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SLIDES-TECR-FISCE-CEP-CT

Time Element for Commercial

Risks

Presented By:

Catherine Trischan

CPCU, CRM, CIC, ARM, AU, AAI, CRIS, MLIS

Time Element

Coverages

Catherine Trischan, CPCU, CIC, CRM, ARM, AU, AAI, CRIS, MLIS

E&K Agency

Eatontown, NJ

[email protected]



Lost Time is Never Found Again

Benjamin Franklin

Purpose of Time Element Coverage

� To provide protection due to reduced earnings

and/or increased expenses that result from damage

to property

� To put the insured in substantially the same

financial position he would have been in had no

loss occurred

� Disability insurance for a business



Reasons to Purchase Time Element Coverage

� Pays continuing expenses as well as profits

� Allows the insured to retain key employees by

maintaining those salaries and benefits

� Encourages prompt settlement of a direct property

loss

� Helps the insured to retain customers and stay in

business

Business Income and Extra Expense Form

� Pay for continuing normal operating expenses

� Pay for lost profits

� Pay above normal expenses to continue operations

� Pay expenses to return to normal operations as

soon as possible



“Business Income”

� Net Income (Profit or Loss) that would have been

earned; and

� Continuing normal operating expenses, including

payroll

� For manufacturing risks, net income includes the net

sales value of production.

Harry’s Hangers is a manufacturing company

that is unable to resume production until thirty

days after a fire loss. Because Harry’s has a

large stock of finished hangers, it is able to sell

from its finished stock while the premises is

being repaired. There is no loss of revenue

during the period of restoration. The loss of

revenue will be felt later, though, and the

Business Income coverage will respond.

Manufacturing Scenario



“Period of Restoration”

� Begins with a covered loss to property on premises

� 72 hour waiting period applies to Business Income,

not to Extra Expense

� Ends when the property should be repaired or

replaced, or the business relocated

� Does not include extra time required due to

enforcement of building laws or due to pollution

clean-up

Waiting Period

� No Extra Expense Waiting Period

� 72 hour Business Income Waiting Period

- Change or eliminate waiting period

(CP 15 56)



Ordinance or Law - Increased Period

of Restoration (CP 15 31)

Amends the "Period of Restoration" to

include increased time necessary to

comply with existing building laws and

codes regulating construction or repair of

damaged buildings

“Rental Value”

� Net profit that would have been realized from rental

income

� Continuing normal operating expenses, including

payroll

� Continuing charges for which the tenant would have

been legally responsible

� Fair Rental Value of any portion occupied by the

insured

� Declarations page must indicate that Rental Value is

to be covered.



Elements of a Business Income Loss

1. Suspension of Operations

The slowdown or cessation of your business

activities


2. Direct physical loss of or damage to property at premises

� Premises includes the area within 100 feet of the

building or described premises, whichever is greater

� If only part of the premises is occupied by the

insured, premises includes areas within the building or

on the premises used to service or gain access to the

premises

� The damaged property doesn’t need to be covered

property for Business Income Coverage to apply




3. Covered Cause of Loss

Basic

Broad

Special


4. Actual loss of business income

� Net Income that would have been earned or

incurred; and

� Continuing normal operating expenses

incurred, including payroll



Extra Expense

� Extra expenses must be necessary expenses

incurred due to a covered loss.

� Extra expenses must minimize the

suspension of business.

� Extra expenses to replace property must

reduce the amount of the Business Income

loss.

� No 72 hour waiting period

� Not additional insurance



Business Income Exclusions

� Loss resulting from damage to finished stock

� Loss resulting from damage to radio or television antennas

� Increase of loss resulting from delays due to strikers

� Increase of business income loss or extra expense, beyond

the period of restoration, resulting from suspension or

cancellation of any license, lease or contract

� Other consequential losses

Additional Limitation

Additional Limitation – Interruption of Computer

Operations

� Applies to both Business Income and Extra

Expense

� Coverage for electronic data is only provided in

the Additional Coverage – Interruption of

Computer Operations.

