ISO TIME ELEMENT COVERAGE FORMS ANALYSIS

(June 2019)

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INTRODUCTION

The Insurance Services Office (ISO) time element coverage forms are similar to one another because all cover indirect losses. This article analyzes each of them. The coverage forms evaluated are:

CP 00 30–Business Income (and Extra Expense) Coverage Form
CP 00 32–Business Income (without Extra Expense) Coverage Form
CP 00 50–Extra Expense Coverage Form
CP 00 60–Leasehold Interest Coverage Form

Note: This analysis is based on the 10 12 edition of these coverage forms. ISO introduced them in most states with an effective date of 04 13. Changes from the previous edition are in bold print.

CP 00 30 BUSINESS INCOME (AND EXTRA EXPENSE) COVERAGE FORM

This coverage form begins by stating that certain provisions in it restrict coverage and encourages careful reading of the entire policy to determine all parties’ rights and duties, what is covered, and what is not covered. It also refers to F. Definitions. Understanding Definitions, the Insuring Agreement, and the Exclusions is critical to understanding the coverage form.

This section also states that the insurance company uses the terms you and your to refer to the named insured and the terms we, us, and our to refer to the insurance company.

A. COVERAGE

1. Business Income

This section explains that business income consists of two components.

Note: Each component is calculated separately and then added together. If one component is negative and another is positive, they must still be added together.

a. The first component is net income that would have been earned. Net income is considered net profit or loss before taxes are paid. It is important to recognize the term “would.” Unlike a physical damage loss, business income is based on assumptions of what would have happened if there was no loss. This term can cause disputes when determining the amount of a business income loss. Net income can be either a net profit or a net loss.

Example: Paul’s Pony Supplies earned $120,000 during the past 12 months. However, a contract he just signed guarantees a minimum of $250,000 for the next 12 months. If a business income loss occurs, it is based on the current situation, including the signed contract.

The net sales value of production must be calculated for any risk that has a manufacturing operation.

Example:

Gross sales		$1,000,000
Beginning inventory	$500,000
Ending inventory	$400,000
Inventory difference		+$100,000
Discounts, bad, debts, discounts, etc.		–$50,000
Total net sales value of production		$1,050,000

The net sales value of production calculation begins with gross sales. The difference between the beginning and ending inventory value is then added to the sales. Finally, anything directly related to the inventory that does not continue if there was no inventory is deducted. Some examples of deductions are returns, allowances, bad debts, discounts, collection expenses, and prepaid freight.

The net sales value of production must be added to other income before various types of deduction are taken in order to establish the actual net income to be used.

The CP 15 15–Business Income Report/Work Sheet is very helpful in developing an accurate net income that can be useful in setting a business income limit.

b. The second component is operating expenses that must continue even after a loss. It includes payroll.

A time element loss can occur even if the first component is a net loss because this second component is for the expenses that continue even after a loss has occurred.

Example: Marianne is caught in an economic downturn, but she is determined to keep going. She has a dozen employees and knows that business will improve in the next quarter. Unfortunately, a fire badly damages her business before the upturn begins. Because she has business income coverage, she is able to continue paying her employees and other continuing expenses while the direct damage repairs are being made.

Marianne’s anticipated net loss is $50,000 but her continuing expenses are $235,000. Her insurance company will pay her $235,000 – $50,000 = $185,000.

There must be a limit on the declarations next to one or more of the following selections. If more than one option is selected, the provisions of the coverage form apply separately to each one selected:

Business Income (including Rental Value)
Business Income (other than Rental Value)
Rental Value Only

The selection made affects rating, loss payments, and potential coinsurance penalties.

After this discussion on what makes up business income, the actual insuring agreement is provided.

This coverage form pays the actual business income loss the named insured sustains as a result of its business operations being suspended during the period of repair or replacement. The suspension must result from direct physical loss or damage by a covered cause of loss to property. The loss must occur at a premises listed and described on the declarations that has a limit for business income coverage.

Example: Overheated baking equipment causes an explosion that badly damages Lorenzo’s Bakery. The business is shut down while repairs are being made. Lorenzo has a $50,000 business income limit at this location. The direct damage is the result of a covered cause of loss at a listed location that has business income coverage. As a result, coverage applies up to the limit of insurance for the amount of time needed to repair the damage.

If the property loss is to personal property in the open or in or on a vehicle, premises is expanded to include the area that is within 100 feet of the described premises.

The definition of premises is changed when the named insured occupies only part of a building. It means all of the following:

The portion of the building the named insured occupies, leases, or rents
When business personal property is in the open or in or on a vehicle, premises is expanded to include the area that is within either 100 feet of the building or 100 feet of the premises, whichever is greater. (10 12 change)
Any part of the premises or building used to access the part of the premises the named insured occupies, rents, or leases (10 12 change)

Note: The business income coverage form was changed after the first bombing of the World Trade Center in New York City in the 1990s. This was done to recognize the fact that a tenant may not sustain any direct damage yet still have a substantial business income loss because the building occupied is damaged and the tenant's employees and customers do not have access to its premises.

Example: Pre-Legal Temporary Services’ offices are on the ninth floor of a 14-story building. A major fire damages the building's basement and lobby. Pre-Legal’s customers and employees cannot enter the building or gain access to its premises. Pre-Legal sustains a business income loss until access to the building is restored. The loss is covered because there was damage to the means of access to the building.

2. Extra Expense

a. Extra expense coverage applies at each location listed and described on the declarations that has a business income limit of insurance.

b. Extra expenses are costs beyond normal operating expenses that would not have been incurred unless there was direct physical loss or damage by a covered cause of loss to covered property.

