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
What is ordinary payroll expense
the entire payroll expense for all employees of the Insured, except officers, executives, department managers, employees under contract and other important employees whose services would not be dispensed with should the business be interfered with or interrupted.
Your clients are concerned that they might not have enough coverage to comply with the co-insurance requirement at the time of loss. They also don’t want to spend more than is necessary to purchase additional limits. Your recommendation is that they purchase increased amounts if they are concerned about not having enough insurance. At the same time, you advised them that there is a provision in Business Interruption policies which allows for a refund when too much insurance has been purchased. Outline four provisions contained in the Premium Adjustment Clause.
Application for the premium adjustment must be made within 12 months
When the Insurer has made payment for any loss, the premium is deemed to be fully earned
When coverage is on a 50% coinsurance basis, the Insured is entitled to a maximum refund of 25% of the annual premium.
When coverage is on an 80% coinsurance basis, the maximum refund is limited to 50% of the annual premium
Besides the savings in premium likely to be realized by the Insured, what reasons can be made for deleting ordinary payroll expense?
The Insurer may not recognize the continuation of these salaries as
being necessary continuing expenses. As a result, the Insured may
decide to reduce the premium payable by deleting ordinary payroll
coverage.
Indicate whether the coverage provided by this form would respond to pay for loss of income due to an interruption arising out of the following:
(a)____ Total loss of Insured’s stock by fire.
(b)____ Increase in time required to reinstate damaged property because of employee strike.
(c)____ Denial of customer access for period of two days when fire chief closed street due to fire which threatened entire business district.
(d)____ Fines levied by court against Insured for his failure to honour delivery terms as stated in contract.
(e)____ Loss of income for additional three months required by Insured to rebuild in compliance with local building by-laws.
Only those expenditures that result in a reduction of the loss are
reimbursed.
a) yes
b) no
c) yes
d) no
e) no
What arguments can be made for insuring ordinary payroll expense on a limited basis?
If the estimated interruption will only be for a short period (1-2
months), it would be wiser for the insured to insure this payroll
rather than recruiting and training new employees within weeks of
opening up again
The Profits Form provides the Insured with a number of coverage advantages over the Gross Earnings Form. Provide three key coverage features which you would discuss in a presentation to a potential client.
Indemnity Period is longer
By-Laws Coverage included
Due diligence and dispatch provision requires only that the Insureds do whatever they can do to prevent delays in reinstating the property
Discuss how the Profits Form deals with the following continuing expense items:
(a) Ordinary payroll.
(b) Depreciation of stock.
(c) Bad debts.
There is no coverage for ordinary payroll, depreciation of stock or bad
debts under the Profits Form. However, provision can be made for
insuring ordinary payroll.
What purpose is served by the Contributing Property(ies) Business Interruption form?
This form would be to insure contingent business interruption exposures
What kinds of businesses would purchase Extra Expense Insurance?
Businesses which need to resume operations as soon as possible after a loss or face a permanent loss of customers.
Describe how payment is made in the event of a loss.
The amount of insurance available is based on the time needed to resume normal operations referred to as “period of restoration.”
Your clients already have this coverage under the Business Interruption Form provided on their business. What advantage is gained when Insureds purchase additional limits of coverage under Contributing Property(ies) Form?
The Insured would not have to prove that the expense being
claimed resulted in a reduction in the amount of the business
interruption claim
Identify three factors which will be considered when determining the amount of a loss which is insured by the Rent or Rental Value Endorsement.
Actual annual rents
Estimated annual rental value of unoccupied portions
Fair rental value of portions of building occupied by the Insured
Income
includes all monies from sales or services rendered by a business
Fixed Expense
Are those which continue during the period of an interruption
Semi-Variable expenses
Are those expenses which may or may not continue during the period of interruption
Gross Profit
Is the sum produced by adding to the “net profit” the amount of the ‘insured standing charges’
Net Profit
Is the gross profit, minus all other expenses earned by the business
Actual Loss Sustained
The measure of recovery under the Gross Earnings Form - refers to the amount the business would actually have earned had the loss not occurred
Ordinary Payroll Expense
The entire payroll expense for all employees of the insured, except officers, executives, department managers, employees under contract and other important employees whose services would not be dispensed with should the business be interfered with or interrupted
Contributing Properties
The manufacturer or supplier upon whom the insured depends on for materials or goods
Recipient Properties
The customer(s) who the insured depends upon to purchase it’s products
Magnet Properties
Businesses which attract a large number of customers to an area
