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Business Income and Undeclared Buildings

Author: Mike Edwards 
Question“I recently acquired an account mid-term through Agent of Record. In keeping with our agency procedure of reviewing all AOR/BOR accounts within 10 days, I found something puzzling in the coverages written by the previous agent. The insured operates a food processing plant, which requires a lot of water. They have their own source of water, which comes from a well on site. The high speed water pump and filtration system is located in a small building (‘Building #2’) about 100 feet from the main building (‘Building #1’), where the actual processing work is done. Building #2 also has a couple of offices, a small shop, plus a storage area for old office records and miscellaneous supplies.
“The Business Income coverage lists only Building #1, and my concern is that if something happened to Building #2 – such as lightning – there would be considerable loss of income, as the food processing operation cannot function without water. My question is whether or not there would be any business income coverage if we leave the policy written this way? My instinct is to describe both buildings.”
AnswerFirst, kudos for the agency’s procedure on reviewing all AOR/BOR accounts within 10 days. That is the recommendation of just about every E&O expert I’ve ever talked to.
I agree with your instincts to describe both buildings. In the CP 00 10 – Building and Personal Property Coverage Form, coverage for items such as fixtures, machinery, equipment, and business personal property, etc., is provided only if such property is located in a described building. (In contrast, the ISO BOP (BP 00 03) is less restrictive, as it covers buildings and business personal property “at the premises described.”)
Excerpt from CP 00 10 [emphasis added]:
A. Coverage
1. Covered Property
a. Building, meaning the building or structure described in the Declarations, including:
2) Fixtures, including outdoor fixtures;
(3) Permanently installed:
(a) Machinery and
(b) Equipment;
b. Your Business Personal Property located in or on the building described in the Declarations or in the open (or in a vehicle) within 100 feet of the described premises…
Business income coverage (and extra expense coverage – BI/EE) work differently, however. If damage to an undeclared building causes a suspension of business operations (as in your question), BI/EE coverage still applies. Excerpt from CP 00 30 06 07 – Business Income (And Extra Expense) Coverage Form [emphasis added]:
A. Coverage
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.
Two important points. First, the damage (by a covered cause of loss) need only occur to “property,” which is not limited to damage to covered property. For example, if vandals came onto the premises one night and destroyed all the refrigerated trucks used by your insured to transport the processed food to customers, this would most likely cause a suspension of operations. The resulting BI/EE loss would be covered, even though refrigerated trucks are not a class of property covered by the CP 00 10. However, the CP 00 30 only requires “damage to property.”
The second point is that BI/EE coverage is not tied to any specific building, as you inquired about. In the case of your insured, so long as a covered cause of loss (lightning as you suggested) caused damage to property (including an uninsured building) at the described premises, then there is coverage. On the other hand, if the building housing the water pump and filtration equipment was located at another premises (“Location #2,” and not described in the policy), then there would be no BI/EE coverage for the suspension of operations at “Location #1” – the location of the processing plant where coverage was described.
Nonetheless, I still agree with you that the best approach in general is to declare all buildings, unless the insured stipulates that they contain no real or business personal property of any consequence related to a direct property loss, or a BI/EE loss. And, of course, be sure to document the insured’s request not to include coverage on such buildings. This can be done as a part of the coverage checklist, which you and the insured should always sign. Thanks for a great question!
Last Updated: February 2012
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Alexandria VA 22314
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