Topics covered:

Description of business income coverage

Extra expense

Covered causes of loss

Special exclusions

Additional limitation—interruption of computer operations

Additional coverages

Civil authority

Alterations and new buildings

Extended business income

Interruption of computer operations

Coverage extension

Limits of insurance

Loss conditions

Loss determination

Resumption of operations

Coinsurance

Optional coverages

Definitions

Description of Business Income Coverage

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 A.Coverage

1.Business Income

Business Income means the:

a.Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and

b.Continuing normal operating expenses incurred, including payroll.

For manufacturing risks, Net Income includes the net sales value of production.

Coverage is provided and limited as described below for one or more of the following options for which a Limit Of Insurance is shown in the Declarations:

(1)Business Income including "Rental Value."

(2)Business Income Other Than "Rental Value."

(3)"Rental Value."

If option (1) above is selected, the term Business Income will include "Rental Value." If option (3) above is selected, the term Business Income will mean "Rental Value" only.

If Limits of Insurance are shown under more than one of the above options, the provisions of this Coverage Part apply separately to each.

We will pay for the actual loss of Business Income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration." The "suspension" must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit Of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss. With respect to loss of or damage to personal property in the open or personal property in a vehicle, the described premises include the area within 100 feet of such premises.

With respect to the requirements set forth in the preceding paragraph, if you occupy only part of the building, your premises means:

(a)The portion of the building which you rent, lease or occupy; and

(b)The area within 100 feet of the building or within 100 feet of the premises described in the Declarations, whichever distance is greater (with respect to loss of or damage to personal property in the open or personal property in a vehicle); and

(c)Any area within the building or at the described premises, if that area services, or is used to gain access to, the portion of the building which you rent, lease or occupy.

 Analysis

 Unlike the old earnings and business interruption forms that described coverage in terms of reduction of earnings or gross earnings, the simplified business income forms cover actual loss of business income sustained due to the necessary suspension of the named insured's operations during the period of restoration. The suspension must be due to direct physical loss of or damage to property at the premises described in the declarations, and the physical loss or damage must be caused by or result from a covered cause of loss.

 The damaged property does not need to belong to the insured or even be covered property. Physical loss of or damage to property will trigger the coverage as long as it is located at the premises described in the declarations and as long as the cause of loss is covered.

 There is coverage for loss of business income caused by loss or damage to personal property in the open or in a vehicle within 100 feet of the building or within 100 feet of the premises described in the declarations, whichever distance is greater. This was changed in the 2012 revision to address instances of a tenants in multi-occupancy buildings. If the tenant is located on the fifteenth floor of a high rise, 100 feet from the described premises may not be include the front door where a package is delivered.

 The definition of business income under the simplified forms is different in language from older gross earning forms, but the change in language does not result in any intended difference in coverage. Business income means the (a) net income (net profit or loss before income taxes) that would have been earned or incurred and (b) continuing normal operating expenses, including payroll, incurred. For manufacturing risks, net income includes the net sales value of production.

 The use of this two-item definition of business income could create a problem of interpretation in cases where a business is operating at a loss. Some might argue—and courts have agreed—that the two items, net income and continuing normal operating expenses, are separate, unrelated items of covered business income and that a negative net income should not be used to offset continuing expenses. For instance, in Continental Ins. Co. v. DNE Corp., 834 S.W.2d 930 (Tenn. 1992), the court found that adding DNE's net income to its continuing expenses yielded a negative number, so no business income coverage existed. For more information on this issue, see Net Operating Losses and Business Income Insurance.

 The insuring agreement requires that the insured must suffer a necessary suspension of business operations during the period of restoration. The terms in italics are defined at the end of the policy. Suspension is either a slowdown or a complete cessation of business operations, and also describes the part of the premises rendered untenantable if coverage is for rental value or business income including rental value. Operations includes the insured's business activities occurring at the described premises or the tenantability of the described premises if coverage is for business income including rental value. Either the insured's business activities must be suspended, or the insured's building's tenantability must be suspended. The form's definition of rental value does include the fair rental value of any portion of the premises occupied by the insured.

 The coverage description also allows the insured to buy coverage without rental value and to buy coverage for rental value alone, as well as buying coverage including rental value. Each of these options can be chosen for different premises listed on the declarations, and they each can be written either with coinsurance or with the monthly limit of indemnity option.

