(June 2019)
Underwriting time element coverage begins with underwriting direct damage commercial property exposures.
Related Article: ISO Commercial Property Program Underwriting Considerations
The time element specific analysis must then concentrate on exploring the factors that deal with the length of time an operation is shut down or operating at less than optimal capacity.
The first step in analyzing time element exposures is to determine the type of coverage needed. A business that must continue operations under any circumstances needs extra expense coverage more than business income coverage. This type must immediately resume operations at the current location or relocate operations to another facility within a very short period of time. Operations like these have made promises they must keep, or they will lose most of their clients and customers. They may even be subject to a breach of contract. Examples include hospitals, banks, insurance agents, “just-in-time” suppliers, newspapers, radio and television stations, and other media risks.
Service and contracting businesses that can quickly and easily resume full operations at a different location as soon as the basic equipment and supplies they need to operate are replaced also need extra expense coverage more than business income coverage.
Businesses that conduct operations that are not subject to time pressure and that require a specific location to operate from need business income coverage. These businesses are heavily invested in plant, equipment, and stock, and cannot simply resume operations at another location with only minimal investment.
Most businesses need a combination of business income coverage and extra expense coverage. A small retail operation is at one end of the scale. It requires extra expense coverage to aid in moving to another location or setting up a website for operations to continue. However, it also needs business income coverage for the lost income during the rebuilding process. Other risks have little use for extra expense because only rebuilding the building will allow operations to resume. Examples are shopping centers and apartment complexes.
Leasehold coverage is an often-forgotten type of time element coverage that may need to be combined with business income and/or extra expense to provide complete time element protection for an insured. When a loss causes a favorable lease to be cancelled, the named insured may not realize that neither business income nor extra expense coverage makes up the difference between current pricing and the pricing provided by the favorable lease.
The named insured must decide what it will do after a loss before it can determine the exact type and amount of coverage needed. It should consider the following important points.
No business is immune to the possibility of serious or catastrophic loss or damage. No building is totally "fire-proof," "earthquake-proof," or unaffected by other natural or man-made disasters. Successful businesses take the time to evaluate the potential for natural, business, and catastrophic disasters that could occur and affect them.
Every business must understand the factors involved in resuming its usual business operations and should develop contingency plans that involve “what if” scenarios ranging from minor to major interruptions of operations. The first step in this process is to thoroughly analyze the entire workflow of all component parts and processes. A typical analysis should include at least the following points:
o The number of suppliers
o The availability of raw materials or stock available
o The number and types of distributors available including their skills and markets served
o The customers/customers served and their ability to find another market
Once the thorough risk assessment is complete, the business should have a picture of the type of contingency plans needed to address any business income or extra expense losses.
Those businesses that must quickly resume operation should identify potential relocation sites. Contingency agreements can be put into place that permits the damaged operations to use another business’s site or facility during off hours. Making such agreements and taking other steps before a loss occurs results in operations resuming faster and more efficiently. Anticipating and planning for even the most remote loss possibilities can be an enormous advantage and make a big difference in whether the business successfully continues operations or breaks down completely. The business must also familiarize itself with the types of direct damage property losses that have the greatest potential to trigger a business income or extra expense (or both) loss. The next sections address some areas to consider when evaluating the potential for a time element loss of any kind or size.
Does the named insured’s building where it conducts operations have any unique or unusual features that may increase the length of time needed to repair or rebuild it? If it does, does it need these features to conduct operations or are they simply aesthetic? Is highly skilled or specialized construction labor needed? If so, are such laborers readily available locally? Special, required building features and the need for skilled labor substantially increases both the costs incurred and the time needed to make repairs and resume normal operations. They also affect the amount and type of coverage needed. The same features and conditions are also issues for the insurance company to consider when it evaluates the risk and makes decisions about underwriting acceptability and premium charges.
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Example: ClearView Glass manufactures plate glass for a variety of applications. It needs large insulated tanks and underground lines for the molten glass to flow through and be poured and floated in special vats of quenching liquids. The buildings that contain these operations have specially designed features to allow for both the floating and the cooling operations. If a fire destroys ClearView’s plant, operations cannot simply be resumed at just any large manufacturing facility. The features ClearView’s operations need, such as the large tanks, lines, and special vats would have to be duplicated. Doing so would add weeks, perhaps even months, to the time needed to repair or rebuild its plant. |
On the other hand, businesses that can essentially reopen at a new facility with few or only minor modifications experience less serious time element losses. These businesses are able to reopen and resume normal operations more quickly.
Both the named insured and the insurance company must completely understand the amount of time needed to rebuild or complete repairs.
Another area that has a significant impact on time element losses is the operation’s processes. Some processes take a long time to complete. Others require certain types of raw material available at only certain times of the year. In operations with such processes, even a relatively minor direct damage loss may lead to a large business income or extra expense loss.
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Examples:
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Evaluating a process to determine the time element exposure may draw attention to another common but extremely important situation. Does the process have a specific stage crucial or essential to the entire operation? Does the process have a bottleneck that consists of a single machine, step, or part that everything flows through that, if shut down or not operational for any reason, would result in a significant interruption of business?
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Example: General Codependance Corporation manufactures several different products. Each production line is separate and largely independent of the others. However, each line's final stage is a chemical sealant process that presents a potential bottleneck because there is only one sealing machine. All of General’s production would stop if it was damaged or shut down. |
Production aspects, circumstances, and peculiarities such as in the example above must be considered when evaluating and assessing the type and extent of time element losses that may occur.
Some business operations (such as manufacturing or processing) have special machinery, equipment, or other critical property that may be difficult or impossible to replace or may require an extensive amount of time to do so.
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Example: KuttingEdgeKorp paints and coats metal parts for other manufacturers. It uses a modern, highly efficient and environmentally safe process done in an atmospherically controlled environment. The production line is designed, customized, and manufactured in Germany and has many safety features. When a tornado damages the KuttingEdgeKorp plant, it orders a new production line. The order is placed on a 22-month waiting list. It then takes eight additional months to manufacture it. This results in a very lengthy and expensive time element loss. |
Modern or high-tech equipment is not the only kind that must be examined carefully. Old, outdated, or obsolete equipment can result in frequent incidents of downtime and partial losses. Another issue to consider is increased moral hazard if there is outdated and obsolete equipment.
The number and availability of suppliers in the local area that can provide the goods and raw materials needed to continue operations is another important consideration. Raw stock may not be easily obtained, or the number of suppliers may be limited, and their goods may already be committed elsewhere. In such cases, a direct damage property loss to the existing stock of raw materials and supplies may result in a much longer time element loss.
Once the business estimates or determines its potential downtime, it must calculate the amount of financial loss. To do so, it must determine the projected income and expenses for both the current year and the following year. ISO has developed two fairly comprehensive forms to use in these calculations.
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