Extra expenses are eligible for reimbursement when they do any of the following:

Help avoid or minimize business down time and allow operations to continue at either the same location or at a temporary location. Relocation expenses and costs to equip and operate such a replacement or temporary location are considered extra expenses.
Minimize business down time if operations cannot be continued
Repair or replace property. This is not the same as the expense to actually repair or replace the property. That expense is not included. However, amounts that expedite the repair and replacement process are covered. This item is limited to the amount such expense reduces the loss this coverage form otherwise pays without that extra expense.

Example: A fire damages Journey Dry Cleaners. The ironing press is destroyed and must be replaced. Everything else can be cleaned and returned into service within 60 days but the ironing press will not be delivered for four months. The ironing press supplier can ship the press earlier, but it will cost Journey extra, That extra cost is covered as extra expense, but it is limited to no more than the two months loss of income payment that it saves.

Note: Only extra expenses related to repairing or replacing property are subject to the requirement that payments under this form be reduced in order for payment to be made.

Florist

Example: Ashland Floral sustains heavy smoke damage five days before the start of the prom season. Not wanting to disappoint its customers, Ashland has flowers shipped in overnight and arranges for a refrigerated unit to store them. Ashland cannot sell the flowers for more than she had previously quoted, so she takes a loss on the orders. However, she satisfies and retains her customer base.

The good news for Ashland is that the added costs to ship the flowers and lease the refrigerated unit are considered covered extra expenses.

3. Covered Causes of Loss, Exclusions, and Limitations

The causes of loss covered, exclusions, and limitations that apply are not part of this coverage form. One of the causes of loss forms must be attached. It can be the same one that applies to direct damage coverage or it can be a different one.

4. Additional Limitation–Interruption of Computer Operations

a. There is no coverage for business income loss related to the destruction or corruption of electronic data. However, a limited amount of coverage is provided under 5. Additional Coverage d. Interruption of Computer Operations.

b. There is no coverage for extra expenses related to the destruction or corruption of electronic data. However, a limited amount of coverage is provided under 5. Additional Coverage d. Interruption of Computer Operations.

c. This coverage form describes electronic data. It is items stored in computer programs or used in computer software programs. The items can be stored in the computer or on a drive, disk, or other media. Electronic data is considered virtually any information, fact, or program that can be stored in and retrieved by a computer.

Example: Kollectitall's client mailing list is stored on the computer and is also backed up on disks in the office. A fire destroys the computer and every backup disk. Kollectitall sustains a business income loss and an extra expense loss as it attempts to recreate the lost information. None of this loss is covered because of this limitation.

d. Electronic data that is an integral part of the building heating, ventilating, air conditioning, elevator, lighting, or security systems is not subject to this limitation. (10 12 change)

5. Additional Coverages

This coverage form has four additional coverages:

a. Civil Authority

A covered cause of loss may damage premises other than the named insured's to an extent that the civil authority restricts access to the insured premises Business income coverage begins 72 hours after the restriction begins and ends four weeks later. Extra expense is not subject to the waiting period and coverage ends at the later of four weeks after the civil authority action or when the civil authority business income coverage ends.

Example: A fire guts Charlie’s Coin Laundry located adjacent to Polly’s Package Liquors. The fire consumes Charlie’s structural framing and the fire chief is concerned that the brick wall next to Polly’s store might collapse. He prohibits access to Polly’s store until the wall can be torn down safely. Polly’s Package Liquors is closed for nine days. Her loss of business income is covered because fire is a covered cause of loss, but her loss doesn’t begin until 72 hours after the action was taken so is paid for only six days.

However, the only properties that this additional coverage insures are those located within one mile of the damaged property.

Example: Mytell Chemical is on fire. Civil authorities are concerned about the chemical release and evacuate everything within two miles of Mytell. A business within the one-mile radius has immediate extra expense coverage and has business income coverage after 72 hours. However, a business located beyond the one-mile radius (but within the two-mile radius) has no coverage.

Note: One mile in a densely populated urban setting may seem to be a large area but is a very small area in less populated suburban and rural settings. The impact could be significant for businesses located in any disaster area where civil authorities may close certain sections in order to maintain control even though many properties may not be damaged. Examples to consider are coastline communities following a hurricane or rural communities following a tornado. Some businesses or communities may be relatively undamaged following a storm, but civil authorities prohibit entering them in order to maintain control of the more seriously damaged larger area.

Adding CP 15 32–Civil Authority Changes should be considered. Part B of the endorsement schedule has the flexibility to make the radius more than one mile. Insurance companies may not be open to adding the word “unlimited” but may be open to a radius that could include the county where the business is located.

b. Alterations and New Buildings

As with most property coverage forms, CP 00 30 gives the named insured some automatic business income coverage for new buildings. It also extends coverage for damage to alterations and additions to existing buildings. The named insured can collect income it would have earned from the time the new structure would have been ready if the covered loss or damage did not occur. Coverage also extends to time lost due to damage to or destruction of construction equipment or building materials that is within 100 feet of the premises. This is basically the equivalent of builder’s risk coverage for loss of income. Coverage also applies if extra expenses are incurred because occupancy is delayed.