� Electronic data is described.



Four Additional Coverages

1. Civil Authority

� Applies when access to the insured premises is prohibited due to a covered direct physical loss of or damage to property within one mileof the insured’s location

� 72 hour business income waiting period

� No extra expense waiting period

� 4 week time period

� Time Period and/or radius can be increased

(CP 15 32)


2. Alterations and New Buildings

� Covers loss due to direct damage on

the described premises for the

following:

� New building or structures,

� Alterations or additions to existing

building or structures

� Material within 100 feet for use in

construction




2. Alterations and New Buildings

� The "Period of Restoration" begins on

the date "operations" would have

begun if direct physical loss or damage

had not occurred.


� This coverage doesn’t apply to new

buildings at another premises.

3. Extended Business Income

� Starts when the property is replaced and

operations are resumed

� Up to 60 days coverage

� Does not apply to loss resulting from

unfavorable business conditions caused by the

impact of the loss in the area





Tommy’s Trattoria was shut down for three

months after a fire destroyed much of the

premises. Tommy re-opened on March 1st, but

business didn’t return to normal for another

two months. Business Income coverage will

continue to apply for 60 days, from March 1st.

Extended BI Scenario

Extended Period of Indemnity

� Increases the Extended Business Income

time period from the 60 days included

� Options range from 90 to 730 days

� Important for businesses that will need a

long period of time after the period of

restoration ends to get business back to pre-

loss levels

� Be sure to include enough dollars of

coverage to cover the extended period




4. Interruption of Computer Operations

� Specified causes of loss

� Includes coverage against virus, unless it is

introduced by an employee or contractor

� $2,500 aggregate limit

Coverage Extension

Newly Acquired Locations

� Only applies with coinsurance percentage of 50% or higher

� Insured may extend Business Income coverage

to new locations acquired, other than fairs or

exhibitions.

� $100,000 limit per location

� Up to 30 days coverage



Loss Determination

The amount of Business Income loss will be determined based

on:

(1) Net Income before the loss

(2) The likely Net Income of the business if no physical

loss or damage had occurred, BUT…

(3) The operating expenses, including payroll expenses,

necessary to resume "operations" with the same quality

of service that existed just before the direct physical

loss or damage; and

(4) Other relevant sources of information

Loss Determination

The amount of Extra Expense will be determined based on:

All expenses that exceed the normal operating expenses that would

have been incurred… with deductions for:

(a) The salvage value that remains of any property bought for

temporary use

(b) Any Extra Expense that is paid for by other insurance

All necessary expenses that reduce the Business Income loss.



Resumption of Operations

� Business Income loss is reduced to the extent

"operations" resume in whole or in part

� Extra Expense loss is reduced to the extent you

can resume normal operations

� If "operations" are not resumed, pay based on

the length of time it would have taken to

resume "operations" as quickly as possible

Coinsurance

� Coinsurance applies to Business Income only

� Coinsurance does not apply to Extra Expense

� 50%, 60%, 70%, 80%, 90%, 100% and 125%

options are available.

� The rate decreases as the coinsurance percentage

increases.



Coinsurance

Limit =

Coinsurance Percentage x [Net Income + Operating

Expenses (that would have been earned or

incurred for the 12 months following the

inception or anniversary date of the policy)]

Coinsurance

Few Operating Expenses can be Excluded:

� Prepaid freight – outgoing

� Returns and allowances;

� Discounts;

� Bad debts;

� Collection expenses;

� Raw stock and factory supplies consumed

� Cost of merchandise sold

� Cost of other supplies consumed

� Cost of services purchased from outsiders



Payroll Limitation/Exclusion

Payroll Limitation or Exclusion

CP 15 10 10 12

� Limits payment of payroll expense to:

0 days;

90 days; or

180 days

� Endorsement allows flexibility in deciding which payroll

will be limited or excluded.

� Different options can be chosen for different locations.

