Ch 10

Question 1

What consequences beyond damage to or destruction of tangible property might an organization suffer following a loss?

Answer 1

Loss of revenue or increased expenses.

Question 2

Explain why evaluating business income losses involves examining business documents and financial records rather than inspecting tangible property.

Answer 2

Business income losses are purely financial losses.

Question 3

Identify the question that an organization’s balance sheet answers.

Answer 3

Where do we stand right now.

Question 4

Identify the question that an organization’s income sheet answers.

Answer 4

How did we do during a particular time period?

Question 5

What is the intent of the BIC limitation of recovery to “actual loss sustained?”

Answer 5

Limit losses to those that are real and direct, rather than speculative. Not every property loss of interruption of operation results in loss of business income.

Question 6

Investure, Inc. is a brokerage company that owns a small suburban office building in which it occupies the first floor. Tenants occupy the second and third floors. A fire destroyed the incoming electrical power lines and made the building unusable for at least a month. The owner of Investure declared to the adjuster “It is imperative we stay open to service our customers and I will have our people working around the clock, if necessary, to set up records, computers, and phone lines in alternative office space.” the adjuster responded, “you have business income coverage, but, unfortunately, no rent insurance” Explain in what respect their payroll during relocation would be covered as a continuing expense.

Answer 6

Normal payroll that continues would be covered as a continuing expense.

Question 7

Investure, Inc. is a brokerage company that owns a small suburban office building in which it occupies the first floor. Tenants occupy the second and third floors. A fire destroyed the incoming electrical power lines and made the building unusable for at least a month. The owner of Investure declared to the adjuster “It is imperative we stay open to service our customers and I will have our people working around the clock, if necessary, to set up records, computers, and phone lines in alternative office space.” the adjuster responded, “you have business income coverage, but, unfortunately, no rent insurance” Explain in what respect their payroll during relocation would be covered as an extra expense.

Answer 7

Would be covered if it helps mitigate the suspension of business.

Question 8

Explain whether business income coverage or extra expense coverage applies to an organization’s normal expenses.

Answer 8

Business income coverage applies to normal operating system expenses that continue.

Extra expense coverage applies only to expenses that are above the normal amount.

Question 9

Describe the two-step process used to determine how much extra expense incurred by the insured is compensable by the Business Income and Extra Expense Coverage (BIC) form.

Answer 9

1) The adjuster determines if the expense is “extra” by verifying that it exceeds the normal operating expenses.
2) The adjuster has to determine whether the expense reduced the BIC loss that would have been incurred had the additional money not been spent.

Question 10

Explain why trend sheets are a better means of evaluating revenue trends than using a daily, weekly, or monthly average.

Answer 10

They reflect fluctuations in revenue and are more reflective of the loss period. An average includes all days and would usually result in higher revenues.

Question 11

What are the two methods commonly used to determine the value of net income plus continuing expenses owed under the BIC form?

Answer 11

Net income plus continuing expenses.

Gross profit less noncontinuing expenses.

Question 12

What is the reconciliation process and why is it used?

Answer 12

Matches net income and continuing expense projections with the actual sales made and expenses incurred during the loss period. It is necessary to avoid overpayment.

Question 13

Distinguish between the “loss period” and the “period of restoration” for business income and extra expense.

Answer 13

The loss period begins to run from the date of loss and includes the 72-hour deductibles and may include a period of time after operations resume.

The period of restoration begins i72 hours after the time of direct physical loss or damage For extra expense, the period of restoration begins immediately after the loss. The period of restoration ends on either the day property is repairers, rebuilt, or replaced using reasonable speed, or on the date when business is resumed at a new location.

Question 14

What are the advantages and disadvantages of using a reasonably expected time in which repairs should be completed?

Answer 14

Advantages:

• allows adjustment to be made prospectively or before repairs are complete.
• if damage isn’t repaired or repaired in a different manner they can still receive payment.
• eliminates delays
• can use proceeds as they prefer

Disadvantage

• uncertainty about the loss projection could cause overpayment.
• the insured might think the loss is underpaid.

Question 15

Identify the limitations of the ISO BIC form for losses caused by electronic media or data.

Answer 15

The longer of 60 days or the time needed to repair other property involved in the loss.

Question 16

Identify the limitations of the ISO BIC form for losses caused by strikers.

Answer 16

Any increase is not covered.

Question 17

Would the period of indemnity be extended and, if so, for how long.

Special machinery is not available because of a strike at the plant that produces the machinery.

Answer 17

If equipment is essential for repairs or rebuilding, the strike would be circumstances beyond the insurer’s control and would be covered.

Question 18

Would the period of indemnity be extended and, if so, for how long.

