Business Income Coverage Guide

Index

Chapter 1

Introduction

This book discusses business interruption coverage, or business income coverage, along with other time element coverages, as provided under standard forms primarily drafted by the Insurance Services Office, Inc. (ISO) and similar insurance industry trade groups.

What Is ISO?

For those not familiar with ISO, it dates to approximately 1960, when two insurance industry rating organizations, the Mutual Insurance Rating Board (MIRB) (representing mutual insurance companies) and the Insurance Rating Board (IRB) (representing stock companies and formerly known as the he National Bureau of Casualty Underwriters) established several committees to develop what would become the 1966 standard-form occurrence Commercial General Liability insurance policy. The IRB and MIRB merged in 1971 and formed ISO.

ISO gathers data that is filed with state regulators from commercial and personal property and casualty insurers, and among other things, develops standard policy forms, which it files for use with each state¹. ISO currently is an association of more than 1,000 domestic property and casualty insurers and operates as one of the most important sources of support services in the United States for the insurance industry.

What Is Business Income Insurance?

This book focuses on business income insurance, as well as other time element coverages, such as extra expense, civil authority, and business income and extra expense from dependent properties (formerly and sometimes still referred to as contingent business income and contingent extra expense). The advent of business income insurance dates to the early part of the twentieth century.

Insurance protection for loss of business earnings due to physical damage has undergone a gradual but steady evolution. Along with many changes in the provisions of coverage, it has also gone through several changes in name since the first time element coverage was written over a century ago. Known as use and occupancy insurance in its early days (a term that survived in boiler and machinery insurance until the late 1970s), the name, for fire insurance, was changed to business interruption insurance in the 1940s. This name, in turn, was replaced, under the ISO simplified commercial property program, by the term business income insurance.

Until the introduction of the current ISO business income coverage form, the predominant business interruption form in use was the gross earnings form. There were separate editions for mercantile and nonmanufacturing risks and for manufacturing risks, the difference between the two editions being the basis for computing the gross earnings. For the mercantile and nonmanufacturing form, gross earnings were net sales less cost of goods and consumable supplies for a twelve month period. For the manufacturing form, gross earnings were net sales value of production less cost of raw materials and consumable supplies for the same period.

For insureds who wanted a less complicated form, earnings insurance was introduced in the mid-1950s in the hope that a simplified form would encourage small to medium businesses that had not been purchasing business interruption insurance to do so. The principal point of difference between the earnings and the gross earnings forms was that the earnings forms did not have a coinsurance requirement, substituting instead a percentage limitation on recovery as respects each consecutive thirty days of interruption. Most insurers did not require the insured to submit a worksheet showing operating figures for the business, allowing the insured simply to pick an amount of insurance and choose any one of three available monthly limits.

Combined business interruption and extra expense insurance provided protection against reduction of business income due to interruption of operations combined with extra expense insurance. It covered the loss of earnings from business interruption, the extraordinary expenses undertaken to restore operations quickly following loss, and the cost to maintain operations on an emergency basis to avoid loss of sales or production after a loss. Extraordinary expenses were covered regardless of the cost of doing so without the limitation on expense to reduce loss to the amount by which the earnings loss is reduced, contained in the earnings and the gross earnings forms.

The Basic Elements of a Business Income Policy

A business income policy has many of the same elements found in other types of insurance policies. The policy generally begins with declarations, which is usually the first page or few pages of the policy. The declarations usually set forth the name of the insured and insurance company; the policy number; the policy period; information about limits, sublimits, and deductibles; and the identity and location of covered property. For an insured with many covered locations, the declarations can be lengthy and consist of several pages.

After the declarations come the coverage forms, including endorsements. Because business income, extra expense, and other time element coverages are first-party property insurance coverage, such forms often accompany forms associated with direct first-party property insurance, such as for physical loss or damage to insured property. This book does not address those forms, but they would typically be included in a policy that also contains time element coverages.

A business income form has many of the same components as other insurance policies, and it will be familiar to those used to reading insurance policies. The forms begins with a coverage grant, which outlines the basic coverage the form will provide to the insured. For the Business Income (And Extra Expense) Coverage Form, this includes a coverage grant for business income followed by a coverage grant for extra expense. The form also includes additional coverages, which have their own respective coverage grants.

After the coverage grant there is a section on limits of insurance. Limits are the amount the policy will pay for a loss. As stated, the limits are usually set out in the declarations. The form contains a section on loss conditions. Most of these will be recognizable to readers and include such conditions as notice and cooperation. A few that are more peculiar to first-party insurance—such as appraisal, proofs of loss, and examinations under oath—are discussed in more detail in Chapter 5.

The section of the form on loss conditions is followed by a long section on coinsurance. This, too, will be discussed in Chapter 5. The form ends with a definitions section.