Power, Heat & Refrigeration

Power, Heat and Refrigeration Deduction (CP 15 11)

A. Business Income does not include the cost of power,

heat or refrigeration:

Consumed in production "operations"; and

That does not continue under contract.

B. In determining the operating expenses for the policy

year for coinsurance purposes, the cost of power, heat or

refrigeration as described in paragraph A. of this

endorsement will not be included.



Coinsurance

Amount Paid =

Did X Loss (not to exceed the limit of insurance)

Should

Coinsurance Example

Net Income + Operating

Expenses for 12 months

following inception

$1,000,000

Coinsurance Percentage 80%

Limit of Insurance $600,000

Limit that should’ve been carried $1,000,000 x 80% =

$800,000

Loss (Net Income + continuing

operating expenses)

$400,000

Amount Paid $600,000/$800,000 x

$400,000 = $300,000



Cost of Goods

Operating Expenses

Profit

Where does the Money Go?

Determining the Proper Limit

1. What is the Expected Annual Business Income? (Net Profit/Loss plus operating expenses)

Remember:

Annual Sales = cost of goods + operating expenses + net profit/loss

Expected Annual BI = operating expenses + net profit/loss

Expected Annual BI = annual sales minus cost of goods




Business Income for last year + growth factor for next 12 months

Consider:

Type of business

Economic conditions

Local conditions

Past experience of the insured

Plans for the future

1. What is the Expected Annual Business Income? (Net Profit/Loss plus operating expenses)


WARNING! INCLUDE ALL OPERATING EXPENSES, NOT JUST THOSE THAT YOU EXPECT WILL CONTINUE!

Failure to do so will most certainly result in a coinsurance penalty!




2. How long will operations be suspended?

� Consider time to rebuild

� Consider the worst-case scenario


3. Maximum possible loss for time operations

are suspended

� Consider seasonal variations

� Operating expenses plus net profit for busiest

months

� This is the amount of business income

insurance needed to cover the period of

restoration.




4. Set a limit and coinsurance

Amount of Business Income Insurance (Step 3) = coinsurance %

Expected Annual Business Income (Step 1)

5. Add additional amount needed for extra

expense and/or extended period of indemnity.

Cathy’s Shoe Store

Last year Projection for

upcoming year

Gross Sales 1,000,000 1,100,000

Cost of Shoes

Purchased for

Resale

500,000 550,000

Operating

Expenses

400,000 440,000

Profit 100,000 110,000




Projected Gross Sales $1,100,000

- Cost of Goods Sold - $550,000

= Expected Annual BI =$550,000

Projected Annual Operating

Expenses

$440,000

+ Projected Net Profit + $110,000

= Expected Annual BI = $550,000


Expected Annual BI $550,000

How long will operations be

suspended?

9 months

Maximum Possible loss for time

operations are suspended (limit of

insurance)

$550,000 x 9/12 =

$412,500 max. loss

Limit and Coinsurance % $412,500/$550,000 =

.75 (70% coins.)

Add Extra Expense and Extended

Period of Indemnity Dollars

Amount to be

determined after

discussion with insured



Cathy’s Nursery

Season - April 1 through October 1

Gross Sales - $1,000,000

Costs of Goods Sold - $500,000

Operating Expenses - $400,000

Net Profit - $100,000

Rebuild Time - 6 months

Cathy’s Nursery

Common Error!

� $1,000,000 gross sales - $500,000 cost of goods =

$500,000 OR

� $400,000 operating expenses + $100,000 net profit

= $500,000

� $500,000 x 50% coinsurance (based on 6 month

rebuilding) = $250,000 limit

Fire occurs on 4/1 and the business is shut down for 6

months.



Cathy’s Nursery

Has Cathy satisfied her coinsurance

requirement?

YES

Does Cathy have enough insurance to make

her whole?

NO

Cathy’s Nursery

Projected Gross Sales $1,000,000

- Cost of Goods Sold - $500,000

= Expected Annual BI =$500,000

Projected Annual Operating

Expenses

$400,000

+ Projected Net Profit + $100,000

= Expected Annual BI = $500,000



Cathy’s Nursery

Expected Annual BI $500,000

How long will operations be

suspended?

