Nine pages! The business income (BI) form is a mere nine pages; but these few pages encompass what has historically been confusing, scary and undersold. Hopefully some of the mystery surrounding this extremely important and vital property coverage has been removed.

Previous posts detailed the main BI policy provisions and many of the external factors directly affecting the business income coverage. This article highlights most of the remaining business income policy provisions not discussed in prior installments. The next post thumbnails the business income endorsements not detailed in earlier commentaries.

Three Business Income Source Options
The business income policy allows the insured to choose from among three "sources" of business income:
• Business Income(BI) including Rental Value (RV);
• Business Income other than Rental Value; or
• Rental Value (only).

Business Income other than Rental Value is selected if the insured receives no rental income from use of the insured building. Pure Rental Value coverage would generally apply to a lessor's risk only-type policy. The Business Income including Rental Value option may be chosen when the insured occupies part of the building and leases out part.

As the name suggests, "rental value" is income the insured receives from contracted tenants who lease or rent space in the insured structure. The insured has the option to insure the loss of rents as part of the business income, on a stand-alone basis or not at all. Insureds that choose not to protect the loss of rental income may have contractually transferred the exposure to the tenant.

Rental value is captured on "Line G." of the business income report/worksheet (CP 15 15). Note that "Line G." reads "Other earnings from your business operations (not investment income or rents from OTHER properties)." Only rents received from the insured location are contemplated here.

Five Business Income Coverage Triggers
"A.1." of both business income coverage forms specifies the five coverage triggers. Business income loss is payable only if all of these requirements are met:
• There must be a "suspension" of "operations;"
• Only pays for loss during the "period of restoration" (as defined in previous articles);
• The suspension is caused by direct physical loss of or damage to property at an insured premises;
• The damage or destruction must be caused by a covered cause of loss (based on the cause of loss form attached); and
• If personal property in the open (or in a vehicle) causes a suspension of operations, such property must be located within 100 feet of the insured premises for BI coverage to apply.

Covered Cause of Loss
Business income coverage applies and the loss paid only if the damage to or destruction of insured property emanates from a covered cause of loss. The business income policy references and employs the same cause of loss form used by the commercial property policy (either the special, broad or basic form).

Additional BI/EE exclusions not applicable to the other commercial property coverages apply to all three causes of loss forms, including:
• No business income coverage is available to pay for damage to or destruction of "finished stock;"
• The "period of restoration" does not include time to replace or repair "finished stock" (see "Business Income's Period Of Restoration Delaying Factors Revealed - Part II");
• Business income or extra expense coverage is not available if the business suspension is caused by or the result of damage to or destruction of ANY part of a radio or television antenna;
• The "period of restoration" does not include any increase in building time due to the actions of strikers or any other like persons;
• The "period of restoration" is not lengthened due simply to the suspense, lapse or cancellation of any license, lease or contract. Any increase in the business income loss resulting from such suspension, lapse or cancellation directly caused by the suspension of operations IS covered, but only during the original period of restoration and any extended business income or extended period of indemnity.
• No extra expense protection is provided due to the suspension, lapse or cancellation of any license, lease or contract.

Interruption of Computer Operations - Limited Coverage
Statistically, businesses that close following a major computer malfunction are less likely to reopen than those suffering major property damage (i.e. a fire). According to the US Department of Labor, 40 percent of businesses suffering a catastrophic data loss never reopen. Fifty percent of the businesses that do reopen close within three years. Ninety-three percent of businesses that can't recover data within 10 days ultimately fail according to the National Archives and Records Administration in Washington D.C.

