Author: Mike Edwards
"I am stumped on a couple of business income issues, and would appreciate your help. First, I'm trying to figure out the difference between Extended Business Income, Extended Period of Indemnity, and Maximum Period of Indemnity. Second, how do all these differ from 'regular' Business Income? I realize these are probably pretty basic questions, so my apologies in advance. I am still learning about Business Income."
No apology needed. I've been in insurance for over 30 years, and I'm still learning, too. In fact, in my view, every agent should be committed throughout their career to the goal of "still learning."
For the discussion below, assume: (1) Your insured is "JJ's Restaurant," which is owned by Jill Smith and her daughter Jillette. (2) The restaurant is damaged by a fire on March 9. (3) Coverage form excerpts and comments are based on ISO (Insurance Services Office) forms. (4) Proprietary forms may be different.
I think the key to understanding these three options is to first see how "regular" Business Income coverage works. Below are pertinent excerpts from the ISO Business Income coverage form – CP 00 30 10 12.
Issue #1: ("Regular") Business Income coverage
CP 00 30 10 12
Business Income (And Extra Expense) Coverage Form
1. Business Income
We will pay for the actual loss of Business Income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration". The "suspension" must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit Of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.
(1) For JJ's Restaurant to have a valid Business Income claim, their operations must be suspended due to direct physical damage by a Covered Cause of Loss to property at their premises.
(2) Business Income is defined as "a. Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and b. Continuing normal operating expenses incurred, including payroll."
(3) Payment for the loss of income ("a." above) as well as for the continuing normal operating expenses ("b." above) is made for the duration of time it takes to get the restaurant repaired, rebuilt, or relocated, which is referred to as the "period of restoration."
3. "Period of restoration" means the period of time that:
(1) 72 hours after the time of direct physical loss or damage for Business Income Coverage; or
(2) Immediately after the time of direct physical loss or damage for Extra Expense Coverage;
caused by or resulting from any Covered Cause of Loss at the described premises; and
b. Ends on the earlier of:
(1) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or
(2) The date when business is resumed at a new permanent location.
"Period of restoration" does not include any increased period required due to the enforcement of or compliance with any ordinance or law that:
(1) Regulates the construction, use or repair, or requires the tearing down, of any property; or
(2) Requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants".
The expiration date of this policy will not cut short the "period of restoration".
(1) The definition of the "period of restoration" clearly lays out the span of time for which JJ's Restaurant can be compensated. [3.a. and 3.b. above.]
(2) The 72-hour delay in the commencement of the period of restoration can be reduced or eliminated by endorsement CP 15 56 – Business Income Changes – Beginning of the Period of Restoration.
(3) But even after all repairs are completed and JJ's Restaurant is back in business, there is still a potential vulnerability: customer traffic may not return to pre-loss levels immediately. In other words, income might lag behind what it otherwise would have been before the loss. This exposure is commonly referred to as a "lag loss." It is impossible to accurately predict how long this diminished-income period will last, so consultation with the insured on this point is very important.
(3) The CP 00 30 includes a little cushion for lag losses, called "Extended Business Income."
Issue #2: Extended Business Income
CP 00 30 10 12
5. Additional Coverages
c. Extended Business Income
(1) Business Income Other Than "Rental Value"
If the necessary "suspension" of your "operations" produces a Business Income loss payable under this policy, we will pay for the actual loss of Business Income you incur during the period that:
(a) Begins on the date property (except "finished stock") is actually repaired, rebuilt or replaced and "operations" are resumed; and
(b) Ends on the earlier of:
(i) The date you could restore your "operations", with reasonable speed, to the level which would generate the business income amount that would have existed if no direct physical loss or damage had occurred; or
(ii) 60 consecutive days after the date determined in (1)(a) above.
However, Extended Business Income does not apply to loss of Business Income incurred as a result of unfavorable business conditions caused by the impact of the Covered Cause of Loss in the area where the described premises are located.
Loss of Business Income must be caused by direct physical loss or damage at the described premises caused by or resulting from any Covered Cause of Loss.
(1) Extended Business Income starts when repairs are completed [c.(1)(a)], and can last up to 60 days [c.(1)(b)(i)(ii)]. That is, Extended Business Income starts when the period of restoration ends.
(2) Note that Extended Business Income is automatically included in the CP 00 30, as an Additional Coverage. No endorsement is needed.
(3) Depending on JJ's reputation and customer loyalty, and other factors that need to be addressed with Jill and Jillette, the income might return within 60 days.
(4) For some business income insureds, they may recognize that the 60 days of Extended Business Income coverage is insufficient to cover anticipated lag losses. For those insureds, a critical available option is Extended Period of Indemnity.
Issue #3: Extended Period of Indemnity
CP 00 30 10 12
E. Optional Coverages
4. Extended Period Of Indemnity
Under Paragraph A.5.c., Extended Business Income, the number 60 in Subparagraphs (1)(b) and (2)(b) is replaced by the number shown in the Declarations for this Optional Coverage.
(1) A good memory-jogger to remember Extended Period of Indemnity is that it "extends Extended Business Income" (beyond 60 days).
(2) Under ISO Rule 51.D., options are available for Extended Period of Indemnity up to 730 days (2 years).
Issue #4: Maximum Period of Indemnity
The Maximum Period of Indemnity is one of three Optional Coverages available to an insured as an alternative to the Additional Condition – Coinsurance requirement. The three options are Maximum Period of Indemnity, Monthly Limit of Indemnity, and Business Income Agreed Value.
CP 00 30 10 12
E. Optional Coverages
1. Maximum Period Of Indemnity
a. The Additional Condition, Coinsurance, does not apply to this Coverage Form at the described premises to which this Optional Coverage applies.
b. The most we will pay for the total of Business Income loss and Extra Expense is the lesser of:
(1) The amount of loss sustained and expenses incurred during the 120 days immediately following the beginning of the "period of restoration" or
(2) The Limit Of Insurance shown in the Declarations.
(1) Maximum Period of Indemnity provides coverage for up to 120 days. Essentially, the insured's "period of restoration" is limited to 4 months.
(2) This optional coverage is much simpler to manage than Coinsurance, Monthly Limit of Indemnity, or Business Income Agreed Value.
(3) For insureds who could either rebuild, repair, or relocate in that period of time, it can be the best option.
(4) However, a miscalculation by an insured that the business could be up and running in that amount of time can be catastrophic, since the Extended Period of Indemnity option cannot be used if the Maximum Period of Indemnity option is selected. [ISO Manual – Business Income Coverage Options, Rule 51.D.2]
(5) There appears to be no ISO Manual Rule regarding the applicability of Extended Business Income (the 60-day extension), if the Maximum Period of Indemnity option is selected. Therefore, the insured might be able to have the 120 days, plus 60 days, coverage. Insurers may differ on this, however, absent any ISO guidance.
Last Updated: November 1, 2016