(June 2019)
Direct physical loss or damage to property by a covered cause of loss triggers time element coverage. As a result, the starting point for rating any time element coverage is the building rate for the insured location. The time element coverage is written independently of the direct damage coverage so it can be written with the same or a different insurance company from the one providing the direct damage coverage.
The Insurance Services Office (ISO) business income rating factors are in a specific table and are based on three criteria:
ISO Rule 50 explains this and answers any questions with respect to the occupancy and how to properly classify it.
The building rate is multiplied by the appropriate business income factor to develop the business income rate for the specific occupancy. The next step is to multiply the limit of insurance by this rate to arrive at the premium.
The coinsurance option can be burdensome. This is why there are three alternatives available:
The first two options have their own rating factors that are not dependent on the basic formula. These factors are multiplied by the building rate to develop the final business income rate. The limit of insurance is then multiplied by that rate to arrive at the premium.
The third option develops a rate following the basic formula and then applies a 10% surcharge. The limit of insurance is then multiplied by the adjusted rate to arrive at the premium.
There are numerous endorsements available. Each has its own rating formula. ISO Rule 51 Business Income Options has more information and rating details for other options.
There are
three percentage options available under the basic extra expense rating rules.
Each has a factor that is multiplied by the building rate to develop the extra
expense rate. The basic options are 100/100/100, 40/80/100 and 35/70/100.
If one of those
three options is not sufficient, ISO has additional options available in Rule 53,
Extra Expense Options, which allow the named insured to select the appropriate
breakdown for its needs. The only conditions are that the first percentage must
be less than 40% and be the lowest percentage, each following percentage must
be higher or equal to the one before it and the final percentage must be 100%.
The building rate is multiplied by the extra expense factor to develop the
extra expense rate. The extra expense rate is multiplied by the extra expense
limit of insurance, per $100, to develop the premium.
ISO Rule 65 Leasehold Interest Coverage provides the instructions to rate this coverage. There are two parts.
Step 1. The starting point is the gross leasehold interest. This is the difference between the current rental value of the property and the rent the named insured pays.
Step 2. Multiply Step 1. by the leasehold interest factor that applies. The factor is based on the number of months that remain in the lease as of the policy inception date and the selected interest rate.
Step 3. Multiply Step 1. by the leasehold interest factor that applies. The factor is based on the number of months that remain in the lease as of the policy expiration date and the selected interest rate.
Step 4. Add Step 2. and Step 3. together and divide by 2. The result is the average limit of insurance for the policy term.
Step 5. Multiply Step 4. per hundred of limit by the basic building rate to arrive at the premium for tenants lease coverage.
Note: A second method of Tenants Lease Premium Determination is based on an algebraic formula. However, the end result should be similar.
Step 1. Divide the bonus payments, improvements and betterments, and prepaid rent by the number of months between the time they were incurred and the lease’s expiration date. This becomes the monthly leasehold interest.
Step 2. Multiply Step 1. by the number of months that remain in the lease as of the inception date.
Step 3. Multiply Step 1. by the number of months that remain in the lease as of the expiration date.
Step 4. Add Step 2. and Step 3. together and divide by 2. The result is the average limit of insurance for the policy term.
Step 5. Multiply Step 4. per hundred of limit by the basic building rate to arrive at the premium for the bonus payments, improvements and betterments, and prepaid rent.