loss is determined in the BIC.

Determined on the basis of the following: - net income of the business before the loss occurred - probable net income of the business if no loss had occurred - operating expenses that must continue during the period of restorations to permit the insured to resume operations with the quality of service that existed prior to loss - other relevant sources of info

Janet has a dental office that was damaged in a windstorm (a covered loss). She is insured under a BIC without extra expense form. The period of restoration lasted 7 months. Her office is now restored, but not all of her patients have returned. Will her BIC policy provide coverage?

Extended Business Income (EBI) additional coverage covers this; it extends the regular business income to include business income losses that continue after the period of restoration ends - coverage begins when the damaged property has been restored, and ends when the business returns to normal - lasts up to a max of 60 days

Explain how extra expenses to repair or replace property are treated differently than other extra expenses in the Extra Expense insuring agreement.

Extra expenses are covered to the extent that they actually reduce the business income loss. Other extra expenses are covered in full, subject the the policy limit, and are not limited to the amount by which they reduce the extra expense loss. This coverage applies even if the business income loss isn't reduced at all. These include: - costs to move to a temporary location - increase rent at the temporary location - rental of substitute equipment - cost of substitute services (ex. data processing)

When is the only time insured should add the Max Period of Indemnity coverage option to their business income insurance?

If they are certain that any suspension of operations will last no more than 4 months Max Period of Indemnity lasts 120 days

Surewell Aircraft manufacturers small, single-engine aircrafts. It annually assembles 100 aircrafts at its plant in Arizona from composite-material bodies manufactured in MX and engines manufactured in England. Analyze Surewell's business income loss exposures.

Income loss exposures include... - loss of income from the manufacture and sales of the aircraft - extra expenses to rent equipment and a facility while its plant is being restored - damage to either of the 3 key suppliers' plants could shut down Surewell's production and sales

Business income insurance

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

2 people sell yoga merch in their yoga studio. A month after they purchased insurance, a windstorm broke their windows and ruined their merch. In an attempt to fill customer orders, they paid $2,000 in overnight shipping costs to replace the damaged goods. Had they not paid for expedited shipping, they would've lost $3,000 in merch sales. Explain whether their Business Income Coverage Form will pay for the overnight shipping cost.

Insurer will pay the $2,000 is shipping costs cause doing so reduces the $3,000 of business income loss that would've occurred. - IF the cost to ship didn't reduce the business income loss, then the coverage would not have been applicable

A sporting goods store is insured for $60,000 under a BIC form that contains a 50% coinsurance clause. After a fire, the store was closed for 1 month. The business income loss was $12,000. If there was no fire, the annual net income and operating expenses would have been $180,000. What dollar amount will be recovered from the insurer for this business income loss?

Loss Payment = (Insurance carried / Insurance required) * Loss amount Insurance carried: 60,000 Coinsurance: 0.5*180,000 = 90,000 Loss amount: 12,000 (60,000 / 90,000) * 12,000 = $8,000

Describe how business income losses can be measured.

Measured as the reduction is the firm's net income (The diff between what the firm would have earned had no loss occurred and what the firm actually did earn during the period of interruption)

Compare writing the limits of insurance for business income on a specific basis with doing so on a blanket basis.

Specific Basis: specific limit is set for each building insured Blanket Basis: limit applies to all buildings at one location or to all buildings at multiple locations

Jack's auto repair ship is covered under a business income coverage (BIC) form. His shop incurs a covered business income loss. It will take 2 months to reopen his shop. The net profit he would have earned during that time is $10,000. His continuing operating expenses of rent, taxes, and insurance (but no salary) total $4,000 for 2 months. Explain what will be considered part of Jack's business income loss.

Sum of these 2: 1. Net profit or loss that would've been earned or incurred - Jack would be covered for the loss of a net profit of $10,000 2. Normal operating expenses - Jack would be covered for his $4,000 in operating expenses

Probable maximum loss (PML)

The largest loss that an insured is likely to sustain

Describe what must occur, according to the usual business income insuring agreement, for business income insurance to apply.

There must be 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

Why is the Extended Period of Indemnity coverage option so attractive to insured that own restaurants and clothing stores?

This coverage option extends the coverage to include business income losses that continue for more than 60 days after the property is restored - This is attractive for restaurants and clothing stores cause they reply on strong customer relationships and repeat business

Explain the purpose of Interruption of Computer Operations additional coverage in the BIC.

To provide $2,500 of coverage for all loss of business income or extra expense when business operations are suspended due to an interruption of computer operations resulting from the destruction or corruptions of electronic data caused by a covered cause of loss

Explain the purpose of Alternations and New Buildings additional coverage in the business income coverage (BIC) forms.

To provide coverage for loss of income resulting for a delay in beginning operations if the delay results from damage at the described premises by a covered cause of loss to any of the following: - new buildings or structures, completed or under construction - alterations or additions to existing buildings - machinery, equipment, supplies, or building materials within 100 feet of premises

Bob has a computer repair store, and just opened a new store 60 days ago. The new store recently had a fire loss involving extensive property damage, making the property unusable. He is insured under a BIC and paid additional premium for the New Acquired Locations coverage extension. Bob didn't report the existence of his new store to his insurer until the day of the fire. Will this coverage extension response to Bob's fire loss?

Would have been covered if he had reported the new store within 30 days of the date he opened it

Brad is an insured who purchased business income coverage. He chose the Max Period of Indemnity optional coverage to suspend any Coinsurance penalty. How will covered losses will be calculated? a. The policy limit is $60,000. The business income loss is $50,000 per month for a period of restoration that lasts 90 days (3 mo). b. The policy limit is $600,000. The business income loss is $50,000 per months for a period of restoration that lasts 180 days (6 mo).

a. No Max Period of Indemnity cause less than 120 days - insurer will pay the policy limit of $60,000 b. Mac Period of Indemnity does apply cause more than 120 days - insurer will pay $200,000 - 200,000 = $50,000 per month * 4 months of restoration

Describe the application of the following terms found in the Business Income insuring agreement, as indicated in the following context: a. What must the "suspension" result from? b. What are the "operations" in relation to business activities of the insured and rental value coverage? c. When does the "period of restoration" begin and end?

a. The "suspension" must result from direct physical loss or damage to real or personal property caused by a covered cause of loss and occurring at the "premises" described in the declarations. b. The "operations" of the insured are (1) the business activities of the insured that occur at the premises described in the declarations or (2) in the case of rental value coverage, the "tenantability" of the described premises c. The "period of restorations" beings 72 hours after the physical loss occurs and ends when the property is (or should've been) restored to use