Note: This Additional coverage does not include coverage for newly acquired locations. Newly acquired locations are covered under the Newly Acquired Locations Extension of Coverage. However, the extension is only available when 50% or more coinsurance is shown on the declarations.

c. Extended Business Income

(1) Income that operations generate does not automatically return to a pre-loss level when repairs are complete and business operations resume. It usually takes some time to attract new tenants, regain lost clients, or return to the previous level of manufacturing output. This additional coverage provides an extra 30 days to cover income lost during that period between resuming operations and reaching the previous level of income. However, there is no coverage for any reduction in income that unfavorable business conditions cause.

This additional coverage does not necessarily begin when business income coverage ends. It begins when the property (other than finished stock) is rebuilt, repaired, or replaced and operations resume. Business income coverage ends when property should have been rebuilt, repaired, or replaced without stating that operations are resumed. As a result, there might be a gap between the time that business income coverage ends, and the extended business income coverage begins.

Example: The covered loss at Bill’s Tin Snipping should have been repaired in 10 weeks. However, Bill takes one of those weeks as vacation, goes hunting, and refuses to talk to the contractor during that time. He reopens 11 weeks after the date of loss. Payments under business income end after 10 weeks. Extended Business Income coverage begins on the date that Bill actually resumes operations, 11 weeks after the direct loss.

This additional coverage extends business income for 60 days. However, coverage for additional periods is available for an additional premium charge.

Example: Carl’s French Cookery is closed for six weeks after its crepe maker explodes. When it reopens, the first week's sales are only half of what they were before the loss. As the weeks go by, sales gradually increase but it takes three months before sales return to the pre-loss level.

(2) If the loss involves rental value, coverage begins on the date repairs are complete and ends after 60 days or when the tenant actually moves in, whichever is first. However, coverage does not apply if the lack of rental income is simply due to poor business conditions caused by the same cause of loss that caused the policyholder’s damage.
(10 12 change)

Example: A windstorm damages the Grace Place Apartments. Repairs are complete and the units are ready to be occupied 180 days after the date of the direct damage loss. All 20 of the original tenants had to find other housing after the loss and only five of them return.

Scenario 1: Grace Place offers significant enticements to fill the apartments because the number of units currently available exceeds demand. Even then, it takes over four months before all the units are occupied. Extended Business Income coverage applies because the occupancy issue is related to business conditions that are not directly related to the cause of loss that produced the damage.

Scenario 2: Grace Place offers significant enticements to fill the apartments because the number of units currently available exceeds demand. Even then, it takes over four months before all the units are occupied. The delay was due to limited access and job opportunities in the area following the tornado that also damaged Grace Place. Extended Business Income coverage does not apply because the occupancy issue is related to the cause of loss that produced the damage.

d. Interruption of Computer Operations

This additional coverage provides nominal limits that apply to the same items in 4. Additional Limitation–Interruption of Computer Operations. Coverage applies for business income and/or extra expense due to direct damage to electronic data as the coverage form defines. The limit is $2,500, unless there is a higher limit on the declarations. This coverage does not extend to electronic data that is an integral part of the building’s heating, ventilation, air conditioning, elevator, lighting, or security systems because it is not subject to the Additional Limitations. (10 12 addition)

This additional coverage is not subject to the same causes of loss forms that apply to other coverages. The changes to the causes of loss form that applies are as follows:

If other coverage is subject to the special causes of loss form, this additional coverage applies only to losses due to the specified causes of loss and collapse.
If other coverage is subject to the broad causes of loss form, only those causes of loss and collapse are covered.
If an additional covered cause of loss is added to the causes of loss form, the covered cause of loss added does not apply to this additional coverage.
Coverage also includes virus and hacking. However, coverage does not apply to damage due to employee manipulation of computer systems. An employee is not limited to a direct hire. Temporary and leased employees are also considered employees. Coverage also does not apply if an outside entity specifically hired to work on the system causes the damage.

The $2,500 limit of insurance is an annual aggregate. It applies to all losses sustained during the year for all occurrences at all locations.

Example: Jay’s policy period is 06/01 to 06/01 and there are 10 locations on the policy. Jay’s computer operations sustain a loss at location 1 on 09/01. The total amount of loss is $2,400. An identical loss occurs at location 2 on 10/01. Only $100 is available to pay the second loss.

This additional coverage ends when the period of restoration ends.

6. Coverage Extension

This coverage extension rewards the named insured if business income coverage is written at 50% or a higher coinsurance percentage.

Note: There is no mention that this requirement is waived if one of the alternatives to coinsurance is selected. Therefore, this extension may not apply if the Optional Maximum Period of Indemnity or Monthly Limit of Indemnity is selected.

This extension provides business income and extra expense at newly acquired locations. The $100,000 limit per location applies to covered property at all newly acquired locations for up to 30 days. Coverage does not apply to property at fairs or exhibitions. Premium for the new acquisition is calculated as of the date the property is acquired. This limit can be increased. (10 12 addition)

Coinsurance does not apply to this coverage extension.

Note: The coverage ends when the policy expires, the acquisition is reported to the insurance company or after 30 days, whichever happens first. As a result, a location acquired just before the expiration date must be reported to the company promptly to avoid a possible lapse in coverage.

B. LIMITS OF INSURANCE

The most the insurance company pays for a single occurrence is the limit on the declarations. Extra expense coverage, alterations and new buildings, civil authority, and extended business income additional coverages are all part of the business income limit on the declarations and do not increase that limit.

Note: Coverage Extension–Newly Acquired Locations and Additional Coverage–Interruption of Computer Operations have their own limits. These limits apply in place of the business income limit.

