An agent insures a nonprofit organization. It owns buildings and has tenants, but collects as much in donations annually as it does in rental income. The nonprofit asked if business income and extra expense coverage includes donations. The nonprofit includes donations in its financial profit and loss statement. The underwriter responded that the claim would need to be evaluated by a field claims specialist on its own merits.

The policy says: 

b. Business Income and Extra Expense

SECTION C. DEDUCTIBLE does not apply to this Coverage Extension.

(1) Business Income

We will pay for the actual loss of "Business Income" and "Rental Value" you sustain due to the necessary "suspension" of your "operations" during the "period of restoration". The "suspension" must be caused by direct physical "loss" to property at a "premises" caused by or resulting from any Covered Cause of Loss. With respect to "loss" to personal property in the open or personal property in a vehicle, the "premises" include the area within 1000 feet of the site at which the "premises" are located.

Business income is defined as:

SECTION G. DEFINITIONS

2. "Business Income" means the:

a. Net Income (net profit or loss before income taxes) that would have been earned or incurred; and

b. Continuing normal operating expenses incurred, including payroll.

Q: Donations are not excluded in the form or the definition. But they do appear on the nonprofit's profit and loss statement and therefore impact the profits. How would donations qualify for business income coverage?

Response 1: Donations and grants are interesting components of business income. They are part of the income. The difficulty lies with estimating and budgeting for them, especially grants.

Nonprofits have a particular issue with coinsurance because of this uniqueness. In general, because donations and grants are part of business income—with no way to exclude them in the ISO world—an option is to use a very low coinsurance amount to avoid a coinsurance penalty. Remember that the coinsurance percentage does not limit how much the insured gets paid. The insured is paid until the limits are met. 

Unfortunately, I can't say what would and would not be included, as there are several types of grants in particular. A grant can be conditional, unconditional or reimbursable. Given any particular situation, a conditional grant may be clawed back if the purpose is not yet fulfilled.

Response 2: Even though a nonprofit's revenue includes donations, keep in mind that business income coverage doesn't simply replace the revenue that is no longer coming in. Business income pays net income plus continuing normal operating expenses. Only a portion of the donations may be net income. 

Response 3: The answer may depend on what kind of donations are received and how, why and when your client receives these donations. In many cases, the amount received is not directly linked to the buildings and physical assets. 

Cash donations often continue even after a covered property loss since they were not generated by the covered property. If the donations do not decrease, they would not be included in a business income loss calculation. 

On the other hand, if the nonprofit is operating a thrift shop, donations of items would likely stop if the store and donation center are closed. Donations of supplies or materials used at the location may also cease. 

Many of my nonprofit clients have experienced wind and hurricane losses and financial and cash donations continued and even increased. Unlike a for-profit entity, nonprofits often operate facilities at a financial loss. On paper, they were in financially better shape when operations ceased. 

However, their goal was to continue providing the service to the community. The extra expense to continue operations even when a loss did not lower the business income was their real exposure. Make sure extra expense is included for your nonprofit accounts.

Response 4: I don't know enough about the insured to answer the question. Why would the donations stop if the nonprofit has property damage? Is it possible that the donations could increase when the public finds out it suffered a loss? Unless donations are only coming from tenants, I don't understand why donations would be affected by the property damage. 

Business income coverage requires due diligence from the insured. Thus, the insured would be required to continue to seek donations, which I think they could do with or without a building. The insured may not get coverage for donation losses unless they can prove the loss was caused by the property damage and there were no steps the insured could take to keep them going. 

Response 5: A key phrase here is "Rental Value." Revenue received reflects the value of the operation. In my experience, business interruption for a nonprofit dependent on both revenue generation and donations has not been a problem. YMCA facilities, churches, colleges and more have been resolved to the satisfaction of the insured entity. 

However, larger facility nonprofit organizations often have more than 12 months of business income exposures. You need to address the time requirements for major repair or rebuilding. 

This question was originally submitted by an agent through the Big “I" Virtual University's (VU) Ask an Expert service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

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