ISO TIME ELEMENT COVERAGE FORMS OVERVIEW

(June 2019)

INTRODUCTION

Time element insurance covers time-sensitive consequential losses that result from covered direct physical loss or damage to buildings and/or personal property. Time element insurance losses are considered to be consequential or indirect damage because they develop only after direct damage occurs.

DIRECT DAMAGE VS. INDIRECT DAMAGE

Direct damage refers to physical loss or damage to tangible property. When an apartment building burns down, the structural damage is visible and readily measured. However, the time element loss is much less apparent and more difficult to quantify.

The flow of rental income revenue from the damaged apartment building ends immediately after the direct damage loss occurs. The total gross rental income loss is the number of months needed to repair or rebuild the facility multiplied by the monthly rental income. This is considered business income.

The apartment owner arranges with a fellow apartment owner to offer temporary housing to his tenants in order to reduce his business income loss and retain his tenants. The additional cost to assist the tenants is considered extra expense.

Another issue to consider is that some tenants in the damaged or destroyed building may lose very attractive leases as a result of the direct damage. They incur the financial loss of the value of the remaining portion of their leases. This is considered leasehold interest.

INSURABLE RISK VERSUS BUSINESS RISK

Direct loss of or damage to tangible property is only one of many causes of indirect losses.

Examples:

A printing operation is completely shut down when its employees go on strike for two months.
A local restaurant that specializes in offering Australian cuisine loses 80% of its business when its customers' tastes change, and they decide to eat elsewhere.
A tenant in a building has an attractive ten-year lease. It must move out when the building owner goes out of business trying to affect repairs to address environmental issues and nobody else purchases the building.

Each of these is an example of a business risk. Each is a result from an event other than direct physical loss or damage to property that insurance covers. Standard insurance coverage forms and policies do not cover such indirect losses.

MATCHING COVERAGE TO THE RISK

It is difficult to determine the correct business income limit to carry because losses are evaluated based on expected or anticipated lost income. The named insured's financial statement is a useful and practical starting point to develop an appropriate limit for the coverage selected. Current financial conditions, emergency plans, long-term business plans, and specific business processes are just a few examples of other issues that must be addressed and evaluated before selecting the appropriate coverage form and its limit.

Regardless of the coverage form selected, Insurance Services Office (ISO) CP 15 15–Business Income Report/Work Sheet should be used as part of the process to develop and determine the proper limit of insurance. It has detailed instructions and steps to follow to determine the appropriate limit for the coverage selected.

POLICY MAKE-UP

Time Element coverage requires at least the following seven forms:

Common Policy Declarations
IL 00 17–Common Policy Conditions

This mandatory form contains the common conditions that apply to all commercial insurance coverages. It is required to be used with all simplified monoline or multiline policies.

Related Article: Related Article: IL 00 17–Common Policy Conditions Analysis

CP DS 00–Commercial Property Coverage Part Declarations

CP 00 90–Commercial Property Conditions

One or more time element coverage forms:

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

One or more of the Causes of Loss Forms:

CP 10 10–Causes of Loss–Basic Form
CP 10 20–Causes of Loss–Broad Form
CP 10 30–Causes of Loss–Special Form

Policy Cover or Policy Jacket

TIME ELEMENT COVERAGE FORMS

ISO provides four primary time element coverage forms:

Related Article: Time Element Coverage Forms Analysis

CP 00 30–Business Income (and Extra Expense) Coverage Form

This is the most frequently used coverage form. It reimburses the named insured for business income lost and extra expenses incurred that result from direct physical loss or damage to property by a covered cause of loss. Extra expense coverage reimburses the named insured for the additional costs incurred to continue operations.

Example: Tony’s Comic Book Shop burns to the ground. Tony loses significant income from walk-in customers. He rents space at another location so his regular customers can continue their reading habits while a new shop is being built. The extra expenses to rent the location plus the reduced income due to the loss are covered.

CP 00 32–Business Income (without Extra Expense) Coverage Form

This coverage form basically provides the same business income coverage as CP 00 30. However, it covers only extra expenses incurred that reduce the business income loss. It is appropriate for operations that do not expect to incur any unusual or unanticipated extra expenses.

Example: An apartment building is a type of business that may not require extra expense coverage.

CP 00 50–Extra Expense Coverage Form

This coverage form insures only extra expenses the named insured incurs. It should be used by only businesses that must continue operations, regardless of the circumstances. Some examples are hospitals, newspapers, insurance agencies, and public communications. They must continue operations regardless of the costs and will incur any extra expense necessary to do so.

Example: A fire seriously damages the building that Damond Insurance Agency occupies. Joe Damond has an online server with copies of all of his clients’ files and does not lose any income because of the loss to his insurance office. However, he must rent temporary office space at another location as well as furniture, computers, phones, and other equipment to continue to service his customers. This coverage form covers the additional costs to notify his clients and his carriers of the temporary location. It also responds to other expenses he incurs to continue operations at the new location.

CP 00 60–Leasehold Interest Coverage Form

Tenants with attractive long-term leases with payments below current market value can use this coverage form. It covers the financial benefits contained in the lease for the period of time that remains on it. It responds to a covered loss only when the lease is cancelled because of direct physical loss or damage to covered tangible property.

CAUSES OF LOSS FORMS

The Causes of Loss Forms describe the types of losses insured, exclusions, and relevant limitations that apply. The policy is not complete unless at least one of the following causes of loss forms is included.

CP 10 10–Causes of Loss–Basic Form

This form provides coverage against fire, lightning, explosion, windstorm, hail, smoke, aircraft or vehicles, riot or civil commotion, sprinkler leakage, vandalism, sinkhole collapse, and volcanic action.

CP 10 20–Causes of Loss–Broad Form

This is an intermediate-level causes of loss form. It includes the basic causes of loss plus breakage of glass, falling objects, the weight of snow, ice, or sleet, and water damage.

CP 10 30–Causes of Loss–Special Form

This form covers direct physical loss or damage caused by all types and causes of loss not specifically excluded or limited.

AVAILABLE ENDORSEMENTS

There are various endorsements available to tailor the Coverage Forms. Some are mandatory and are required for specific classifications and types of business. Others are optional and permit customizing a standard form to meet a specific risk's coverage needs. Endorsements broaden, restrict, delete, modify, or add coverage.

UNDERWRITING

Underwriting time element coverage always starts with analyzing the direct damage features of Construction, Occupancy, Protection, and Exposure (COPE) along with the important intangibles of moral and morale risk. Once this is complete, time element specific underwriting begins. The coverage form(s) needed, the factors that could increase the period of restoration, and the limit of insurance required can be determined only after careful analysis.

RATING

Time element rating starts with the direct damage property rating but is modified by coverage-specific factors. The procedure is very exact but some of the details can be extremely confusing.