C. LOSS CONDITIONS

This section explains the duties the named insured and the insurance company owe to one another. The insurance company can void coverage if the named insured does not honor its duties. The insurance company can be sued or incur other sanctions if it breaches the contract. These conditions are in addition to the Commercial Property Conditions and the Common Policy Conditions.

CP 00 90–Commercial Property Conditions Form Analysis

IL 00 17–Common Policy Conditions

1. Appraisal

If the named insured and the insurance company disagree on the amount of a claim, either can make a written demand for an independent appraisal. Each party selects an appraiser and the two appraisers select an umpire, or a judge in a court that has jurisdiction appoints an umpire. The appraisers submit their recommendations to the umpire who then reviews only the differences. A decision that any two of these three parties makes is binding on all parties. Each party pays its own appraiser and shares any other common costs. This condition applies to only the value of the claim. It does not determine if the claim is covered.

The insurance company retains its right to deny a given claim even after it goes through the appraisal process.

2. Duties in the Event of Loss

a. This coverage form requires that the named insured take certain actions to minimize a loss or to assist in recovery efforts against parties that may be responsible for the loss. Coverage can be voided unless it complies with all of the following:

Notify the police. This is a requirement only if it is possible that a law has been broken.
Promptly notify the insurance company of the loss and describe the property involved.
Give the insurance company a description of how, when, and where the loss occurred. This must be done as soon as possible.
Take all reasonable steps to protect damaged covered property from further loss and keep records of the expenses it incurs to do so. These expenses are paid as a part of the final settlement. However, they do not increase the limit of insurance.

Note: The term “Covered Property” is used in only this condition and nowhere else. In addition, the expenses paid are to reduce the direct damage loss to the property while this coverage pays for loss of income. Does this inadvertently provide direct damage coverage within time element coverage? Are the expenses paid only if they reduce the loss of income claim?

Example: Jeremy spends $50,000 to protect his property after a windstorm destroys the roof of his building. This is a reasonable amount considering the value of the equipment inside. The Business Income limit is $100,000. Jeremy’s business income loss is calculated at $75,000. This leaves only $25,000 to apply to the expenses he incurs to protect the property.

Give the insurance company permission to inspect the damaged property and examine the named insured’s books and records. These can be done as often as the insurance company requires but only if the inspections and examinations are considered reasonable and not harassment. This may involve taking samples of the damaged property for analysis and making copies of the books and records.
Send a signed and sworn proof of loss that contains the information the company requests within 60 days following the request.
Cooperate with the insurance company as it investigates or settles the claim.
Resume operations as soon as possible if it plans to remain in business.

b. The insurance company has the right to examine any and all insureds. It can examine each insured individually, outside the hearing range of other insureds. All answers in response to examination questions must be signed. There may be multiple requests for examination, but such requests must be reasonable.

3. Loss Determination

This is a key section that must be understood in order to purchase the correct limit and to prevent surprises after the fact. It is broken into four parts:

a. The business income loss amount is based on the following:

· Net income profit or loss prior to the loss

Probable net income if a loss had not occurred

However, this does not include net income likely to have been earned by an increase in sales due to favorable business conditions that the named insured could not capitalize on because of the loss payment.

Example: The raging California wildfires destroy many homes and businesses. John’s Hardware is one of those businesses. As soon as people return to their homes and began to purchase building materials to repair them, every hardware store in the area scrambles to meet the demand and most double their normal sales. John’s Hardware cannot include the loss of those windfall profits in determining its business income loss.

All continuing and operating expenses needed to resume operations at the same level that existed before the loss

Example: John’s Hardware employed ten people before the loss. John must pay higher rates and salaries in order to retain them or hire new employees because of the demand for help after the losses.

HardwareStore

Other pertinent information that applies to the loss. Every loss is unique and differences in operations and circumstances must be considered. The named insured must give the insurance company factual data to substantiate the value of the loss claimed. This includes items such as financial records, bills, invoices, deeds, contracts, and any other information that affects the loss.

b. The extra expense loss amount is based on the following:

Expenses the named insured incurs during the period of restoration that are more than normal operating expenses and would not have been incurred except for the direct damage loss. Any salvage value of property purchased for temporary use and any expense any other insurance written on the same basis as this insurance paid for is deducted from any payment.

Example: John’s Hardware has the exclusive contract to supply liquid propane gas in the region. John will lose that contract if its customers are not supplied. In order to keep the contract and to comply with its terms, John rents a large tent he uses to run the gas operation and arrange for emergency shipments. John rents trucks to deliver the fuel because the loss made his trucks unusable. This coverage form’s extra expense portion pays for the tent and truck rental contracts in addition to the added cost for emergency shipments.

Any other expense that are necessary to reduce the business income loss

c. Resumption of Operations

If the named insured can resume operations, even if only partially, but does not, the business income loss is reduced accordingly. Similarly, the extra expense loss is reduced if it is determined that the business can resume normal operations.

Example: John’s Hardware is finally repaired, restocked, and ready to reopen. However, John decides to give his employees a week off to rest before the grand opening and to thank them for their hard work. The insurance company does not pay for this delay. In addition, it reduces any business income loss payment. Similarly, it does not pay for the rental on the tent and the trucks for that week because John could have resumed normal operations but did not.

d. Not Resuming Operations

This section deals with cases of businesses that do not resume operations promptly or at all. There are many reasons why this occurs and, while the loss is still paid, it is evaluated differently. The insurance company pays only the amount of loss it would have incurred if the named insured had resumed operations promptly.

