chapter7

Question 1

Why some clients may be reluctant to discuss business interruption Insurance.

Answer 1

Seen as being too technical;

• Reluctant to reveal earnings;
• Lack of consumer knowledge

Question 2

Sources of business interruption losses

Answer 2

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

Question 3

Three other sources of funding to pay continuing expenses, other than business interruption insurance.

Answer 3

1) Use capital reserves to pay expenses;
2) Bank loan;
3) Increase product prices to cover the loss

Question 4

Two key coverages provided by business interruption policies

Answer 4

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

Question 5

“Income.”

Answer 5

Includes all monies from sales or services rendered by a business.

Question 6

“Fixed expenses

Answer 6

Expenses that continue during the period of an interruption. Includes mortgage interest, interest on accounts payable, management salaries and salaries under contract,

Question 7

“Semi-variable expenses

Answer 7

Expenses that may or may not continue during the period of interruption. Includes advertising, short-term salary continuation, warehousing costs, etc.

Question 8

Five common characteristics of business interruption insurance forms

Answer 8

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.

Question 9

“Gross profit” in insurance terms

Answer 9

The sum of “net profit” and “standing charges.”

Question 10

Net profit” in insurance terms

Answer 10

Gross profit minus all other expenses earned by the business

Question 11

How “gross profit” in accounting terms is different from “gross profit” in insurance terms.

Answer 11

“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

Question 12

Difference in indemnity period between the Gross Earnings Form and the Profits Form

Answer 12

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.

Question 13

Indemnity period maximum under both the Gross Earnings Form and the Profits Form.

Answer 13

12 months. May be extended for additional premium.

Question 14

Two factors to determine type of business interruption coverage required.

Answer 14

Nature of the business;
2) Types of perils likely to cause interruption.
Both affect length of possible interruption

Question 15

Coverage provided by the Gross Earnings Form

Answer 15

Covers the reduction in gross earnings, less charges and expenses, that don’t necessarily continue during the interruption of the business.

Question 16

Coverage provided by the Profits Form

Answer 16

Covers net profit + standing charges

Question 17

“Actual loss sustained” when referring to loss of income.

Answer 17

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.

Question 18

Two factors that might affect determination of actual loss (of income) sustained.

Answer 18

1Competition increase or decrease;

2) Economic conditions getting worse or better.

Question 19

Ordinary Payroll Expense.”

Answer 19

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

Question 20

A reason for deleting ordinary payroll expense

Answer 20

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..

Question 21

Why it might be a good idea to insure ordinary payroll expense on a limited basis.

Answer 21

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.

Question 22

The restriction on expenses incurred by insured to reduce the amount of loss.

Answer 22

Only those expenses that result in a reduction of the loss are reimbursed

Question 23

Three coverage advantages of the Profits Form over the Gross Earnings form.

Answer 23

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.

Question 24

There’s no coverage for these three items under the Profits Form.

Answer 24

1) Ordinary payroll (can be added);
2) Depreciation of stock;
3) Bad debts.

Question 25

“Contributing properties.”

Answer 25

The manufacturer or supplier the insured depends on for materials or goods.

Question 26

Recipient properties.”

Answer 26

The customer(s) the insured depends on to purchase its products.

Question 27

Magnet properties.”

Answer 27

Businesses that attract a large number of customers in an area

Question 28

Purpose served by the Contributing Property(ies) Business Interruption Form.

Answer 28

Protects against substantial losses when a large customer or supplier has an interruption to their business, which causes the insured to lose income

Question 29

Types of businesses that buy Extra Expense Insurance

Answer 29

Those that need to resume operations as soon as possible after a loss, otherwise they’ll permanently lose customers.

Question 30

How payment is made under Extra Expense Insurance in the event of a loss.

Answer 30

Based on the time needed to resume normal operations, which is known as the “period of restoration.”

Question 31

Three factors considered when determining the amount of loss insured by the Rent or Rental Value Endorsement

Answer 31

1) Actual annual rents;
2) Estimated annual rental value of unoccupied portions;
3) Fair rental value of portions of building occupied by the insured.