Underinsuring business income is troublesome given that coinsurance penalties can be catastrophic. This is particularly true when a business experiences sales and profits far beyond those anticipated or if the business is new and really doesn’t know how it will perform relative to its pro forma budget.

Sometimes it’s wise to insure the exposure without coinsurance, even though it can double the coverage cost. ISO provides three ways:

Monthly limit of indemnity. This option establishes a maximum monthly recovery based on a fraction that is entered on the Declarations page to largely reflect how long the insured will need to resume operations (typically three, four or six months). The insurer will pay, in each period of 30 days of the period of restoration, only the business income loss equal to the limit of insurance times the fraction (1/3, 1/4 or 1/6) shown on the Declarations. The rate for this coverage depends on a number of factors and can typically be 110% to 265% of the BI rate. This option may be appropriate for insureds who can rebuild or relocate within three to six months and whose BI doesn’t fluctuate significantly from month to month.

Maximum period of indemnity. Under this option, the insurer will pay, up to the policy limit, the amount of business income loss sustained only during the first 120 days (following, as usual, the 72-hour waiting period) of the restoration period (including the 30-day Extended Business Income Additional Coverage). This is not an additional coverage, just a restriction on the recovery period. The rate for this coverage depends on a number of factors and can typically be 120% to 240% of the BI rate. This option may be appropriate for insureds who can rebuild or relocate within four months and have inadequate accounting information, are reluctant to divulge financial information, have a new business or have income that fluctuates from month to month.

Agreed value. The insurer will pay up to the agreed value shown on the Declarations page for business income loss during the restoration period. The agreed value must be at least equal to the coinsurance percentage shown on the Declarations times the net profit plus operating expenses during the 12 months following the inception of the optional coverage. If the Limit of Insurance is less than the agreed value, a penalty is applied (example shown in policy). The insured must furnish a Business Income Report/Work Sheet (CP 15 15) showing actual financial data for the prior 12 months and estimated data for the coming 12 months.

For more detailed information, including mathematical examples, click here

Insured Locations and Dwellings Under Construction

The Virtual University "Ask an Expert" service recently received the following question:

"The definition of ‘insured location’ under the ISO homeowner policies includes ‘Land owned by or rented to an "insured" on which a one, two, three or four family dwelling are being built as a residence for an insured.’ Does the liability coverage extend to the land only, or does it include liability INSIDE the home that is being built? You can see that the wording says, "land …on which…" Most direct writers advise that liability extends to land only and not the structure. We would appreciate your clarification."

This is a matter of interpretation. Even the VU faculty members couldn’t agree 100%, although they reached a consensus that there is coverage inside the dwelling under construction.

It appears that the carriers are mincing words and restrictively reading too much into the definition’s phrasing. For example, Coverage A applies to the dwelling on the "residence premises." By the logic applied here, there would be no coverage for a basement because it’s "in" or "under" the premises and not "on" it. This is too literal a reading.

By their logic, if someone was injured while using a Port-O-Let on the construction site, there’d be no liability coverage. You can be inside a structure and still on the land.

To read the VU faculty responses, click here.

Bill Wilson (bill.wilson@iiaba.net) is Big "I" director of the Virtual University, an online learning center for agents and brokers.