Example: Greg reluctantly took over his dad's business, but he dreamed of being a stock car driver. He saw his opportunity when a tornado destroyed the business' building and he took full advantage of it. He decided to use the insurance proceeds to assemble a racing team. The insurance company estimated the loss of income based on Greg’s accounting records, determined the average length of time needed to rebuild in the community, and paid a loss of business income amount that Greg approved.

4. Loss Payment

The insurance company must pay the loss amount within 30 days after it receives the signed and sworn proof of loss. The named insured must have complied with all the coverage form’s requirements and the parties must have either agreed on the amount of loss or an appraisal award must have determined the amount.

D. ADDITIONAL CONDITION–COINSURANCE

Coinsurance is a rating credit in the premium calculation that the named insured receives in exchange for its promise to maintain a certain limit of insurance. It is also the penalty applied if the named insured does not maintain the required limit. Coinsurance is a common concept with respect to direct damage property coverages.

E. OPTIONAL COVERAGES

Three of the four optional coverages listed and described below are actually alternatives to coinsurance. The coverage or coverages selected are entered on the declarations.

1. Maximum Period of Indemnity

This valuation clause states that a business income loss and extra expenses incurred in the 120 days after the date of loss are covered for up to the limit of insurance on the declarations. All other conditions are unchanged. Most small businesses can easily understand this method because there are no coinsurance penalties. However, it should not be used if the business cannot resume operations within 120 days. The rating in this approach is more expensive but the final premium may be lower because the named insured can purchase lower limits of insurance.

2. Monthly Limit of Indemnity

This approach is more complicated than the Maximum Period of Indemnity but less complicated than the coinsurance method. The named insured chooses a percentage represented by the fractions 1/3 (for 33 1/3%), 1/4 (for 25%) or 1/6 (for 16 2/3%). These are the percentages of the limit of insurance available to pay losses for each 30 days that the loss continues. Upon reaching the percentage of the limit for the month, payments end and do not resume until the following month.

Example: Gustav’s Cards purchases a $100,000 limit with a 1/4 (25%) monthly limit of indemnity. A covered loss occurs in January. The amount of loss paid is the lesser of either the actual amount of loss for the given month or 1/4 (25%) of the limit of insurance.
Actual monthly loss amounts	Amount available	Amount paid
First 30 days: $50,000	$100,000 X 25% (.25) = $25,000	$25,000
Second 30 days: $15,000	$100,000 X 25% (.25) = $25,000	$15,000
Third 30 days: $10,000	$100,000 X 25% (.25) = $25,000	$10,000
Fourth 30 days: 0	$100,000 x 25% (.25) = $25,000	$0
Total: $75,000	Total: $75,000	$50,000
Gustav’s Cards absorbs $25,000 of the business income loss because of the timing, amounts of loss in each respective month, and the recovery percentage selected.

Note: This limitation applies to only business income. It does not apply to any covered extra expenses or costs the named insured incurs. However, once the business income plus the extra expense reach the limit of insurance, coverage ends.

3. Business Income Agreed Value

This option allows the named insured to benefit from the coinsurance credit applied to the rating without being concerned about incurring a corresponding coinsurance penalty. The named insured completes and signs a business income worksheet and submits it to the insurance company. The company’s underwriter reviews the worksheet and agrees to accept the values and calculations. Any loss that occurs during the policy year is adjusted without regard to the coinsurance condition. However, the agreed value clause lapses and the coinsurance condition reinstates if a new worksheet is not provided every 12 months or any other required time period.

If the limit of insurance on the declarations is less than the value agreed to, any loss must be adjusted. The adjustment factor is the business income limit of insurance divided by the agreed value.

4. Extended Period of Indemnity (10 12 change)

This optional coverage amends 5. Additional Coverages c. Extended Business Income. It changes the 60 days after business operations resume to the number of days entered on the declarations. It is designed for businesses that expect to continue to experience a continuing loss as they work toward rebuilding their clientele and contract bases. Under this optional coverage, the named insured must evaluate the difficulty of winning back customers after the business resumes operations and the amount of time it needs to do so.

Example: Friend’s, Inc. developed a loyal clientele because of its ability to provide excellent and timely service. However, Friend's knows its clientele will go elsewhere if its business closes for even a short period of time. It also knows that it will take at least six months to resume normal operations and get those clients back. This is why Friend's purchases business income coverage with an Extended Period of Indemnity of 180 days.

F. DEFINITIONS

The Business Income (and Extra Expense) Coverage Form has six definitions. All should be carefully reviewed because of the impact they have on the coverage being provided.

1. Finished Stock

This is stock that the named insured manufactures. However, there are two exceptions:

Whiskey and other alcoholic products are considered stock unless there is a coinsurance percentage for business income on the declarations. This applies only when these items are being aged.
Stock that the named insured manufactured and that is held for sale at any retail location premises that this coverage form insures is not considered finished stock.

Note: This term is used in only 5. Additional Coverages c. Extended Business Income. This section states that the extended business income begins even if the finished stock has not been replaced. More importantly, it is used in the causes of loss forms that exclude business income loss due to damage to finished stock and the time to reproduce it.

Example: Krissy Chrizmaz has a retail outlet adjacent to its manufacturing plant that has $200,000 in finished stock on its premises. The manufacturing plant itself has $500,000 in finished stock. A tornado damages stock at both locations. Coverage applies for the time needed to replace the stock at the manufacturing plant. There is no coverage for the time needed to replace the stock at the retail outlet. The building and personal property coverage form covers the direct damage to the finished stock. Extended Business Income coverage begins when Krissy resumes operation, although Krissy needs 180 days to replace the damaged finished stock.