Inclement weather prevents major concrete work from being done at the damaged premises for an additional three weeks.

Answer 18

Inclement weather interfering with rebuilding is valid.

Question 19

Alpha Merchandise was damaged by fire on 12/18/12. In addition to other insurance, the company carried a BIC form.

They decided not to rebuild. Are they entitled to recover under BIC?

Answer 19

Yes. Thy don’t have to rebuild.

Question 20

Alpha Merchandise was damaged by fire on 12/18/12. In addition to other insurance, the company carried a BIC form.

Their policy expired on 1/1/13. It would take 6 months before they resume operations. Explain the effect of the policy expiration on the claims adjustment.

Answer 20

No effect.

Question 21

Explain the circumstances under which civil authority coverage applies.

Answer 21

Civil authorities prevent access to the insured premises because of direct physical loss to other property caused by a covered cause of loss

Question 22

Explain the circumstances under which coverage for alterations and new buildings applies.

Answer 22

Loss to alterations and new buildings causes actual loss of business income

Question 23

Explain the circumstances under which coverage for extended business income applies.

Answer 23

Up to 30 days when the business income loss continues after property has been restored.

Question 24

Explain the circumstances under which coverage for interruption of computer operations applies.

Answer 24

Extends cause of loss to interruption in computer operations caused by the destruction or corruption of electronic data from a covered cause of loss

Question 25

Explain the circumstances under which coverage for newly acquired locations applies.

Answer 25

Additional $100,000 for newly acquired property. Parallels property coverage for locations acquired during the policy term.

Question 26

The limits of insurance section of the BIC form provides that the most that can be paid for any one loss is the limit of insurance shown on the dec. This clause also restricts recovery to the stated limit for which additional coverages?

Answer 26

Alterations and new buildings.

Civil authority

Extra expense

Extended business income.

Question 27

Debbie sells a product in high demand. She had a BIC that covered the period of restoration and an extra 30 days of extended income. Her operations stopped due to a covered cause of loss. Property was restored in 4 months but it was 6 months before her income was back up to the level at which it would have been had no loss occurred. What could Debbie have done to cover this extended loss?

Answer 27

Could have purchased an extended period of indemnity.

Question 28

Against what amount is coinsurance compliance under the BIC coverage form determined?

Answer 28

Determined against net income plus all other operating lenses that would bag been earned or incurred for the 12 months following inception, or the last previous anniversary date of the policy.

Question 29

Explain why extra expense cannot be included in the insurable values upon which coinsurance is based.

Answer 29

Cannot forecast easily.

Question 30

Al, the owner of a successful retail store, was having a difficult time understanding the calculations of the coinsurance condition. He explained to his agent that he could rent out a substitute building and restock his inventory in fewer than 90 days. What coverage options to Al’s BIC might the agent suggest?

Answer 30

Maximum period of indemnity. Coinsurance doesn’t apply. Insurer pays lesser of amount g loss sustained and expenses incurred during the 120 days immediately following the beginning of the period of restoration or the limit shown in the declarations.

Question 31

Contrast the source of a for-profit organization’s revenue with the source of a not-for-profit organization’s

Answer 31

For-profit: revenue from sales of product or services

For not-for-profit: revenues, dues, memberships, contributions, sales

Question 32

Identify the two general categories of operating expenses.

Answer 32

General

Expenses directly related to sales.

Question 33

Contrast net income with gross profit.

Answer 33

Net income: all operating revenue less all operating expenses.

Gross profit: all operating revenue less cost of goods sold.

Question 34

Identify the circumstance in which physical damage or destruction of property can affect an organization’s income statement.

Answer 34

If it disrupts the organization sufficiently to cause a decrease in revenue, an increase in expenses, or both.

Question 35

Why is it essential for an adjuster to check the type of business income coverage of an insured?

Answer 35

It could cover just loss of income, or just loss caused by extra expenses, or both.

Question 36

What references in the ISO BIC form make clear that “business income” is determined by operating income and operating expense only?

Answer 36

Covers “actual loss of business income you sustain due to necessary suspension of your operations,”Additionally, “business income” is defined as “net income” plus “continuing normal operating expenses. “

Question 37

What are the three types of extra expenses under the BIC?

Answer 37

1) avoid or minimize the suspension of business and to continue operations.
2) minimize the suspension of business when the insure cannot continue operations.
3) repair property or restore records to the extent that it reduces other covered loss.

Question 38

How are causes of loss determined under the BIC?

Answer 38

A cause of loss to is added -basic, broad, or special.

Question 39

Explain how to determine loss settlement when revenue ceases but expenses continue.

Answer 39

Limit recovery to losses that are real and direct, rather than speculative. Not every property loss or interruption of operations results in a loss of business income.