6 months

Maximum Possible loss for time

operations are suspended (limit of

insurance)

$500,000

Limit and Coinsurance % $500,000/$500,000 =

100%

Add Extra Expense and Extended

Period of Indemnity Dollars

Discuss Amount with

Insured

Maximum Period of Indemnity

� Coinsurance does not apply

� Loss is limited to the lesser of:

1) The limit of insurance

2) 120 days following the beginning of the

“Period of Restoration”




Advantages

1) High limit to satisfy coinsurance isn’t required

2) No monthly limitation on payment

3) Easier to choose a limit

4) No need to disclose detailed financial

information

5) Easy to explain and understand


Disadvantages

1) Rate is higher than writing coverage on a

coinsurance basis or a monthly limit of

indemnity.

2) Coverage ends after 120 days, even if the dollar

limit of coverage has not been exhausted.

3) This option is good only for insureds who will

have a period of restoration less than 120 days.



Monthly Limit of Indemnity

� Coinsurance does not apply

� Loss is limited by the fraction shown in the

Declarations multiplied by the limit of

insurance, for each 30 consecutive days

following the beginning of the “Period of

Restoration”


Advantages

1) High limit to satisfy coinsurance isn’t required

2) It can be used for insureds who will have a

period of restoration longer than 120 days

3) Easier to choose a limit

4) No need to disclose detailed financial

information




Disadvantages

1) Rate is higher than writing coverage on a

coinsurance basis

2) Business Income coverage is limited during any

one thirty day period

Monthly Indemnity

30 day periods Business Income

loss per month

Amount paid

1 $60,000 $60,000

2 $80,000 $75,000

3 $50,000 $50,000

4 $40,000 $40,000

5 $20,000 $20,000

Limit of Insurance - $300,000 at ¼ monthly indemnity



Monthly Indemnity

30 day

periods

Business

Income loss

Extra

Expenses

Incurred

Amount paid

1 $80,000 $30,000

2 $110,000 $5,000

3 $60,000 $5,000

4 $30,000 $10,000

Limit of Insurance - $300,000 at 1/3 monthly indemnity

Monthly Indemnity

30 day

periods

Business

Income loss

Extra

Expenses

Incurred

Amount paid

1 $80,000 $30,000 $110,000

2 $110,000 $5,000 $105,000

3 $60,000 $5,000 $65,000

4 $30,000 $10,000 $20,000

Limit of Insurance - $300,000 at 1/3 monthly indemnity



Agreed Value

� Coinsurance is suspended

� Insured must buy the amount of insurance

needed to satisfy coinsurance

� Business Income Report/Work Sheet (CP 15

15) must be submitted to the company.

Agreed Value

Advantages

1) No monthly limitation

2) Eliminates the possibility of a coinsurance

penalty



Agreed Value

Disadvantages

1) Requires detailed financial information and

completion of ISO worksheet

2) Limit may be too low to compensate the insured

even though there is no possibility of a

coinsurance penalty

Business Income w/o Extra Expense

Extra Expense Coverage is replaced with Expense to

Reduce Loss.

� It pays for extra expense only to the extent

that it will reduce the amount of loss that

would have been otherwise payable under the

coverage form.



Nancy’s Needlepoint sells T-shirts and caps

with embroidered pictures and slogans. The

machine Nancy uses to do the embroidery is

very specialized and is made only in Germany.

It will take approximately 4 weeks to get a new

one. Nancy can rent a machine for the four

weeks at a cost of $20,000.

BI w/o EE Scenario

Extra Expense Coverage Form

A. Pays for costs incurred that are in excess of

normal operating expenses

� Designed for insureds with no business

income exposure

� Useful for insureds who must stay in

operation regardless of cost




B. Pays to continue operations

C. Pays to minimize the suspension if operations

cannot continue

D. Pays extra expenses to repair or replace property,

but only to the extent that it reduces the amount

otherwise payable as extra expense

Extra Expense Limit

$100,000

40-80-100

or

$100,000

100-100-100

Example:



Extra Expense Form

Step #1 - Determine the length of the shutdown.

