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Business Income Refresher
Chubb Commercial Insurance

Need a crash course in Business Income? Read on...

 

Business Income (BI) insures the net profit (or loss) and continuing expenses you (the insured) would have had if there had not been any covered loss.  Any expense that is not necessary to continue will not be paid. 

Continuing Expenses are normal operating expenses, including payroll that may continue during the period of restoration and extended period of indemnity.

Non-Continuing Expenses are normal operating expenses that do not continue during the period of restoration and extended period of indemnity.           

Period of Restoration is the period of time that payment for the covered losses will continue until:

  • the property is restored;
  • for manufacturers, plus the time it takes for them to restore their manufacturing production capabilities; or
  • the limit of insurance is exhausted, whichever occurs first.

Extended Period of Indemnity The policy may provide for an extended period of indemnity which insures the difference between what the business is doing following restoration of property and what it would have done had no loss occurred.  Most companies grant 30 days coverage for the extended period of indemnity with the option to purchase a greater time frame up to “unlimited”.

Waiting Period:  A waiting period is an amount of time, represented by normal business hours, which must elapse before the insurance company will start calculating a BI loss.  The BI coverage starts after the waiting period is exhausted.  The waiting period does not apply to extra expense.  This is so you may use the EE dollars immediately so as to return to business quickly.

100% Business Income:  The 100% BI amount is determined by completing a BI Worksheet. The worksheet sets forth what constitutes the 100% BI for the 12 months of the policy year.  In theory, if you were out of business for 12 months, and you determined the 100% BI correctly, you would have insurance for 12 months.  If you determine that recovery will take a period longer then 12 months, you will need to calculate an increased BI limit.  You must be conservative in estimating how long it will take you to return to the business to where it would have been if no loss occurred.

If you estimate it would take the following recovery times:

  • 9 months (optimistic) you’d require 75% of the 100% BI;
  • 12 months, you’d require 100% of the 100% BI; or
  • 18 months, you’d require 150% of the 100% BI;

Ordinary Payroll:  Ordinary payroll is automatically covered under Business Income.  If you do not want to cover the ordinary payroll, it must be excluded or limited by endorsement.  Non-ordinary payroll or executive payroll may not be excluded as these individuals are essential for the insured’s return to business.

Failure to insure the ordinary payroll may cause you problems in returning to the market place because trained employees may not be available.  In such cases training costs are not insured and may represent a considerable amount plus a delay in returning to business.

There are two types of payroll:

Executive Payroll
  • officers;
  • executives;
  • department managers;
  • employees under contract; and
  • any additional person or persons the insured wants to decree as executive payroll either by job classification or by individual’s names. 
Ordinary Payroll
  • payroll;
  • benefits;
  • governmental pensions paid by the insured;
  • union dues paid by the insured; and
  • Worker’s Compensation premium.

Even though it is usually not advisable to exclude ordinary payroll, you have the option to exclude the ordinary payroll entirely or insure the ordinary payroll for 30, 60, 90 or 180 days.  

Extra Expense (EE) insures those necessary expenses, over and above your normal operating expenses, you pay in an attempt to reduce the BI loss and/or return to business more rapidly than if such extra expenses were not paid.

Business Income Including Extra Expense Combined Limits: If the combined BI/EE form is purchased, values for BI and EE should be established and combined.  Too many times only the BI value is calculated. At the time of loss, the combined BI/EE limit of insurance may be used entirely for BI; entirely for EE; or any combination of BI/EE.