It continues to amaze me how many otherwise solid commercial lines coverage packages lack even the most rudimentary business income protection.

How fortunate for many insureds that at least some BI coverage is automatically included in popular packages such as the BOP (although even that may fall far short of actual needs, as discussed in my June 2013 article, “Walk the Line”). For others, it seems the coverage falls far down the totem pole of recommendations. Perhaps this is because BI is not normally required coverage, unlike property, liability, auto and workers' compensation. But just because no one has a gun to the insured's head doesn't mean that other coverages are not key to proper protection.

BI fits squarely in that latter camp. It is a simple truth of accounting and bookkeeping principles that a business with no income will soon cease to be a business at all. So if there were a method to insure a least a portion of current cash flow, if interrupted due to a covered peril, why would such a solution not be presented as not just a side dish, but as a key ingredient of a successful feast?

The basic BI coverage forms, similar to other standard commercial property forms, have a coinsurance requirement. Proper evaluation of tangible property is difficult enough to meet coinsurance provisions. Make those provisions contingent on accurately estimating items as potentially slippery as future earnings and expenses, and coming up with an amount of coverage with any degree of confidence it will avoid any penalty can give you more indigestion than undercooked stuffing.

But the good news is BI has coverage options to avoid coinsurance that can be activated simply by indicating the choice in the declarations page. Effective modification of the basic BI form only requires one of the following:

Maximum period of Indemnity. The main effect of this option is to substitute a limited coverage period of 120 days for the annualized coinsurance requirement. The good news? No complicated accounting of estimated annual revenues and expenses, hoping to calculate a valid coverage amount to avoid any coinsurance penalty. The bad news? For good or ill, all coverage terminates at the end of the 120-day period, so the insured's business better be back in swing in that period.

While traditionally this option was suggested as adequate for smaller retail and office exposures, catastrophes such as Superstorm Sandy have exposed the potentially glaring shortcoming of assuming such insureds getting back in business in a few short months is a slam dunk.

Monthly limit of indemnity. Often espoused as an effective choice for smaller risks, the argument for this option was that such risks could avoid calculations of annual revenues and cash flows by choosing a simple monthly amount that should prove sufficient. As many smaller businesses are more aware of their monthly sales, expenses, etc., as opposed to annualized financial accounting, this approach has much merit. A choice of three monthly limits is provided in the form: 1/3, 1/4 and 1/6.

An annualized coverage amount needed still must be calculated, but coinsurance is then waived in favor of the monthly limit on payouts. The potential downside? That limit may prove insufficient, either by month or in total, when facing catastrophic losses. This option is also a bad idea for any business whose monthly income protection needs may fluctuate widely over a policy year.

Agreed Value. Last month's article went into some detail on the concept of Agreed Value, with the attendant potential benefits and pitfalls. Although the language of the BI option is not exactly the same as that in the Commercial Property Form, it is very similar in operation. Here are the three key steps:

  1. The insured must complete an approved work sheet, providing all the necessary accounting numbers to make a proper calculation of the coverage estimated to be needed for the coverage period.
  2. The insured must agree to carry at least the amount of coverage determined by multiplying the total amount on the work sheet by the applicable coinsurance percentage chosen.
  3. Assuming the insured complies with Step 2, any coinsurance penalty is waived. However, if the insured is found at time of loss to have carried less that 100 percent of the amount mandated by Step 2, then the insured loss will be “coinsured” to the extent the amount actually carried falls short of the requirement. Depending upon the amount of noncompliance, the insured might actually have been better to ignore choosing this option and simply rely on the coinsurance clause in the basic form.

So when it comes to providing a coverage feast for your clients, follow the long-proven advice:

  • Although the main dishes are a given, it's the side offerings that separate a mere meal from a truly sumptuous repast.
  • Every bit as much pride and expertise should go into the proper choice and preparation of the sides as is expended on the main course.
  • To elevate an otherwise adequate side dish to true bliss, always sweeten the offering by modifying to the unique tastes and preferences of your guests.

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