(June 2019)
Many businesses rely on other businesses to provide materials, supplies, services, or component parts, to purchase their products, or to attract customers. They are often referred to as dependent properties because the named insured depends on them for its financial success. Standard unendorsed business income and extra expense coverage forms limit coverage to suspension of operations that a covered direct loss causes at the named insured’s location. Time element coverage at dependent property locations is available under one or more of the following endorsements:
These coverage endorsements are increasingly important to many businesses as they outsource more of their operations and rely more on goods and services that others provide.
Note: This analysis is based on the 10 12 edition of these coverage forms. Changes from the previous edition are in bold print.
Dependent properties are defined as a business or property operated by an entity that the named insured depends on for materials, supplies, services, or component parts. That other entity cannot be a named insured on the policy. There are four types of dependent properties.
This is a very broad category. These locations manufacture or supply the named insured with raw material or products it uses in its manufacturing operation. They may manufacture products for the named insured that the named insured then sells through its wholesale or retail businesses. A contributing location may provide a service the named insured depends on. Time element coverage at these dependent properties is especially important when the material or service provided is custom-made for the named insured’s exclusive use or if it comes from a unique or remote geographic location.
Examples of business operations that may have their operations curtailed because of a direct damage loss to a contributing location include:
These are locations that accept the named insured's products or services. If the named insured offers services or sells products to only a few customers, coverage for business income from dependent properties is very important.
Examples of business operations that may have an exposure from a direct damage loss to a recipient location include:
This category is sometimes confused with contributing locations. However, this category refers to specific businesses that take orders for products that others manufacture. Some examples are manufacturers’ representatives or businesses that sell products under their name that others manufacture for them.
Examples of business operations that may have an exposure from a direct damage loss to a manufacturing location include:
Leader locations attract customers to the named insured's business. While these locations are usually associated with retail operations, there are many others. Examples of business operations that may be negatively affected by a direct damage loss to a leader location include:
These coverage endorsements are endorsed to a business income coverage form to protect the named insured for its loss of business income as a result of a direct damage loss at the scheduled dependent property. Coverage applies at only locations the named insured does not own, operate, or manage. The dependent property’s location must be entered on the endorsement schedule. Two different coverage forms are available.
A. and B. This endorsement extends the coverage the business income coverage form provides to handle losses caused by direct physical loss or damage to dependent properties. The damaged dependent property must be listed on the endorsement schedule. Coverage is subject to the same limits, coinsurance, and coverage options that apply to the business income coverage form.
C. Secondary Dependencies–Contributing and Recipient Locations (10 12
addition)
This coverage applies if there is a selection for them on the
endorsement schedule. Coverage applies only if two separate but connected
events occur. If the dependent property is a contributing location, the
secondary dependent location must first sustain a covered cause of loss. The dependent
location must then not be able to provide material and services to the named
insured because the damaged secondary dependent location cannot provide
material or services to it.
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Example: Krazy Kind of Love sells unique gifts. Its main supplier is Unique and Unusual, Inc. Krazy lists Unique on CP 15 08’s schedule. All Unique gifts are packaged in animal shaped boxes. Animals for Fun, LLC manufactures the boxes for Unique. A fire occurs at Animals and it cannot provide boxes to Unique for six months. Unique has a small supply of boxes but it will not be able to send the gifts to Krazy after the supply is depleted. Scenario 1: Under the 06 07 edition of CP 15 08, Krazy would not have coverage for loss of income it sustains because it is unable to receive gifts from Unique because Unique did not sustain a covered cause of loss. Scenario 2: Under the 10 12 edition of CP 15 08, if Krazy
checked the Secondary Contributing Locations, there is coverage for the loss
of income it sustains because Animals sustained a covered cause of loss that
started the series of events that prevents Krazy from receiving gifts to sell.