2. Operations

a. These are the business activities that occur at the premises described on the declarations.

b. When rental value is included, operations also means whether a tenant can occupy the premises.

3. Period of Restoration

This is the period of time during which coverage applies. It begins either:

a. Seventy-two hours after the time of covered loss or damage. This applies to business income coverage.

Note: CP 15 56–Business Income Changes–Beginning of the Period of Restoration can be used to reduce the waiting period to 24 hours or to completely eliminate it.

b. Immediately after the time of covered loss or damage. This applies to extra expense coverage.

Under either of these, coverage ends on either the date when property at the described premises should be repaired, rebuilt, or replaced or the date that the business reopens at a new location. A major sticking point in evaluating when a premises should be ready is the clarifying statement that the repairs, building, or replacing must be done on a timely basis and with substantially similar materials.

Example: Maisy May’s hat manufacturing plant uses a custom-built machine. It takes 10 months to build a new machine and deliver it following a covered loss. Maisy May’s insurance carrier believes that Maisy May could have been back in business in four months if she had accepted a similar machine and refuses to pay more than a four-month business income loss.

The period of restoration does not include any increased time period required because of an ordinance, regulation, or law being enforced or because of the compliance with any ordinance, regulation, or law regulating construction, use, repair, or demolition of any structure. (10 12 change)

Note: This can cause a significant gap in coverage.

The period of restoration also does not include any increased time period required to test for, monitor, clean up, remove, contain, treat, detoxify, neutralize, or in any way respond to or assess the effects of pollutants.

The policy expiration date does not affect the period of restoration.

4. Pollutants

These are irritants and contaminants such as smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste of a solid, liquid, gaseous, or thermal nature. Waste includes property to be disposed of, as well as property to be recycled, reconditioned, or reclaimed.

5. Rental Value

This is a specialized type of business income that consists of two parts.

a. The net income, either profit or loss, from tenant(s) that occupy the premises. The fair rental value of the named insured’s occupancy of its own premises is included in the net income amount.

b. The normal operating expenses of the premises that continue after a loss. Examples of such expenses are payroll and tenants’ legal obligations that become the owner’s obligation during the period of time when the premises cannot be occupied.

Example: Trey and Margo own a strip shopping center. They have five tenants in addition to their own shop in the center. Heavy ice and snow accumulations cause the roof to cave in and everyone must vacate during the repairs. The monthly business income rental value is as follows:
Rental income from five tenants	$10,000 ($2,000 per tenant)
Trey and Margo’s rental value	$2,000
Payroll	$1,500
Contracted utilities	$2,500
Total monthly rental value	$16,000
Trey and Margo have a rental value loss of $16,000 per month until the damage from the roof collapse is repaired.

6. Suspension

This is either of the following:

The complete closure of the named insured’s business operations or a slowdown.
If rental value coverage is included, it means when tenants cannot occupy all or any portion of the insured premises.

CP 00 32–BUSINESS INCOME (WITHOUT EXTRA EXPENSE) COVERAGE FORM ANALYSIS

This coverage form is identical to CP 00 30–Business Income (and Extra Expense) Coverage Form except that nearly all references to extra expense are removed. The only extra expense coverage provided is for expenses incurred that reduce the business income loss. The most any such expense is paid is for an amount equal to the amount by which it reduces the business income loss.

Example: An underground gas line explosion damages every building along a two-block section of Main Street. Mallory O’Donovan at The Corner Drug Store knows that his customers must have their prescriptions filled. For this reason, Mallory rents an office trailer and is back in operation within two days. The extra expenses for the office trailer, emergency shipments of drugs and free delivery to customer totals $100,000. The business income loss is reduced by only $25,000 because Mallory resumes only part of the operation.
CP 00 32 covers only $25,000 of the extra expenses. All $100,000 of the extra expenses would have been covered if CP 00 30 had been used.

DrugStore

CP 00 50–EXTRA EXPENSE COVERAGE FORM ANALYSIS

Introduction

Some types of businesses do not actually lose income after they experience a direct damage loss. They must spend any amount necessary to continue their operations, stay in touch with their customers and suppliers, and take any other emergency measures needed to maintain their income stream. CP 00 50 covers those expenses. It is available to businesses that do not need the loss of business income coverage that CP 00 30 offers. Using this form allows the named insured to establish a contingency plan, price out the extra expenses needed to operate it, and then purchase the exact amount of coverage for the period of time the plan requires.

Note: Some insureds might want to consider purchasing coverage under CP 00 30, Business Income (and Extra Expense) Coverage Form for a limit that represents 125% coinsurance instead of purchasing CP 00 50. These types of business do not have an actual business income loss and are interested in only the extra expense portion of the coverage. The CP 00 30 at 125% coinsurance is less expensive than the CP 00 50 and has no limitation as to how much of the extra expense limit is available in a particular month.

CP 00 50 is similar to CP 00 30 except for four sections that are different. This analysis addresses only the differences in those four sections.

A. Coverage

The insuring agreement is similar but all references to business income are removed. The Covered Causes of Loss and Additional Limitation–Interruption of Computer Operations and Coverage Extensions are unchanged. Additional Coverages is changed only by removing Extended Business Income Coverage.

C. Loss Conditions

This section has two significant differences compared to the same section in CP 00 30.