Like most insurance policies, the main form is packaged with several endorsements. The coverage envisioned by the ISO forms is no different. ISO offers a wide array of endorsements that can add to, eliminate, or alter the coverage provided by the main form. Of course, endorsements can be mixed and matched, so as with all policies, endorsements should be read very carefully for their terms and effective dates.

Definitions

When reading any insurance policy or policy form, it is important to consider the defined terms when analyzing coverage claims. Discerning coverage under a business income and extra expense form is no different. These are the definitions that will be critical to keep in mind as the book dives into the ISO forms.

Finished Stock

1.    Finished stock means stock you have manufactured.

Finished stock also includes whiskey and alcoholic products being aged, unless there is a Coinsurance percentage shown for Business Income in the Declarations.

Finished stock does not include stock you have manufactured that is held for sale on the premises of any retail outlet insured under this Coverage Part.

Under the form, finished stock means the stock the insured has manufactured and includes whiskey and alcoholic products being aged, unless there is a coinsurance percentage shown for business income in the declarations. It does not include any stock that the insured manufactured that is held for sale on the premises of any retail outlets insured under the form.

Operations

2.    Operations means:

a.    Your business activities occurring at the described premises; and

b.    The tenantability of the described premises, if coverage for Business Income Including Rental Value or Rental Value applies.

Operations is a critical definition under the form, as it is one of the terms that influences the trigger of the business income coverage. The form defines operations as the insured’s business activities occurring at the described premises, as well as the tenantability of the described premises, if coverage for business income including rental value applies. It is these business activities from which the economic benefit flows that the business income coverage is intended to insure.

Period of Restoration

3.    Period of restoration means the period of time that:

a.    Begins:

(1)    72 hours after the time of direct physical loss or damage for Business Income Coverage; or

(2)    Immediately after the time of direct physical loss or damage for Extra Expense Coverage; caused by or resulting from any Covered Cause of Loss at the described premises; and

b.    Ends on the earlier of:

(1)    The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or

(2)    The date when business is resumed at a new permanent location.

Period of restoration does not include any increased period required due to the enforcement of or compliance with any ordinance or law that:

(1)    Regulates the construction, use or repair, or requires the tearing down of any property; or

(2)    Requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants.

The expiration date of this policy will not cut short the period of restoration.

Another key definition under the form is for the period of restoration. This is the hypothetical time it takes for damaged property to be restored or repaired to its preloss condition. It is one of the factors used to quantify the business income loss. The period of restoration begins seventy-two hours after the time of direct physical loss or damage—which was caused by or resulted from any covered cause of loss at the premises—for business income coverage or immediately after the time of direct physical loss or damage for extra expense coverage.

Note for purposes of the business income coverage, the period of restoration has a seventy-two-hour waiting period, such that property that is restored within that time will not carry with it a business income loss. That waiting period, however, does not apply to extra expense claims. The period of restoration ends at the earlier of the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality or the date when business is resumed at a new permanent location. The phrase repaired, rebuilt or replaced with reasonable speed and similar quality generally requires the insured to be diligent in its efforts—the phrase used to be with due diligence and dispatch—but also that the restored property must be of like kind. Moreover, the word should connotes that the period is the hypothetical, not the actual, amount of time it would take to do the repairs.

The period of restoration does not include any increased period required due to the enforcement of or compliance with any ordinance or law that…[r]egulates the construction, use or repair, or requires the tearing down of any property[, or r]equires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize or in any way respond to, or assess the effects of ‘pollutants.’ This provision cuts short the period based on code compliance and includes a pollution exclusion of sorts by not extending the period for any amount of time needed to deal with a pollution issue. The form also makes clear that the termination of the policy will not affect or cut short the period of restoration, meaning that the period can extend beyond the policy period where appropriate. This is critical for many catastrophic losses as the period of restoration can extend for many years.

Pollutants

4.    Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

The form contains a typical definition of the term pollutants, which means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste also has a typical definition, and includes materials to be recycled, reconditioned or reclaimed.

Rental Value

5.    Rental Value means the Business Income that consists of:

a.    Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred as rental income from tenant occupancy of the premises described in the Declarations as furnished and equipped by you, including fair rental value of any portion of the described premises which is occupied by you; and

b.    Continuing normal operating expenses incurred in connection with that premises, including:

(1)    Payroll; and

(2)    The amount of charges which are the legal obligation of the tenant(s) but would otherwise be your obligations.

Rental value as business income means net income (net profit or loss before income taxes) from rental property, including for any portion of the property that is occupied by the insured. It also includes necessary continuing operating expenses such as payroll and amounts that would be the insured’s obligation but that are the legal obligation of the tenant. Those are standard components of business income, but carried through to the use of a property for rent. Where rent is the type of income derived from a property, the form will provide business income coverage for any such loss of rents.