Step #2 - Based on Step #1, choose the appropriate % from

the Declarations Page.

30 days or less - Use first %

31 - 60 days - Use the second %

Over 60 days - Use the third %

Step #3 - Multiply the limit of insurance by the %

determined in Step #2. This is the amount available to pay

the loss.


• Period of Restoration 30 days or less, 40% of limit is available

• Period of Restoration 31 to 60 days, 80% of limit is available

• Period of Restoration over 60 days, 100% of limit is available

Limits on Loss Payment

e.g. $100,000 limit

40-80-100



A Few Additional Endorsements

Discretionary Payroll Expense CP 15 04

� Payroll for scheduled classifications or

employees will be considered continuing normal

operating expenses whether or not the expense is

necessary to resume operations.

� A maximum number of days of coverage is

specified for listed employees and/or classifications

� Eliminates disputes after a loss about which

payroll expenses will continue to be paid



Utility Services – Time ElementCP 15 45

Covers loss when service to an insured’s premises is

interrupted by a covered cause of loss.

�Water Supply Services

�Waste Water Removal Property

�Communications Supply Services

�Power Supply Services

�Overhead Transmission Lines may be excluded

Dependent Properties

� Contributing Properties

� Recipient Locations

� Manufacturing Locations

� Leader Locations



1. Extends business income coverage and limits to

respond when direct damage occurs at the

premises of a "dependent property" described in

the endorsement

2. Name, location and occupancy of the dependent

property are included on the schedule.

2. Coverage for secondary (unnamed) contributing

and recipient locations can be included.

Business Income from Dependent Properties

– Broad Form

CP 15 08

1. Separate limits apply to the dependent property


property are included

3. A limit of insurance is shown

Business Income from Dependent Properties

– Limited Form

CP 15 09



1. Provides extra expense coverage to respond when

direct damage occurs at the premises of a

"dependent property" described in the endorsement


property are included

3. A limit of insurance is shown

4. Only used with the Extra Expense Coverage Form

Extra Expense from Dependent Properties –

Limited Form

CP 15 34

Dependent Properties -

International

�Business Income from Dependent

Properties – Limited International

Coverage (CP 15 01)

�Extra Expense from Dependent

Properties – Limited International

Coverage (CP 15 02)



COURSE MATERIAL DISCLAIMER

• The information contained in this continuing education/ webinar presentation is for your general information and personal use only.

• It is subject to change without notice. While we endeavor to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the accuracy, completeness, reliability, suitability or availability with respect to the webinar or the information, products, services, or related graphics contained on the presentation slides for any purpose.

• We do not provide legal or other professional advice. Please seek the services of a qualified professional for advice on specific and factual questions or guidance.

• The course material includes copyrighted information.

• Reproduction of the material requires permission in writing.

• Submit reproduction requests to FISCE: [email protected].

FLORIDA MANDATORY REMINDER-

UNAUTHORIZED ENTITIES

• An entity that is required to be licensed or registered with the Florida Office of Insurance

Regulation but is operating without the proper authorization is identified as an

unauthorized insurer. All persons have the responsibility of conducting reasonable

research to ensure they are not writing policies or placing business with an unauthorized

insurer. Any person who, directly or indirectly, aid or represent an unauthorized insurer

can lose their licenses or face other disciplinary sanctions. Please see section 626.901,

Florida Statutes, to read the laws. Lack of careful screening can result in significant

financial loss to Florida consumers due to unpaid claims and/or theft of premiums.

Under Florida law, a person can be charged with a third-degree felony and also held

liable for any unpaid claims and refund of premiums when representing an unauthorized

insurer. It is the person’s responsibility to give fair and accurate information regarding

the companies they represent.

• For more information please contact http://www.floir.com/CompanySearch

time element coverages - iabforme.com€¦ · tommy’s trattoria was shut down for three months...

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