3. Limits on Loss Payment

This is the method used to determine how the extra expense is paid out. The basic coverage form pays extra expense over three time periods: 30 days, 60 days, and over 60 days. The named insured can have 40% paid during the first 30 days, a total of 80% paid over the first 60 days, and a total of 100% when the period of restoration extends beyond 60 days. This is entered on the declarations as 40/80/100. The other basic options are 35/70/100 or 100/100/100.

The named insured also has the option to customize the way payments are made and extend them to up to 12 months. CP 15 07–Expanded Limit of Loss Payment must be attached, and an increasing sequence of payouts entered on the endorsement schedule. The first month cannot be more than 40%. Each 30-day period percentage must be higher than the previous percentage until reaching 100. The final percentage must be 100%. The maximum number of entries is 12. For example, a 12-month option could be 10/20/30/40/50/60/70/80/90/100/100/100. A four-month option could be 25/50/75/100.

An important point is that the final percentage is not limited to just a 30-day period. It extends to the period of restoration beyond the previous 30-day periods.

Example: Farley Office Supplies has a contract with its top customer that requires Farley to immediately respond to it at any time. Farley has a contingency plan and reciprocal arrangement to share facilities with Infuse Supplies if a loss occurs and to operate out of Infuse’s location during night hours. A fire occurs at Farley's location that activates the contingency plan. During the next 105 days of the period of restoration, it pays its employees a 10% bonus to work a third shift. Farley also pays Infuse rent for use of its equipment and space and overnight freight charges to maintain stock levels. The extra expenses incurred are paid as follows:
Actual loss amount	Insurance amount available	Amount paid
First 30 days: $50,000	$100,000 X 40% (.40) = $40,000	$40,000
First 60 days: $80,000	$100,000 X 80% (.80) = $80,000	$80,000 less $40,000 = $40,000
105 days: $100,000	$100,000 X 100% (1.00) =$100,000	$100,000 less $80,000 = $20,000
Total: $100,000	$100,000	$100,000

4. Loss Determination

This section is changed slightly because all references to business income are removed.

D. Definitions

This is F. in CP 00 30 because coinsurance does not apply, and CP 00 50 does not have provisions for “Additional Condition–Coinsurance.” The only difference is that the definitions for finished stock and rental value are removed because this coverage form does not use either of those terms.

E. Optional Coverages

Optional Coverages is removed because there are no optional coverages.

CP 00 60–LEASEHOLD INTEREST COVERAGE FORM ANALYSIS

This coverage form was not updated with the 10 12 edition. This analysis is of the 06 95 edition.

Introduction

This coverage form pays the financial loss the named insured incurs when a covered cause of loss damages the property it leases and causes a favorable lease to be cancelled.

Note: Financial loss includes more than just the loss of an advantageous lease.

A. Coverage

The statement of coverage clearly expresses that it pays for loss of the named insured's leasehold interest in a given property. Coverage applies only if the lease is cancelled because of direct damage to property on the premises by a covered cause of loss. Coverage does not apply if another reason causes the favorable lease to be cancelled, even if the named insured sustains a financial loss.

Examples:

· Oldskool Dance Studio loses its fantastic lease agreement because a fire destroys the building it rents for its operations. This financial loss is covered.

· Oldskool Dance Studio loses its fantastic lease agreement after a city building inspector closes down the building it rents until Oldskool complies with a mandatory safety ordinance. This financial loss is not covered.

1. Covered Leasehold Interest

This means the following:

a. Tenants' lease interest

This is the difference between the rent the named insured pays and the actual rental value of the described premises it leases.

b. Bonus payments

These are the unamortized portions of a cash bonus that the named insured will not receive as a refund. A cash bonus is money the named insured pays to acquire the lease. However, it does not include any form of rent or security deposit.

c. Improvements and Betterments

These are the unamortized portions of payments the named insured made for any improvements or betterments. It does not include any value for improvements and betterments that other insurance covers but only to the extent of that other insurance. These are fixtures, alterations, installations, or additions the named insured cannot legally remove. The named insured must have made them a part of the building it occupies or acquired them at its own expense.

d. Prepaid rent

This is the unamortized part of any advance rent payment that will not be refunded. However, this does not include regular rent payments due at the beginning of each month or for any other designated rental period.

2. Covered Causes of Loss

This is based on the covered causes of loss form on the declarations. The named insured can choose from any of the causes of loss forms available under the ISO Commercial Property Program.

B. Exclusions and Limitations

This is the same as in CP 00 30. Any of the causes of loss forms can be used.

C. Limits of Insurance

1. Applicable to Tenants Lease Interest

a. When the lease is cancelled, payment is limited to the named insured’s net leasehold interest as of the date of the cancellation. In some cases, the landlord may provide a new lease for the named insured to sign and continue at the same location. If the named insured agrees to the new higher terms, the most paid is either the net leasehold interest or the difference between the old rent and the new rent, whichever is less.

b. The net leasehold interest amount is lower each month because it is based on the gross leasehold interest multiplied by the leasehold interest factor for the remaining period of the lease. A proportionate share applies to less than monthly time periods.

The leasehold interest factor is part of a schedule on an endorsement attached to the policy.

Example: Carrie has a 10-year lease on an artist’s loft. She paid a $1,000 bonus payment, paid $15,000 for the landlord to put in improvements, and received a preferred lease of $500 per month. At the end of her third year in the loft a fire in the unit next to her causes significant smoke damage to her unit. Carrie must move out for one month while the loft is cleaned and repaired. The landlord notifies Carrie that her lease is cancelled and that she must execute a new lease if she wishes to return. Comparing her loft to others in the area, the rental value is $1,200 per month. Her landlord offers her a new lease at $1,000 per month. If Carrie decides to leave the existing lease, her loss is adjusted as follows:
Unit’s Monthly Rental Value	$1,200
Actual Monthly Rent	$500
Gross Leasehold Value	= $700
8% Leasehold interest factor	71.4531
Calculated net leasehold interest loss	= $50,017
Calculated difference between new lease and old lease	(1,000 - 500) X 96 = $48,000
As a result, the maximum payment for part 1 of this loss is $48,000.