Suspension

6.    Suspension means:

a.    The slowdown or cessation of your business activities; or

b.    That a part or all of the described premises is rendered untenantable, if coverage for Business Income including Rental Value or Rental Value applies.

Another key term in the jurisprudence of first-party property losses is suspension, for it is a suspension of operations that triggers the business income coverage. The form defines suspension as the slowdown or cessation of [the insured’s] business activities or that a part of all of the described premises is rendered untenantable, if coverage for business income including rental value applies.

Much ink has been spilled, particularly since the September 11, 2001, terrorist attacks, on what constitutes a slowdown or a cessation, and whether such cessations must be total or partial for business income coverage to apply. Indeed, the definition seems to resolve the issue by not using the term necessary suspension, and specifically including the term slowdown followed by or to show that a so-called total cessation of operations is not necessary to trigger coverage. Prior decisions to the contrary² should not control the interpretation of this term.

Overview of this Book

Chapter 2 discusses the ISO Business Income (And Extra Expense) Coverage Form, CP 00 30 10 12, as well as the ISO standalone Business Income Coverage Form, CP 00 32 10 12, and Extra Expense Coverage Form, CP 00 50 10 12. It focuses on the basic business income and extra expense coverage grants. These forms and coverage grants are the backbone for all of what follows in this book. Chapter 3 turns to the three main causes of loss forms ISO provides for business income and extra expense coverage: the basic, broad, and special forms. Chapter 4 addresses some additional coverages, coverage limitations, and extensions. Perhaps most importantly, Chapter 4 covers civil authority and extended business income coverage.

Chapter 5 moves to the business income and extra expense coverage conditions. Conditions are an important component of almost all types of insurance coverage, and business income and extra expense are no different. Chapter 6 tackles optional coverages, such as the maximum period of indemnity, the monthly limit of indemnity, business income agreed value, and the extended period of indemnity.

Chapters 7, 8, and 9 discuss some complimentary ISO forms that are critical to time element coverage. Chapter 7 examines the business income and extra expense endorsements, with a brief overview of the text and purpose of each. Chapter 8 provides an in-depth look at the endorsements that provide business income and extra expense coverage for dependent properties. These coverages, formerly known as contingent business income and contingent time element, are vital to any business that relies on customers and suppliers to be profitable, which is just about every business. Chapter 9 covers the Business Income Worksheet, which is also an endorsement. This chapter is a how-to guide for readers to walk them through the process of completing the worksheet.

The final three chapters move away from ISO exclusively and discuss some other groups’ forms and topics. Chapter 10 compares the ISO form with the Time Element Coverage Parts of American Association of Insurance Services (AAIS), which, like ISO, is an insurance rating organization that develops standardized policy forms. Chapter 11, similarly, compares the ISO form with the Business Income and Extra Expense coverage provided under the Mutual Service Office, Inc. (MSO) form. MSO is a rating bureau that primarily serves mutual and stock insurers.

Chapter 12 covers some frequently encountered issues and hot topics, as of the drafting of this book.

Endnotes

1.      ISO develops standard policy forms and files or lodges them with each State’s insurance regulators; most [comprehensive general liability] insurance written in the United States is written on these forms. Hartford Fire Ins. Co. v. Merrett Underwriting Agency Management Limited, 113 S. Ct. 2891, 2896 (1993); see also Morton Int’l, Inc. v. General Accident Ins. Co. of Am., 134 N.J. 1 (1993); In re Hoechst Celanese Corp., 584 N.Y.S.2d 805, 806 (N.Y. App. Div. 1992).

2.      Keetch v. Mutual of Enumclaw Ins. Co., 831 P.2d 784 (Wash. Ct. App. 1992); Quality Oilfield Products, Inc. v. Michigan Mutual Ins. Co., 971 S.W.2d 635 (Tex. App. 1998); The Home Indemnity Co. v. Hyplains Beef L.C., 893 F. Supp. 987 (D. Kan. 1995).

Chapter 2

Insurance Services Office Business Income and Extra Expense Form—the Insuring Agreement

Business Income

Business income coverage, which at one time was referred to as use and occupancy coverage and is now often referred to as business interruption coverage, is the seminal type of time element coverage. Business income coverage is referred to as time element because, quite simply, an element of how it is calculated is time; in particular, the time from when a property damage loss occurs until the time when that property damage has been fixed to a point that is at or close to its pre-loss condition. That time itself has a special name, called the period of restoration.

The purpose of business income insurance is to put the insured in the financial position it would have been in but for the property loss. Karen L. Bush, quoting Keetch v. Mutual of Enumclaw Ins. Co., 831 P.2d 784 (Wash App. 1992), stated, "Business interruption insurance reimburses the insured for costs