Business Income Coverage Guide

Sherilyn Pastor, Nicholas M. Insua

• Publisher: The National Underwriter Company
• Year: 2015
• ISBN:
  9781941627549
• Topic: Business
• Subtopic: Insurance
• Index: Business

This brand new resource is the all-inclusive reference encompassing ISO, AAIS, and MSO Business Income coverage programs. It delivers: • Line-by-line analysis of full-text forms and endorsements • Turnkey case law application to clarify tricky policy language and settle potential interpretation disputes • Clear illustrations on the use of endorsements to cover exposures as well as situations that are excluded on the basic form • Expert answers to frequently asked questions about real-life claims scenarios • And much more! Business Income Coverage Guide also covers the most current—and costly—topics in Business Income today, such as service interruption, pandemic business income, contingent coverage, extended period of indemnity, and much more. This valuable combination, covering both fundamental issues and trending topics, is truly a one-of-a-kind resource. The practice-tested insights found throughout this guide could only be delivered by our expert authors, Nicholas M. Insua, Esq., and Sherilyn Pastor, Esq., partners at McCarter & English. Business Income Coverage Guide delivers expert insights and proven strategies in one of the most important—and growing—areas of commercial coverage.

Chapter 1

Introduction

This book discusses business interruption coverage, or business income coverage, along with other time element coverages, as provided under standard forms primarily drafted by the Insurance Services Office, Inc. (ISO) and similar insurance industry trade groups.

What Is ISO?

For those not familiar with ISO, it dates to approximately 1960, when two insurance industry rating organizations, the Mutual Insurance Rating Board (MIRB) (representing mutual insurance companies) and the Insurance Rating Board (IRB) (representing stock companies and formerly known as the he National Bureau of Casualty Underwriters) established several committees to develop what would become the 1966 standard-form “occurrence” Commercial General Liability insurance policy. The IRB and MIRB merged in 1971 and formed ISO.

ISO gathers data that is filed with state regulators from commercial and personal property and casualty insurers, and among other things, develops standard policy forms, which it files for use with each state¹. ISO currently is an association of more than 1,000 domestic property and casualty insurers and operates as one of the most important sources of support services in the United States for the insurance industry.

What Is Business Income Insurance?

This book focuses on business income insurance, as well as other time element coverages, such as extra expense, civil authority, and business income and extra expense from dependent properties (formerly and sometimes still referred to as contingent business income and contingent extra expense). The advent of business income insurance dates to the early part of the twentieth century.

Insurance protection for loss of business earnings due to physical damage has undergone a gradual but steady evolution. Along with many changes in the provisions of coverage, it has also gone through several changes in name since the first time element coverage was written over a century ago. Known as “use and occupancy insurance” in its early days (a term that survived in boiler and machinery insurance until the late 1970s), the name, for fire insurance, was changed to “business interruption insurance” in the 1940s. This name, in turn, was replaced, under the ISO simplified commercial property program, by the term “business income insurance.”

Until the introduction of the current ISO business income coverage form, the predominant business interruption form in use was the gross earnings form. There were separate editions for mercantile and nonmanufacturing risks and for manufacturing risks, the difference between the two editions being the basis for computing the gross earnings. For the mercantile and nonmanufacturing form, gross earnings were net sales less cost of goods and consumable supplies for a twelve month period. For the manufacturing form, gross earnings were net sales value of production less cost of raw materials and consumable supplies for the same period.

For insureds who wanted a less complicated form, earnings insurance was introduced in the mid-1950s in the hope that a simplified form would encourage small to medium businesses that had not been purchasing business interruption insurance to do so. The principal point of difference between the earnings and the gross earnings forms was that the earnings forms did not have a coinsurance requirement, substituting instead a percentage limitation on recovery as respects each consecutive thirty days of interruption. Most insurers did not require the insured to submit a worksheet showing operating figures for the business, allowing the insured simply to pick an amount of insurance and choose any one of three available monthly limits.

Combined business interruption and extra expense insurance provided protection against reduction of business income due to interruption of operations combined with extra expense insurance. It covered the loss of earnings from business interruption, the extraordinary expenses undertaken to restore operations quickly following loss, and the cost to maintain operations on an emergency basis to avoid loss of sales or production after a loss. Extraordinary expenses were covered regardless of the cost of doing so without the limitation on expense to reduce loss to the amount by which the earnings loss is reduced, contained in the earnings and the gross earnings forms.

