PEAK SEASON COVERAGE
(June 2019)
|
|
INTRODUCTION
Businesses with inventories that fluctuate significantly over the course of a year present an interesting challenge. Insurance professionals must know how to properly insure these inventories, regardless of the extent of fluctuations and value swings. Peak season coverage is an attractive option for some businesses that face this dilemma. However, agents and insureds must be aware that this approach provides benefits with some strings attached.
Related Court Case: Failure of Insured to Read Policy Relieved Agent of Liability for Insufficient Insurance
BUSINESSOWNERS POLICIES
Businessowners Policies include important built-in coverage for the fluctuating inventory issues that many small-to-medium size businesses face. Even relatively small businesses are overwhelmed by paperwork and numerous required federal and state reports, in addition to their usual bookkeeping requirements. Any recommendation or way to ease these problems without creating others is always welcome. Most Businessowners Policies’ property coverage has a seasonal increase provision that increases the business personal property limit by 25% to address seasonal or unusual increases in stock values. This is an important innovation. An example of how it could be especially helpful is a retail store with a fairly constant inventory except during the Christmas season. The Businessowners Policy provides an automatic increase in limit without requiring any reporting forms or endorsements to increase it when values change.
However, this benefit is conditional. It applies ONLY when the business personal property limit is equal to at least 100% of the average monthly business personal property values. In order to satisfy this requirement, the insured may have to carry an inflated limit and be significantly over-insured for the balance of the year.
|
Example: Mindy’s Tack Shop carries a $100,000 business personal property limit. This is less than the maximum value of $120,000 but she is not concerned because her agent told her that a 25% peak season increase is available. Mindy's business does not have much of a peak season issue and her average monthly value is $105,000. After a fire that results in a total loss, the insurance company denies her request for the 25% automatic increase because her limit is less than the average monthly value of her business personal property and inventory. |
In addition, the peak increase may not be sufficient to cover the peak season loss, even if insured to the average monthly value.
|
Example: Crazy Lou’s inventory can be as low as $40,000 and as high as $140,000 throughout the year but the 100% average monthly value is $100,000. Crazy Lou's Businessowners Policy carries a $100,000 limit. When there is a fire during a month where the values at risk are $140,000, the limit available is $100,000 X 1.25 = $125,000. In this case, Crazy Lou must absorb the $15,000 difference from his own funds. |
PEAK SEASON ENDORSEMENT
CP 12 30–Peak Season Limit of Insurance is the property endorsement that provides additional limits that reflect increases in values due to seasonal considerations. This optional endorsement does not contain the same Businessowners Policy condition of insuring to 100% of the average monthly business personal property values. This approach is a practical solution for the insured with regular predictable inventory increases. This endorsement is simpler and more flexible than the automatic approach. The insured determines the amount of limit increase and the period of time for which it is needed. There is no limitation on the number of peak periods, the duration of any peak period, or the increased limit needed.
|
Example: The Keller Children's Store has a tremendous peak period in the month before the start of school. Keller uses a peak season period of July 15 through September 1 because school “always starts” the day after Labor Day. The CP 12 30 schedule is completed as follows: |
||||||||||||||||||
|
The premium charge is also easy to calculate because the insured pays only the premium required for the higher limit for the period or periods indicated. Other than a possible coinsurance consideration, this endorsement does not have any of the penalties or surcharges associated with value reporting forms.
Related Court Case: Reporting Form Conditions Held Met By Mailing Report Day Before and Its Receipt Day after Loss
The only significant problem is to determine when the peak period or periods actually occur. The cautious insured should include an adequate number of days both before and after the peak period to cover early deliveries and late shipments. It may not pay in full if the peak season treatment ends before the inventory is actually reduced and a covered loss occurs. In addition, a coinsurance penalty may apply, depending on the dates and limits involved. Peak periods occur because of unique and specific circumstances. If those circumstances change, the dates and limits must also change.
|
Example: The local school board changed the school starting date this year to August 15. Keller was aware of the change and ordered inventory so that it would arrive before the 4th of July so parents could have a nice holiday shopping weekend. Unfortunately, Keller forgot to adjust and change the peak season period. When a tornado severely damaged Keller's store on July 10, it was underinsured and also incurred a coinsurance penalty because of inadequate business personal property limits. |