2. Applying to Bonus Payments, Improvements and Betterments, and Prepaid Rent

a. When the lease is cancelled, the payment is limited to the named insured’s net leasehold interest as of the date of loss. In some cases, the landlord may provide a new lease for the named insured to sign and continue at the same location. If the named insured agrees to the new terms, the most paid is the named insured’s loss or the net leasehold interest, whichever is less.

b. The net leasehold interest amount is lower each month because it is based on the gross leasehold interest multiplied by the leasehold interest factor for the remaining period of the lease. The leasehold interest factor is part of a schedule on an endorsement attached to the policy.

Example: Let’s stay with Carrie’s loss. Her loss is determined as follows:
Bonus Payment	$1,000
Improvements and Betterments	+$15,000
Total part 2	=$16,000
Number of months in lease	120
Monthly Leasehold Interest	= $133.33
Number of months remaining	X 96
Loss payment for part 2	= $12,799.68
However, Carrie does not sustain a loss if she takes the new lease because the landlord has offered to renew the lease without requiring a bonus payment or new improvements or betterments. Because her loss payment is the lesser of the loss sustained and the net leasehold interest, she does not receive anything. Carrie is upset! Without the offer, she would have received $50,017 for part 1 plus $12,799.68 for part two, or a total of $62,816.68 for her loss. Because of the landlord’s lease offer, the most paid for this loss is $48,000.

D. Loss Conditions

The Appraisal, Insured’s Duties When a Loss Occurs, and Loss Payments Loss Conditions are the same as in
CP 00 30. The Loss Determination condition in CP 00 30 is not part of this coverage form.

The following Vacancy Condition is added.

4. Vacancy

a. Description of Terms

This coverage form applies to only tenants. As a result, “building” refers to the unit the tenant rents or leases. It is considered vacant only when there is not enough business personal property on the premises to conduct the tenant’s customary operations. Buildings under construction or being renovated are not vacant.

b. Vacancy Provisions–Subleased Premises

If the named insured had arranged for a sublease and the property is vacant more than 60 consecutive days, coverage does not apply to loss or damage due to:

Vandalism
Sprinkler leakage, unless the system was protected against freezing
Breakage of building glass
Water damage
Theft or attempted theft

The limit of insurance that applies is reduced by 15% for losses from other covered causes of loss.

c. There is no coverage if the property is vacant more than 60 days and there is no sub-lease in place.

E. Additional Condition

The coinsurance condition in CP 00 30 does not apply. The following condition applies to only CP 00 60.

Cancellation

This condition replaces the cancellation provision in IL 00 17–Common Policy Conditions. The two cancellation provisions are identical except that item 6 explains how to calculate the earned premium in a leasehold interest situation. If this coverage is cancelled, the earned premium is determined by the following steps:

Step 1: Calculate the average of the net leasehold interest based on its value as of the inception date and on the cancellation date.

Step 2: Multiply Step 1 by the rate for the coverage period.

Step 3: Subtract Step 2 from the premium paid at inception.

The insurance company pays the named insured the refund determined in Step 3 but only if the insurance company cancels the coverage. The refund may be less if the named insured requests cancellation.

F. Definitions

None of the Definitions in CP 00 30 apply to this coverage form. Three new definitions are added.

1. Gross Leasehold Interest

This is the difference between the monthly rental value of the premises leased and the actual rent paid. The actual rent can also include any services, taxes, and insurance included as part of the rent. The gross leasehold interest amount is unchanged, whether the named insured occupies the entire premises or subleases all or part of it.

Example: Jamie's rental payment is $6,000 per month but the rental value (the amount that others pay for the same unit) is $10,000 per month. Jamie's gross leasehold interest is $4,000.

2. Monthly Leasehold Interest

This is the monthly portion of the total of covered bonus payments, improvements and betterments, and prepaid rent divided by the number of months that remain on the lease when the expenditure is made.

Example: Jamie makes a $30,000 bonus payment at the beginning of a 10-year lease. The monthly leasehold interest is $30,000 divided by 120 months or $250.

3. Net Leasehold Interest

This consists of two parts:

a. For a tenant’s lease interest, net leasehold interest is the present value of the named insured's gross leasehold interest for the months that remain on the lease at the rate of interest on the leasehold interest coverage schedule. It is calculated by multiplying the gross leasehold interest by the selected interest factor for the remaining period of the lease.

Example: A fire occurs at the building when only 24 months remain on Jamie’s 10-year lease. The lease is forfeited because of the fire. Jamie’s tenant’s lease interest payment is calculated as follows: The effective interest rate selected was 10%. The difference between the rental value and the rent paid is $4,000. $4,000 multiplied by 21.7646 (the interest factor in CP 60 10) equals $87,058.

b. The formula is simpler for bonus payments, improvements and betterments, and prepaid rent. The monthly leasehold interest is multiplied by the number of months that remain in the lease.

Example: Continuing our example, Jamie’s bonus payment loss is calculated by multiplying the monthly leasehold figure of $250 by 24 months for a loss amount of $6,000.