chapter7 Flashcards
Why some clients may be reluctant to discuss business interruption Insurance.
Seen as being too technical;
- Reluctant to reveal earnings;
- Lack of consumer knowledge
Sources of business interruption losses
Physical damage to property;
- Failure or breakdown of public utilities;
- Transportation-related accidents;
- Physical damage to neighbouring premises;
- Loss caused to property of major supplier or customer;
- Ancillary causes - strikes/lockouts
Three other sources of funding to pay continuing expenses, other than business interruption insurance.
1) Use capital reserves to pay expenses;
2) Bank loan;
3) Increase product prices to cover the loss
Two key coverages provided by business interruption policies
Insure lost net profit of the business which it could have earned had there been no loss
Insure expense that must continue during period of business interruption
“Income.”
Includes all monies from sales or services rendered by a business.
“Fixed expenses
Expenses that continue during the period of an interruption. Includes mortgage interest, interest on accounts payable, management salaries and salaries under contract,
“Semi-variable expenses
Expenses that may or may not continue during the period of interruption. Includes advertising, short-term salary continuation, warehousing costs, etc.
Five common characteristics of business interruption insurance forms
1) Insure against same perils as insured by the property policy;
2) Contracts of indemnity;
3) Period of indemnity is not limited by the policy period;
4) Provide payment of expenses necessarily incurred to reduce amount of loss;
5) Provide payment when access to insured’s premises is prohibited by order of civil authority.
“Gross profit” in insurance terms
The sum of “net profit” and “standing charges.”
Net profit” in insurance terms
Gross profit minus all other expenses earned by the business
How “gross profit” in accounting terms is different from “gross profit” in insurance terms.
“Gross profit” on a financial statement allows more deductions than “gross profit” calculated for insurance. If the accounting amount were used, the insured would be under-insured in the event of a loss
Difference in indemnity period between the Gross Earnings Form and the Profits Form
Gross Earnings - ends upon reinstatement of the lost or damaged property;
Profits - continues until income is restored to the level it would have been at if the loss hadn’t occurred.
Indemnity period maximum under both the Gross Earnings Form and the Profits Form.
12 months. May be extended for additional premium.
Two factors to determine type of business interruption coverage required.
Nature of the business;
2) Types of perils likely to cause interruption.
Both affect length of possible interruption
Coverage provided by the Gross Earnings Form
Covers the reduction in gross earnings, less charges and expenses, that don’t necessarily continue during the interruption of the business.
Coverage provided by the Profits Form
Covers net profit + standing charges
“Actual loss sustained” when referring to loss of income.
The amount the business would actually have earned had the loss not occurred.
Determining this involves reviewing pre-loss sales and other income, then assessing whether sales and other income trends would have continued had the loss not occurred.
Two factors that might affect determination of actual loss (of income) sustained.
1Competition increase or decrease;
2) Economic conditions getting worse or better.
Ordinary Payroll Expense.”
The payroll expense for all employees of the insured, except officers, executives, department managers, employees under contract and other important employees whose services would be needed should there be a business interruption
A reason for deleting ordinary payroll expense
The insurer may not recognize these salaries as necessary continuing expenses, so the insured may decide to delete ordinary payroll expense coverage to save premium..
Why it might be a good idea to insure ordinary payroll expense on a limited basis.
If the estimated interruption will only be for a short time (1 to 2 months), it’s wiser to insure this payroll instead of recruiting and training new employees.
The restriction on expenses incurred by insured to reduce the amount of loss.
Only those expenses that result in a reduction of the loss are reimbursed
Three coverage advantages of the Profits Form over the Gross Earnings form.
1) Indemnity period is longer;
2) By-laws coverage included;
3) Due diligence and dispatch provision requires only that the insureds do what they can to prevent delays in reinstating the property.
There’s no coverage for these three items under the Profits Form.
1) Ordinary payroll (can be added);
2) Depreciation of stock;
3) Bad debts.
“Contributing properties.”
The manufacturer or supplier the insured depends on for materials or goods.
Recipient properties.”
The customer(s) the insured depends on to purchase its products.
Magnet properties.”
Businesses that attract a large number of customers in an area
Purpose served by the Contributing Property(ies) Business Interruption Form.
Protects against substantial losses when a large customer or supplier has an interruption to their business, which causes the insured to lose income
Types of businesses that buy Extra Expense Insurance
Those that need to resume operations as soon as possible after a loss, otherwise they’ll permanently lose customers.
How payment is made under Extra Expense Insurance in the event of a loss.
Based on the time needed to resume normal operations, which is known as the “period of restoration.”
Three factors considered when determining the amount of loss insured by the Rent or Rental Value Endorsement
1) Actual annual rents;
2) Estimated annual rental value of unoccupied portions;
3) Fair rental value of portions of building occupied by the insured.