The period of restoration includes a time deductible, with coverage beginning seventy-two hours after the time of direct physical loss. The deductible does not apply to extra expense coverage. The period ends the date when the property at the described premises should be rebuilt, replaced, or repaired with similar quality and reasonable speed or when the business resumes at a new permanent location, whichever is earlier. The period is not cut short by the policy's expiration date.

 The policy also specifies that losses "must be caused by direct physical loss of or damage to property at premises" described in the declarations. Direct physical loss is not defined. Courts have held that physical damage is necessary for business income coverage to apply. For instance, a North Carolina appeals court held that the inability to access a business due to a snowstorm did not warrant business income coverage when no physical damage occurred. The case is Harry's Cadillac-Pontiac-GMC Truck Co. v. Motors Ins. Corp., 486 S.E.2d 249 (N.C. Ct. App. 1997).

 Extra Expense

 2.Extra Expense

a.Extra Expense Coverage is provided at the premises described in the Declarations only if the Declarations show that Business Income Coverage applies at that premises.

b.Extra Expense means necessary expenses you incur during the "period of restoration" that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.

We will pay Extra Expense (other than the expense to repair or replace property) to:

(1)Avoid or minimize the "suspension" of business and to continue operations at the described premises or at replacement premises or temporary locations, including relocation expenses and costs to equip and operate the replacement location or temporary location.

(2)Minimize the "suspension" of business if you cannot continue "operations."

We will also pay Extra Expense to repair or replace property, but only to the extent it reduces the amount of loss that otherwise would have been payable under this Coverage Form.

 Analysis

 The form provides coverage for two categories of extra expense: costs to avoid or minimize the suspension of business at replacement or temporary locations and costs to minimize business suspension if operations cannot continue. Examples of extra expenses of doing business at a temporary or replacement location include costs to set up, rent, and move to the new location and the costs to obtain temporary equipment. If operations cannot be continued, some extra expenses may involve the hiring of additional workers or paying existing employees overtime in order to reopen the business.

 Like business income coverage, direct physical damage or loss is required. The expenses must be incurred during the period of restoration. Only expenses that the business would not otherwise experience if not for the property loss are covered.

 Covered Causes of Loss

 3. Covered Causes Of Loss, Exclusions and Limitations

See applicable Causes of Loss form as shown in the Declarations.

 Analysis

 This item simply refers to the applicable causes of loss form as shown in the declarations. The general provisions of the three available causes of loss forms are discussed in the Causes of Loss Forms article. Each causes of loss form also contains a section of special exclusions applicable only to the business income and extra expense coverage forms. A quick summary of these special exclusions follows.

 Special Exclusions

 The following are excluded under the special business income exclusions found in the causes of loss forms:

 •Any loss caused by or resulting from damage or destruction to "finished stock" or the time required to reproduce "finished stock." This exclusion does not apply to Extra Expense.

•Any loss caused by or resulting from direct physical loss or damage to radio or television antennas (including satellite dishes), and their lead-in wiring, masts or towers.

•Any increase of loss caused by or resulting from:

    (a) Delay in rebuilding, repairing or replacing the property or resuming "operations," due to interference at the location of the rebuilding, repair, or replacement by strikers or other persons; or

    (b) Suspension, lapse or cancellation of any license, lease, or contract. But if the suspension, lapse, or cancellation is directly caused by the suspension of "operations," we will cover such loss that affects your business income during the "period of restoration" and any extension of the "period of restoration" in accordance with the terms of the Extended Business Income Additional Coverage and the Extended Period Of Indemnity Operational Coverage or any variation of these.

•Any Extra Expense caused by or resulting from suspension, lapse or cancellation of any license, lease or contract beyond the "period of restoration."

•Any other consequential loss.

 Analysis

 The 2007 Special Causes of Loss form altered the power failure exclusion, and as a result, the business income special exclusion for power failure was eliminated. On that form, a statement that loss or damage caused by a power surge resulting from such a utility failure is excluded was added. Prior to this wording, a case may have been made that loss caused by the actual failure of, for example, electrical power was not covered but damage from a subsequent power surge (when the power was restored) was covered. In addition, this exclusion operates regardless of the cause of the failure, that is, even if the failure is brought about by a covered cause of loss such as windstorm or hail. However, if the power surge or the failure results in a covered cause of loss that damages covered property, that resulting damage is covered. For example, if heat interruption causes pipes to freeze and rupture and either the broad or special causes of loss forms (CP 10 20 10 12 or CP 10 30 10 12, respectively) applies, there is coverage for the damage caused by the rupture.

