"Period of Restoration" carries essentially the same definition in all three ISO time element forms (with a slight variation in the CP 00 50 as it provides only extra expense coverage):

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F.3. "Period of restoration" means the period of time that:
a. Begins:
(1) 72 hours after the time of direct physical loss or damage for Business Income Coverage; or
(2) Immediately after the time of direct physical loss or damage for Extra Expense Coverage; caused by or resulting from any Covered Cause of Loss at the described premises; and
b. Ends on the earlier of:
(1) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or
(2) The date when business is resumed at a new permanent location.

"Period of restoration" does not include any increased period required due to the enforcement of any ordinance or law that:
(1) Regulates the construction, use or repair, or requires the tearing down, of any property; or
(2) Requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants".

The expiration date of this policy will not cut short the "period of restoration".
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Four key objectives must be accomplished as quickly as reasonably possible during the "period of restoration:"
1) Rebuild the building or find and move to an alternate permanent location;
2) Find, purchase, install and have operational new/replacement machinery and equipment;
3) Replace and/or replenish stock (not "finished stock" for manufacturing operations); and
4) Return to the same level of "operational capability" existing just prior to the loss.

The ultimate goal of the first three objectives is to realize the final objective as quickly as possible -returning the business to its pre-loss "operational capability." Speed is of the essence in completion of each objective towards the goal of returning to full "operational capability;" remember, the policy specifically states that coverage ends when the property "should be repaired…" and not when it "is repaired." Dragging out the return to "operational capability" without due cause or need risks the loss of additional business income for which no business income protection is provided.

"Operational capability" relates to an entity's ability to operate at or near pre-loss production or sales capacity. This is a non-policy business income term describing the point at which a manufacturing operation can return to pre-loss production levels and inventory levels (excluding the recreation of finished stock); and a non-manufacturing entity can operate with the same level of inventory, equipment and efficiency as before the operational-closing loss.

To clarify, "operational capability" is NOT synonymous with a return to pre-loss income levels, which may take much longer to accomplish; it is merely the entity's ability to produce goods and provide service at the same level, efficiency and speed as before the loss (i.e. the ability to conduct "operations" at pre-loss levels).

Importance of Accurately Establishing the "Period of Restoration"

Estimating the period of restoration (POR), the time required to accomplish all four POR objectives, is the first step towards developing the "maximum coinsurance percentage" and ultimately the necessary coverage limits (as discussed in the previous post). A proper and honest assessment of the period of restoration leads the insured and agent to the correct coinsurance choice and business income coverage limits (provided the business income report/worksheet has been accurately completed). An underestimate may be detrimental to the insured's ongoing operations and income.

Granted, the "period of restoration," as defined in the coverage form, is a moving target, fluctuating based on the amount of damage, the time of year and many other factors. Insureds should assume a worst-case scenario loss (a total or constructive total loss to the insured premises) when planning and purchasing business income coverage.

Ten Factors Directly Affecting the Period of Restoration

Attempting to properly guesstimate the "period of restoration" requires the insured and the agent to have a clear understanding of all factors directly affecting the time required to complete the stated POR objectives; ten of these time-factors are listed below.

1. The time required to complete the property loss adjustment;
2. Building plans will have to be drawn and approved;
3. A contractor will have to be found and hired;
4. The insured will have to apply for and wait for building permits to be issued;
5. Clearing the site of damaged/destroyed property must be scheduled and completed;
6. The time required to rebuild (may be adversely affected by #10);
7. The time required to restock;
8. Rehiring and hiring new employees
9. Replacement machinery and equipment will have to be found, purchased, installed and made operational; and
10. The Federal, state or local government may become involved following a loss.

This is not likely an all-inclusive time-factor list nor is it in order of importance or time consumption. The list also is non-linear, that is, several steps can and may be accomplished simultaneously. Each of the 10 factors listed above are detailed in the three commentaries to follow. Three listed factors require and receive a more in-depth discussion: 1) the time required to adjust the direct property loss; 2) the time required to replace machinery and/or equipment; and 3) Federal, state and/or local government involvement (ordinance or law issues). The remaining seven are only highlighted.

Coming Up!

Correctly calculating coinsurance requires a thorough understanding of the four "period of restoration" objectives and the incremental steps (10 listed factors) necessary to accomplish them. Accurately estimating the time required to return the business to its full "operational capability" is key to establishing the "maximum coinsurance percentage," the "amount subject to loss" and finally the minimum amount of business income coverage to purchase. As stated in the previous article, developing the maximum coinsurance percentage is EASY, estimating the basis for that choice, the "Period of Restoration," is hard.

The next three commentaries discuss the time line and the problems the insured may/will encounter in working toward completion of all four POR objectives. Federal, state and local government involvement is a particular problem which, on its own, garners nearly an entire commentary. If the ordinances and laws are ignored in the coverage planning process, the resulting business income gaps could cost the insured (and ultimately the agency) dearly.

For all the information on Business Income coverage, take a look at Insurance Journal's book, "Business Income Insurance Demystified: The Simplified Guide to Time Element Coverages."