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If the dependent property is a recipient location, the secondary dependent
location must first sustain a covered loss. The dependent location must then
not be able to accept material and services the named insured provides because
of that covered loss at the secondary dependent location. (10 12 addition)
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Example: Marshall Machines Parts supplies parts to Heavenly Places Manufacturing. The parts are an integral part of a lawnmower engine. Padre Motors supplies the engine block to Heavenly Places. Padre sustains damage from a tornado and is out of business for six months. Heavenly has a small supply of engine blocks on hand but must shut down operations after the supply is exhausted until Padre is back in operation. Until then, it cannot accept Marshall parts. Scenario 1: Under the 06 07 edition of CP 15 08, Marshal does not have coverage for this interruption because Heavenly did not sustain a covered loss. Scenario 2: Under the 10 12 edition of CP 15 08, if Marshal
checked the Secondary Recipient Location, there is coverage for the loss of
income it sustains because Heavenly is not willing to order from Marshal
because of Padre’s covered loss. |
As with other types of business income loss, there is no coverage if
electronic data is the only loss or damage the secondary dependent location
sustains. If other property is damaged along with electronic data, coverage
applies only until the other property is repaired, replaced, or rebuilt. (10 12
addition)
The limit of insurance for Secondary Dependencies–Contributing and
Recipient Locations is the limit of insurance for business income. This is not
additional insurance even if multiple dependent properties or secondary
dependent properties are damaged. (10 12 addition)
D. Miscellaneous Locations
This coverage applies if a business income loss occurs because of direct damage to an unscheduled dependent location. The limit of insurance is .03% of the business income limit of insurance for each day the named insured’s operations are suspended because the dependent property was damaged. Roads, bridges, tunnels, waterways, pipelines, airfields, and similar property or structures are not considered miscellaneous locations.
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Examples:
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The limit of insurance for Miscellaneous Locations is the limit of
insurance for business income. This is not additional insurance even if multiple
dependent properties, secondary dependent properties, and/or miscellaneous
properties are damaged. (10 12 addition)
A secondary location cannot also be a miscellaneous location if
coverage is provided for secondary locations. (10 12 addition)
E. Loss Determination
The named insured has an obligation to search out alternative sources of material and product outlets. The amount of loss is reduced by the amount of time it could have saved if it had used the alternative sources.
F. Definitions
Dependent property (10 12 change)
This is a property the named insured depends on that it does not operate. The types of dependent property are described earlier in this article. However, water, power, and communication supply services and wastewater removal services are not dependent property locations.
Note: Utility services interruption can be covered under CP 15 45–Utility Services–Time Element
Related Article: CP 15 45–Utility Services–Time Element
Period of restoration
This is the same as the business income period of restoration definition except that it refers to the dependent property or the secondary location instead of referring to the named insured’s premises.
Secondary contributing location (10 12 change)
This is a location that is not listed on the schedule and that is not owned or operated by a contributing location listed on the schedule. It must provide materials or services to the identified contributing location. The contributing location must then use the material or services to provide services or materials to the named insured.
As with miscellaneous property, this definition does not include roads, bridges, waterways, airfields, pipelines, and similar property. As with dependent property location, water, power, and communication supply services and wastewater removal services are not secondary contributing locations.
Secondary recipient location
This is a location that is not listed on the schedule and is not owned or operated by a recipient location listed on the schedule. It must receive materials or services from the identified recipient location that, in turn, receives services or materials from the named insured.
As with miscellaneous property, this definition does not include roads, bridges, waterways, airfields, pipelines, and similar property.
G. Coverage Territory
Coverage applies only if the loss or damage at dependent properties, secondary locations, and miscellaneous locations is at a premises located within the Coverage Territory.
This endorsement is identical to CP 15 08 above except that the insured can customize the business income coverage it needs. It selects the limit of insurance to apply at each scheduled dependent property so that this coverage is independent from the business income coverage on the named insured’s operations. The named insured may or may not carry business income coverage for its own operations. The name, description, and location of the dependent property or properties must be entered in the appropriate space on the endorsement schedule along with the limit of insurance selected for each location.
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Example: Melina is a manufacturer’s representative. She operates out of an office and does not keep any stock on hand. Melina would not have a business income loss if her office location was destroyed. However, she would have a significant business income loss if either of the two companies that she represents had a loss because she is paid a commission only after the goods are delivered. She schedules a $50,000 limit for Company X and a $30,000 limit for Company Z on CP 15 09. She does not have a limit for business income coverage on the declarations. |
The CP 15 09 provides the same coverage as the CP 15 08.
The insuring agreement in the business income from dependent properties coverage endorsements replaces the insuring agreement in the business income coverage forms. It covers the actual loss of business income or the additional expenses the named insured sustains if its business operations must be suspended. The suspension must result from direct physical loss or damage to a dependent property listed on the endorsement schedule. It may also result from a direct physical loss or damage to a secondary contributing or recipient location if selected on the declarations. The direct damage must be due to a covered cause of loss that occurs.
