Most commercial property insurance policies provide coverage for business income loss by adding an endorsement to the insured’s property policy. This endorsement is designed to protect the insured for losses of business income it sustains as a result of direct loss, damage, or destruction to insured property by a covered peril. Although many such clauses are in use today, a typical business income insurance clause reads as follows:
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 the direct physical loss, damage, or destruction to property. The loss or damage must be caused by or result from a covered cause of loss.
In order to better understand business income insurance let’s explore the three terms highlighted above:
- Actual loss sustained: Business income coverage covers the actual loss sustained by the insured as a result of direct physical loss or damage to the insured’s property by a peril not otherwise excluded from the policy.
The insurer is only obligated to pay if the insured actually sustained an interruption of business leading to a business income loss. If the insured does sustain a business income loss, the extent of the insurer’s obligation is limited to the dollar amount of loss actually sustained, but not to exceed the applicable policy limit.
- Business income: Usually, the carrier is liable for the reduction in net income that results from suspension of operations—whether wholly or partially—due to a physical loss at the insured’s premises. This following commonly used definition of business income is intended to clarify what sums can be included when calculating the amount of loss.
"Business income includes the net income (net profit or loss before income taxes) that would have been earned or incurred by the insured and the continuing normal operating expenses incurred, including payroll.”
- Period of restoration: Insurers are liable for the loss of business income only during the period of restoration, which is often defined as the length of time required to rebuild, repair, or replace the damaged or destroyed property. The period of restoration begins when the physical loss or damage occurs; it ends when the property should, with reasonable speed, be repaired or replaced.
Expiration of the policy does not end the period of restoration. As long as the physical loss occurs during the policy period, the business income coverage will provide coverage for the duration of the period of restoration, even if the policy expires before the period of restoration ends.
The business income endorsement published by the Insurance Service Office (ISO)—as well as some insurer forms—includes a 30-day extended period of restoration beyond the standard period of restoration (the period from the time of loss until the time of repair or replacement).
However, the insured may require more than this 30-day limit. To address this issue, an insured may elect to increase this limit from 30 days to any multiple of 30 days up to 720 days. This is accomplished by purchasing the extended period of indemnity optional endorsement offered through ISO.
In addition to coverage for business income, the business income endorsement of the property policy can provide other coverages, know as “additional coverages.” An example of an “additional coverage” is extra expense, which is detailed below.
Extra expense is defined as the necessary expense incurred by the insured during the period of restoration that it would not have been subjected to if there had been no physical loss to real or personal property caused by a covered peril.
Note that when a business income loss occurs, the insured is obligated to take reasonable steps to try to avert or minimize such loss: Any expenses incurred to reduce the loss are covered as part of the business income loss. The insurer will typically limit such expenses to the point that such expenses reduce the business income claim. In other words, the insurer will not pay any part of the expense that is more than the claim itself.
For example, the insurer will reimburse the insured $100 to reduce the claim by $200; but the insurer will not reimburse the insured $100 if the claim is only reduced by $50. Any additional expenses above this that are incurred to continue the business may be recoverable under an extra expense provision in the insurance policy.
Additionally, the business income endorsement section of property policies can include “extensions of coverage,” wherein the insured’s policy will insure against business income losses resulting from a variety of causes, including the following. (Note a sublimit typically applies for these optional, additional coverages.)
- Service interruption provides coverage for an insured for direct physical loss, damage, or destruction to electrical, steam, gas, water, sewer, telephone, or any other utility or service including transmission lines and related plants, substations, and equipment of suppliers of such services.
The owners, managers, or operators of such utilities or services cannot be a named insured under the policy. The loss, damage, or destruction at the location of the utility or service must be the result of a peril(s) similar to the peril(s) covered under the insured’s policy. Note that the policy may impose some limitations, such as:
- Limitations regarding distances (such as where the actual loss occurs to the utility’s property in relation to the insured’s premises where the business income loss occurs).
- Exclusion for certain perils such as earthquake.
- Exclusions for overhead transmission and distribution lines.
- Contingent business interruption (CBI) coverage is designed to cover an insured’s business income loss resulting from loss, damage, or destruction of property owned by others, including: direct “suppliers” of goods or services to the insured and/or direct “receivers” of goods or services manufactured or provided by the insured. The property damage to these suppliers or receivers must be of a type that would be covered by the insured’s policy had the damage happened to the insured’s property.
As noted, CBI coverage provides coverage for the “direct” relationship between the insured’s “suppliers” or “receivers” of its goods or services. This can create a gap in coverage for insureds involved in multi-tiered supply chains.
For example, consider that a supplier or customer of one of the insured’s direct suppliers experiences a loss resulting in an interruption to its operations, which in turn causes a disruption to the insured’s direct supplier/customer. Ultimately, this also causes a business income loss to the insured. Its policy will likely exclude coverage for this business income loss as the insured’s direct supplier did not experience direct physical damage/loss.
This coverage is typically added to a property policy by endorsement if requested by the insured. Commonly, the suppliers of the direct supplier—known as the “indirect” suppliers or “receivers”—must be identified.
- Leader property is an endorsement that provides coverage to the insured for direct physical loss, damage, or destruction of the type insured by the insured’s property policy to property not owned or operated by the insured, located within the stated distance to insured’s property or business, and which attracts business to the insured. Examples would include a nearby amusement park, casino, mall, or destination retail store.
- Interruption by civil or military authority coverage is provided to the insured for the actual loss sustained by the insured during the length of time when access to such described premises is specifically prohibited by order of civil authority as a direct result of damage as insured against in the insured’s policy, to covered property on the described premises or property adjacent to the premises described in the insured’s policy.
The coverage time period most commonly stated in this endorsement is either 14 or 30 consecutive days. The carrier may also impose a waiting period that must be reached in order for coverage to attach: Common waiting periods are 24 hours, 48 hours, or 72 hours.
As illustrated by the various coverage options discussed, there are many considerations that businesses must weigh when purchasing business interruption coverage. In fact, the above are basic coverages; additional coverage options exist and can be customized based on an individual company’s needs. To learn more about business interruption, or to discuss the coverages that would be most appropriate for your organization, please contact your local Marsh representative.