Chapter 3 Flashcards
1-2 give three examples of normal operating expenses that could continue during a short business interruption.
Payroll of key employees, debt repayments, and taxes.
1-3 give three examples of extra expenses that might be incurred to continue operations after a physical loss.
Temporary office space, overtime pay, overnight shipment of repair parts.
1-4 describe what must occur, according to the usual business income insuring agreement, for business income to apply.
Must be an interruption of operations caused by property damage from a covered peril to property at locations or situations described in the policy, resulting in a loss of business income and/or extra expense.
1-5 surewell aircraft manufactures small, single-engine aircraft. It annually assembles 100 aircraft at its plant in Arizona from composite-material bodies manufactured in Mexico and engines manufactured in England specifically for surewells aircraft. Analyze surewell’s business income loss exposure.
Loss of income from manufacture/sale of aircraft, extra expense to rent equipment and a facility, and damage at key providers’ plants.
2-1a what must a business income suspension result from?
Direct physical loss or damage to real or personal property covered by a covered cause of loss and occurring at the “premises@ described in the declarations.
2-1b what are the “operations” in relation to business activities of the insured and rental value coverage?
Business activities of the insured that occur at the premises described in the declarations OR for rental value coverage , the “tenantability” of the described premises.
2-1c when does the “period of restoration” begin and end?
Begins 72 hours after the physical loss occurs and ends when the property is, or should be, restored to use with reasonable speed.
2-2 explain how extra expenses to repair or replace property are treated differently than other expenses in the extra expense insuring agreement.
Covered to the extent that they actually reduce the business income loss. Other extra expenses, such as the costs to move to a temporary location, increased rent at the temporary location, rental of substitute equipment, and the cost of substitute services such as data processing, are covered in full, subject to the policy limit, and are not limited to the amount by which they reduce the extra expense loss. Coverage applies even if the business income loss is not reduced at all.
2-3 explain how the definition of premises is broadened if the insured is a tenant.
Includes “any area within the building or on the site … if that area services, or is used to gain access to, the described premises.”
2-4 does business income (without extra expense) cover overnight shipping if they need to replace damaged goods and avoid losing sales?
Yes; as long as it reduces the business income loss that would have been incurred had they not paid the shipping charges.
2-5 net profit = $10k; continuing expenses (rent, taxes, insurance not salary) = $4k. What would the business income loss be considered?
1) net profit or loss that would have been earned or incurred if the suspension had not occurred. Subject to a 72 hour waiting period. $10,000 would be included in this definition and 2) Normal operating expenses, including payroll, that continue during the suspension. The continuing operating expenses totaling $4,000 would be covered.
3-1 explain a danger to an insured covered by the business income (without extra expense) form regarding expenses incurred to reduce loss.
The insured may incur extra expenses other than the reduction in business income loss.
3-2 explain the purpose of alterations and new buildings additional coverage in the business income form.
Covers loss of income resulting from a delay in beginning operations if the delay results from damage at the described premises by a covered loss to any of the following: 1) new buildings or structures, either completed or under construction, 2) alterations or additions to existing buildings, 3) machinery, equipment, supplies, or building materials located on or within 100 feet of the described premises (provided they are used in the construction, alterations, or additions or are incidental to the occupancy of the new building).
3-3 explain the purpose of interruption of computer operations additional coverage in the bic
$2500 for all loss of business income or extra expense when business operations are suspended due to an interruption of computer operations resulting from the destruction or corruption of electronic data caused by a covered cause of loss.
3-4 Janet’s dental office is damaged in a windstorm. She has a bic without extra expense. Period of restoration was 7 months but office is now restored. Not all patients returned. Will bic cover?
Regular BIC is extended to include business income losses that continue after the period of restoration. Coverage begins when the damaged property is restored and ends when business returns to normal UP TO 60 DAYS.
3-5 bob fixes computers in his shop. He has been expanded and opened a new store 60 days ago. The new store had a fire loss and store was unusable. He has a bic and bought newly acquired locations coverage. Did not report new store until day of fire. Covered?
Would have been covered if he reported the location WITHIN 30 DAYS OF OPENING.
4-1 compare writing the limits of insurance for business income on a specific basis with doing so on a blanket basis.
Specific - specific limit for each building. Blanket - one limit for all buildings at one location or all buildings at multiple locations
4-2 describe how the amount of a business income loss is determined in the BIC.
Based on: net income before loss occurred, probable net income of business if no loss had occurred, continuing operating expenses, etc.
4-3 What are the different coinsurance percentages that can be used with the BIC?
50, 60, 70, 80. 90, 100, 125, or no coinsurance.
4-4 how is the denominator for business income coinsurance formula calculated?
Multiply coinsurance percentage by the sum of the net income plus all operating expenses that would have been occurred in the absence of a loss for the 12 month period beginning at the inception or latest anniversary date of the policy.
4-5 Susan’s sporting goods is insured for $60k under a BIC form with a 60% coinsurance clause. A fire causes the store to close for a month. The net income and operating expenses would have been $180k. For the month they were closed, the Susan’s business income loss (net income plus continuing operating expenses) was $12k. What dollar amount will Susan recover from her insurer for this business income loss?
$90k coinsurance is required and $60k was carried. 60/90 x 12000 = 8,000
5-1 identify three optional BIC coverages that eliminate or suspend the coinsurance condition.
Maximum Period of Indemnity, Monthly Limit of Indemnity, Business Income Agreed Value
5-2 when is the only time insureds should add the Maximum Period of Indemnity coverage to their BIC insurance?
If they are certain suspension of operations will last no more than 4 months.
5-3 Describe the two steps necessary to activate the Business Income Agreed Value coverage option.
1) Secure a completed business income report/worksheet with the following info: actual data for most recent 12-month accounting period AND estimated data for the 12 months immediately following the inception of coverage. 2) Enter the agreed value into the declarations. Must be at least equal to the product obtained by multiplying to coinsurance percentage shown in the declarations by the estimated net income and operating expenses shown on the worksheet for the 12 months following the inception of coverage.