There is a limitation. Coverage does not apply to loss of business income from a suspension of the named insured’s operations when the loss at the dependent or secondary property involves damage to electronic data. This is identical to the same provision in each of the two standard coverage forms. It reflects the reluctance of insurance companies to insure losses to data networks and off-premises storage or supply sources.
Both endorsements redefine the period of restoration to add dependent property, but the definition is otherwise unchanged. In addition, the terms “dependent property” “secondary contributing location,” and “secondary recipient location” are added to the definitions.
This coverage endorsement modifies the extra expense coverage form like CP 15 09 modifies the business income coverage forms. It lets the named insured customize the extra expense coverage it needs and does not tie the coverage limit to the named insured’s premises extra expense coverage. A specific limit of insurance is scheduled for each listed location. There is no requirement that the named insured purchase coverage at its premises.
Each dependent property’s name, description, location, and limit of insurance are entered in the appropriate spaces on the endorsement schedule. Secondary contributing location and/or secondary recipient location coverage is available if selected on the endorsement schedule.
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Example: Kevin is a manufacturer's representative for seasonal products. He represents three manufacturers for his Christmas line and schedules each of them for a $25,000 limit. One manufacturer has a covered loss in November and cannot supply the Christmas products Kevin needs. Kevin’s customers depend on him and he pays to acquire the same product from another source. While Kevin satisfies his customers, he incurs $20,000 in extra expenses to do so. This extra expense coverage pays his $20,000 out of pocket loss. |
The extra expense from dependent properties coverage endorsement’s insuring agreement replaces the extra expense coverage form’s insuring agreement but it is similar. It covers the extra expense the named insured incurs because of direct physical loss or damage to a dependent property listed on the endorsement schedule. It also covers if the extra expense is due to a direct loss to a secondary recipient or contributing location. The direct damage must be due to a covered cause of loss that occurs. If the loss or damage at a miscellaneous location causes extra expense, .03% of the sum of all limits on the endorsement is available as a sub-limit to pay for that loss.
This coverage endorsement redefines the period of restoration to add dependent property and secondary, contributing, and recipient locations but the definition is otherwise unchanged. In addition, the terms “dependent property,” “secondary contributing location,” and “secondary recipient location” are added to the definitions.
Standard dependent property time element coverage forms have the same coverage territory as other property coverage forms. However, they may need coverage for locations outside the United States, its territories and possessions, and Canada as more businesses become international in scope. The following coverage endorsements address this issue:
The coverage these coverage endorsements provide is nearly identical to the coverage that CP 15 09 and CP 15 34 provide but there are several important differences. They are:
This is an extremely important coverage to certain businesses. However, there may be times when market conditions make it unavailable or unaffordable. Insurance companies may not want to offer it because the named insured does not control the dependent property. Neither the named insured nor the insurance company may be able to conduct loss control inspections or apply leverage to force compliance with recommendations made after a loss control inspection. The insurance company has every right to deny coverage on any location that it cannot inspect or that does not comply with recommendations. The company must have the same type of information on the dependent property to properly underwrite it that it uses to underwrite the property it covers for direct physical loss or damage. The following are examples of information the company needs:
The insurance agent and the insurance company both must know and completely understand the hazards, conditions, and exposures for each of the covered causes of loss forms that apply. Underwriting dependent properties must be done as carefully and thoroughly as it is for primary insurance because of the exposures and limits of insurance that they affect.
Adding secondary contributing and recipient locations increases the complexity of underwriting this endorsement. It does not require a listing of secondary locations, but the listing could be useful for underwriting.
When adding secondary contributing and recipient locations, a schematic of the named insured’s supply chain is useful in risk assessment.
As with any business income and extra expense coverage, the actions the named insured takes to mitigate losses must be evaluated. If a dependent property sustains a loss, it does not necessarily mean that the named insured sustains a loss. The underwriter must examine the dependency relationship and identify alternatives that the named insured has available. For example, if a leader store burns down, what does the named insured do? Do the actions taken depend on the length of time the leader store is out of business?
The dependent property risks that are most difficult to underwrite are those where the named insured's relationship is exclusive. Smart businesspeople have contingency plans for covered losses as well as for situations where the dependent property goes out of business permanently, moves to another state, or changes its business plan and adopts a completely different business model.