CP 15 20–BUSINESS INCOME PREMIUM ADJUSTMENT (REPORTING FORM)

(June 2019)

INTRODUCTION

CP 15 15–Business Income Report/Worksheet is an excellent tool to use to develop a realistic business income limit of insurance. It is important to remember that it is just an educated guess because the business income coverage limit is only an estimate of future income based on past performance and figures. The insured that seriously approaches properly insuring its hard-earned assets may decide to select a limit high enough to cover its maximum possible projected income and continuing expenses. However, this means paying a higher premium than necessary.

The Insurance Services Office (ISO) developed CP 15 20–Business Income Premium Adjustment to provide a way to for an insured to select the highest limit necessary while only paying for the amount of insurance actually needed. The named insured can plan for and write a limit of insurance that reflects a best-case exposure scenario but pay only the premium that reflects its actual exposure.

ELIGIBILITY

Any risk that business income coverage forms CP 00 30 and CP 00 32 covers is eligible to use this endorsement. However, there are three exceptions:

• Risks written subject to the Business Income Agreed Value optional coverage
• Risks that include CP 15 08–Business Income from Dependent Properties–Broad Form
• Risks that include CP 15 09–Business Income from Dependent Properties–Limited Form

COINSURANCE

The coinsurance percentages this endorsement uses range from a low of 50% to a maximum of 125%. There may still be a coinsurance penalty if the limit of insurance at the time of a covered loss is inadequate. However, a coinsurance penalty is unlikely if the limit selected reflects the highest possible loss exposure. This endorsement encourages the named insured to periodically compare the limit of insurance to its actual income or earnings and request that the limit be increased to reflect the actual income or earnings if needed.

A. IMPACT OF THE BUSINESS INCOME PREMIUM ADJUSTMENT (REPORTING FORM) ENDORSEMENT

Using this endorsement does not affect or change any coverage provisions. It is simply a different approach to insuring to value and paying only the premium that reflects that value. The named insured pays a deposit or estimated premium for the full policy term based on the limit of insurance it selects. At expiration or cancellation, the named insured reports the actual income and continuing expenses for the period. The premium is adjusted based on the actual figures reported. If the actual figures are lower than the estimated figures a refund is provided. If the actual figures are higher, no additional premium is charged because the policy did not provide any additional coverage.

B. LIMIT OF INSURANCE

This insurance company does not pay more for a covered loss in any one occurrence than the smallest of the following:

1. The limit of insurance for business income coverage on the declarations
2. The loss amount after applying Additional Condition–Coinsurance as the business income coverage form describes
3. The amounts of actual net income and continuing expense that would have been earned or incurred for the 12 months immediately following the date of loss or damage is calculated based as if there had been no loss. That amount is then multiplied by the business income coverage coinsurance percentage on the declarations. This is not a coinsurance penalty. It simply establishes the maximum limit of insurance available. When 125% was entered as the coinsurance percentage, this limitation does not apply.
4. Divide the last reported values by the actual values for that period. Multiply that by the amount of the loss.

Example: Phil’s Photo limit of insurance is $250,000. He selects the 125% coinsurance option. He reported $200,000 in actual net income and operating expenses. Phil sustains a covered loss in the amount of $75,000.

Scenario 1: Phil’s actual reported net income and operating expenses was $200,000. There is no coinsurance penalty in this case because he was required to have $250,000 and he did.

He is paid the least of

1. $250,000,
2. $75,000 (250,000/250,000 X 75,000)
3. Not applicable because of the 125% coinsurance
4. $75,000 ($200,000/200,000 X 75,000)

Scenario 2: Phil’s actual net income and operating expenses was $225,000. There is no coinsurance penalty in this case because he was required to have $250,000 and he did.

He is paid the least of

1. $250,000
2. $75,000 (250,000/250,000 X 75,000)
3. Not applicable because of the 125% coinsurance
4. $66,667 ($200,000/225,000 X 75,000)

C. REPORTING PROVISIONS

Using this endorsement requires that the named insured submit reports of business income and extra expense values on the prescribed worksheet:

• The first one is due on the effective date of coverage to which this endorsement applies, and the values submitted must be for the previous 12 months of the business operations.
• No later than 120 days after each succeeding 12-month period values are submitted for the most current 12-month period
• No later than 120 days after the coverage provided ends or is cancelled for the period of coverage starting at the end of the previous 12-month report

D. FAILURE TO SUBMIT REPORTS

This endorsement’s terms no longer apply if net income and operating expense reports are not submitted as required or if the available business income coverage ends. The deposit or estimated premium is not adjusted and becomes the final premium.

E. PREMIUM ADJUSTMENT

• The premium charged at inception is a deposit or estimated advance premium. The insurance company calculates the final premium after the policy year or when coverage ends based on the reports of net income and operating expenses submitted multiplied by the business income coinsurance percentage.
• If the adjusted premium is less than the deposit, the insurance company refunds the excess to the named insured.
• There is no adjustment if the adjusted premium is more than the deposit. The deposit premium becomes the final premium.