Chapter 7 Flashcards
The financial loss to a business can exceed the amount of the loss to its physical assets. In addition to the loss of tangible property, what other kinds of financial loss would affect the Insured’s ability to continue in business after a loss
Loss of income
Your clients don’t want to discuss the need to purchase Business Interruption insurance. State three reasons they might have for ignoring this very important exposure to loss
perceived as been too technical
reluctance to reveal earnings
lack of consumer knowledge
Identify possible sources of business interruption losses
Physical damage to property
Failure or breakdown of public utilities
Transportation related accidents
Physical damage to neighboring premises
Loss caused to property of major supplier or customer
Actions of regulatory authorities
Ancillary causes - strikes/lockouts
When Business Interruption insurance is not purchased, the business owner must look for additional sources of funding to pay continuing expenses. Identify three other possible sources of funding.
Take money out of capital reserves to pay expenses
Bank loan
Increase product prices to cover the loss
Purchase adequate limits of Business Interruption insurance
A key difference in the approach taken to insuring loss of income under each of the Gross Earnings and Profits Forms is the Period of Indemnity. Explain.
The period of indemnity under the Gross Earnings Form ends immediately upon the reinstatement of the lost or damaged property. The indemnity period under the Profits Form continues until income is restored to the level that would have been at if the loss had not occurred. The indemnity period under both forms is usually 12 months but can be extended for an additional premium.
Identify five characteristics common to Business Interruption insurance forms
Insure against the same perils as are insured by the property policy
Are contracts of indemnity
Period of Indemnity is not limited by the policy period
Provide for payment of expenses necessarily incurred to reduce the amount of the loss
Provide for payment when access to the Insured’s premises is prohibited by order of civil authority
Identify two types of expenses insured by Business Interruption policies and provide two examples of each
Fixes Expenses:
- Mortgage interest
- Property taxes
Semi-Variable Expenses
- Advertising
- Warehousing costs
The meaning given to certain financial terms in Business Interruption policies will often vary from that used in accounting circles. It is crucial that the broker, the Insureds and their accountants are aware of these potential differences in meaning. Discuss using the term gross profit as an example.
The gross profit shown on the financial statement is not an accurate value to use when insuring the gross profits of a business. This is because the calculation of gross profit on the financial statement allows more deductions than does gross profit calculated for insurance purposes. If this amount were to be used as the basis of insurance, the Insured will be under insured in the event of a loss.
Your client has been in business for less than six months. She advises that she does not need Business Interruption insurance because the business is not expected to show a profit for at least another 12 - 18 months. Discuss how you might deal with this statement.
As her expenses will still continue, the need for business interruption
exists.
The type of Business Interruption Coverage required by the business should be based on a consideration of two important factors. Identify these factors and provide a brief statement as to how they could affect a decision as to the type of coverage to be purchased.
Nature of the Business: important in determining the length or duration of a possible interruption
Types of perils most likely to cause an interruption - the period of business interruption will vary depending the type of peril which caused the loss. Therefore, if a peril such as fire is the highest exposure for a business the interruption will be longer than for a brief power outage
Your client is insured under a Broad Form commercial policy. The Gross Earnings Form insures gross earnings while the Profits Form insures the gross profit of the business. Outline, in a single sentence, the coverage provided by each of these forms.
Gross Earnings covers the reduction in gross earnings less charges and expenses which do not necessarily continue during the interruption of the business.
Gross Profit covers the sum produced by adding to the net profit the amount of the insured standing charges.
The gross earnings endorsement form provides for the payment of losses on an actual loss sustained basis. When referring to loss of income, what is the major consideration in determining this amount
The Insured is entitled only to the amount of business would actually have earned had the loss not occurred. To determine that amount will involve a review of the Insured’s pre-loss sales and other income. Next, an assessment must be undertaken to determine if sales and other income trends would have continued had the loss not occurred.
Identify two factors which might affect the determination of this amount?
Competition increase or decrease
Economic Conditions getting worse or better
The Insureds recently suffered a total fire loss to their building. They have advised you that they will be taking a six week European holiday before they make any decision on rebuilding. Discuss how that might affect the amount of any settlement provided under the gross earnings form
The Earnings Form requires that the property be re-instated with due diligence and dispatch. By taking this opportunity to go on holidays, the Insured is not acting with due diligence and dispatch and the amount of payment will be reduced accordingly.
Insureds are entitled to be compensated for expenses incurred by them in reducing the amount of their loss after an interruption. What restriction does the Insurer place on the gross earnings endorsement form
Must show that the reduction does not exceed the amount by which the loss has been reduced