The business income form is not designed to cover the loss of income arising out of a business closure following failure of the insured's computer system. Only a very limited amount and breadth of protection is extended to this type of business income loss. The business income policy:
• Covers a suspension of computer operations only if the interruption is caused by a covered cause of loss (i.e. fire). If the special cause of loss form is attached, only computer damaged caused by the "specified causes of loss" or collapse is covered;
• The covered causes of loss are extended to include damage caused by "a virus, harmful code or similar instruction introduced into or enacted on a computer system (including electronic data) or a network to which it is connected, designed to damage or destroy any part of the system or disrupt its normal operation." No coverage is extended if this damage is caused by any employee (full time, part time, temporary, contract, etc.);
• Coverage is limited to $2,500 per policy year (in the aggregate); and
• The coverage extension ends when the "period of restoration ends." This type of loss does not extend the period of restoration.

Civil Authority
Occasions exist when, due to public safety concerns or access requirements, a civil authority will evacuate businesses or individuals from a dangerous situation or area. Depending on the situational factors involved, such required evacuations and area prohibitions may last several days or weeks. The unendorsed business income coverage form extends only limited protection for such mandated business closures:
• Business income and extra expense (EE is only available if the CP 00 30 is used) is available when a property AWAY from the insured's premises is damaged by a covered cause of loss AND a civil authority (police, fire, etc.) prohibits access to the insured location;
• Damage leading to the actions of the civil authority must occur within one mile of the insured location;
• Business income protection begins 72 hours after the action of the civil authority (unless decreased by endorsement). Extra expense coverage begins immediately upon evacuation;
• Business Income and extra expense coverage is limited to four consecutive weeks; and
• Civil authority coverage is not in addition to the applicable coverage limits.

Alterations and New Buildings
This 11-line provision is almost worthy of its own commentary. This additional coverage can mean the difference between an insured's successful opening or resumption of operations and the business' ultimate failure.

New Buildings or Structures: Loss of or damage to a new building or one under construction can cause the business to lose income and suffer additional expenses. This BI and EE exposure is covered by this additional coverage. Assume the insured is constructing a new store or manufacturing facility; two months from the date operations are slated to begin, the building burns. Rather than opening on time, the facility's opening is delayed eight months (10 months from the date of the fire). Is the insured out any income? Yes! The insured loses the eight months of income that would have been earned had they opened as scheduled.

The eight-month income loss is covered under this policy provision. This exposure is why it is important the insured be offered business income protection anytime a builders' risk policy is written. Remember, commercial structures exist to make money (more specifically a profit) for the owner; if it is not there or is delayed, it cannot produce the desired income. Any delay in opening caused by a covered cause of loss will lead to a loss of business income; this loss exposure needs to be protected against.

Alterations or Additions to Existing Buildings or Structures: This second provision essentially copies the first except this relates to work on existing buildings. If a covered cause of loss delays the planned opening and operation of the altered or renovated structure, this part pays for the resulting loss of business income.

Machinery, Equipment, Supplies or Building Materials: If damage to or destruction of any of the property types listed delay the opening and operation of the building, the resulting loss of income is covered under this additional coverage's third provision. For example, if all the floor tiles are damaged, destroyed or stolen while on the job site, any delay in opening caused by such damage is covered by this section.

A scenario more likely than the stolen tile is the damage to or destruction of a machine critical to a manufacturing operation while it is waiting to be installed. This particular example machine is custom-made and requires six months to build. Two weeks before opening, a fire runs through the building and destroys the machine. The building is not badly damaged and can be repaired within the remaining two-week period, but the machine is destroyed and must be replaced. Because the machine is required for the manufacturing process, the operation cannot open until it is replaced. The six-month loss of income is covered by this policy provision.

How This Section Works: Business income limits, like all property limits, are provided on a per-loss basis. That is the limits are reinstated in preparation for a second (or even third) covered loss. The loss of business income under this provision is calculated from the day the operation should have begun, had no loss occurred; and ends when operations should reasonably be expected to begin.

Just because operations have not begun does not mean that income can't be lost. Remember to discuss this possibility with the insured and offer the protection.

Up Next

As stated at the beginning, the next commentary focuses on the business income endorsements not yet discussed in this series. Following the endorsement discussion are detailed directions for completing the business income supplemental application; and the series ends with a business income check sheet.

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."