The Basic Elements of a Business Income Policy

A business income policy has many of the same elements found in other types of insurance policies. The policy generally begins with declarations, which is usually the first page or few pages of the policy. The declarations usually set forth the name of the insured and insurance company; the policy number; the policy period; information about limits, sublimits, and deductibles; and the identity and location of covered property. For an insured with many covered locations, the declarations can be lengthy and consist of several pages.

After the declarations come the coverage forms, including endorsements. Because business income, extra expense, and other time element coverages are first-party property insurance coverage, such forms often accompany forms associated with direct first-party property insurance, such as for physical loss or damage to insured property. This book does not address those forms, but they would typically be included in a policy that also contains time element coverages.

A business income form has many of the same components as other insurance policies, and it will be familiar to those used to reading insurance policies. The forms begins with a coverage grant, which outlines the basic coverage the form will provide to the insured. For the Business Income (And Extra Expense) Coverage Form, this includes a coverage grant for business income followed by a coverage grant for extra expense. The form also includes additional coverages, which have their own respective coverage grants.

After the coverage grant there is a section on limits of insurance. Limits are the amount the policy will pay for a loss. As stated, the limits are usually set out in the declarations. The form contains a section on loss conditions. Most of these will be recognizable to readers and include such conditions as notice and cooperation. A few that are more peculiar to first-party insurance—such as appraisal, proofs of loss, and examinations under oath—are discussed in more detail in Chapter 5.

The section of the form on loss conditions is followed by a long section on coinsurance. This, too, will be discussed in Chapter 5. The form ends with a definitions section.

Like most insurance policies, the main form is packaged with several endorsements. The coverage envisioned by the ISO forms is no different. ISO offers a wide array of endorsements that can add to, eliminate, or alter the coverage provided by the main form. Of course, endorsements can be mixed and matched, so as with all policies, endorsements should be read very carefully for their terms and effective dates.

Definitions

When reading any insurance policy or policy form, it is important to consider the defined terms when analyzing coverage claims. Discerning coverage under a business income and extra expense form is no different. These are the definitions that will be critical to keep in mind as the book dives into the ISO forms.

Finished Stock

1. “Finished stock” means stock you have manufactured.

“Finished stock” also includes whiskey and alcoholic products being aged, unless there is a Coinsurance percentage shown for Business Income in the Declarations.

“Finished stock” does not include stock you have manufactured that is held for sale on the premises of any retail outlet insured under this Coverage Part.

Under the form, “finished stock” means the stock the insured has manufactured and includes whiskey and alcoholic products being aged, unless there is a coinsurance percentage shown for business income in the declarations. It does not include any stock that the insured manufactured that is held for sale on the premises of any retail outlets insured under the form.

Operations

2. “Operations” means:

a. Your business activities occurring at the described premises; and

b. The tenantability of the described premises, if coverage for Business Income Including “Rental Value” or “Rental Value” applies.

“Operations” is a critical definition under the form, as it is one of the terms that influences the trigger of the business income coverage. The form defines “operations” as the insured’s business activities occurring at the described premises, as well as the tenantability of the described premises, if coverage for business income including rental value applies. It is these business activities from which the economic benefit flows that the business income coverage is intended to insure.

Period of Restoration

3. “Period of restoration” means the period of time that:

a. Begins:

(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.”

Another key definition under the form is for the “period of restoration.” This is the hypothetical time it takes for damaged property to be restored or repaired to its preloss condition. It is one of the factors used to quantify the business income loss. The period of restoration begins seventy-two hours after the time of direct physical loss or damage—which was caused by or resulted from any covered cause of loss at the premises—for business income coverage or immediately after the time of direct physical loss or damage for extra expense coverage.

Note for purposes of the business income coverage, the period of restoration has a seventy-two-hour “waiting period,” such that property that is restored within that time will not carry with it a business income loss. That waiting period, however, does not apply to extra expense claims. The period of restoration ends at the earlier of “the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality” or the “date when business is resumed at a new permanen...