 If, on the other hand, a lightning strike away from the insured premises knocks out the electrical power at the premises, consequential property damage on the premises—spoilage of refrigerated products or of property in process depending on continuous heat or cooling are common examples—is not covered. Though lightning is a covered cause of loss, the underlying agreement is to pay for direct physical loss caused by a covered cause of loss. Lightning that strikes off premises and runs in on a line to cause direct lightning damage on premises is covered under these provisions, but consequential damage caused by a lightning induced power interruption is not.

 This is a broadening of coverage. On-premises failure is limited to situations where the failure involves equipment used to supply utility services from an off-premises source.

 Losses arising from direct physical loss or damage to radio or television antennas and their lead-in wires, masts, or towers are also not covered. This exclusion may be eliminated by purchasing endorsement CP 15 50 10 12.

 Interference at the insured premises by strikers or others is specifically excluded, but a strike elsewhere—such as one affecting material suppliers, transportation lines, or the availability of workers to do the restoration—is covered.

 Additional Limitation—Interruption of Computer Operations

a. Coverage for Business Income does not apply when a "suspension" of "operations" is caused by a destruction or corruption of electronic data, or any loss or damage to electronic data, except as provided under the Additional Coverage – Interruption Of Computer Operations.

b. Coverage for Extra Expense does not apply when action is taken to avoid or minimize a "suspension" of "operations" caused by destruction or corruption of electronic data, or any loss or damage to electronic data, except as provided under the Additional Coverage – Interruption of Computer Operations.

c. Electronic data means information, facts or computer programs stored as or on, created or used on, or transmitted to or from computer software (including systems and applications software), on hard or floppy disks, CD-ROMs, tapes, drives, cells, data processing devices or any other repositories of computer software which are used with electronically controlled equipment. The term computer programs, referred to in the foregoing description of electronic data, means a set of related electronic instructions which direct the operations and functions of a computer or device connected to it, which enable the computer or device to receive, process, store, retrieve or send data.

d. This Additional Limitation does not apply when loss or damage to electronic data involves only electronic data which is integrated in and operates or controls a building's elevator, lighting, heating, ventilation, air conditioning or security system.

 Analysis

 The 2002 editions of the CP 00 30 and CP 00 32 added this limitation for interruption of computer operations. Essentially, coverage is excluded, except for a small amount given back in the additional coverage for interruption of computer operations, for any suspension of operations or extra expenses incurred resulting from corruption or destruction of electronic data. For instance, if a hacker immobilizes a company's online ordering system, coverage is limited to what is available in the additional coverage for interruption of computer operations, discussed later.

 In the 2012 revision, ISO broadened coverage by adding paragraph d. No limitation applies when loss or damage to electronic data involves only electronic date that is integrated in and operates or controls a building's elevator, lighting, heating, ventilation, air conditioning, or security system.

 Additional Coverages

 a. Civil Authority

In this Additional Coverage – Civil Authority, the described premises are premises to which this Coverage Form applies, as shown in the Declarations. When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:

(1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and

(2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.

Civil Authority Coverage for Business Income will begin 72 hours after the time of the first action of civil authority that prohibits access to the described premises and will apply for a period of up to four consecutive weeks from the date on which such coverage began.

Civil Authority Coverage for Extra Expense will begin immediately after the time of the first action of civil authority that prohibits access to the described premises and will end:

(1) Four consecutive weeks after the date of that action; or

(2) When your Civil Authority Coverage for Business Income ends;

whichever is later.

b. Alterations and New Buildings

We will pay for the actual loss of Business Income you sustain and necessary Extra Expense you incur due to direct physical loss or damage at the described premises caused by or resulting from any Covered Cause of Loss to:

(1) New buildings or structures, whether complete or under construction;

(2) Alterations or additions to existing buildings or structures; and

(3) Machinery, equipment, supplies or building materials located on or within 100 feet of the described premises and:

(a) Used in the construction, alterations or additions; or

(b) Incidental to the occupancy of new buildings.

If such direct physical loss or damage delays the start of "operations," the "period of restoration" for Business Income Coverage will begin on the date "operations" would have begun if the direct physical loss or damage had not occurred.

c. Extended Business Income

(1) Business Income Other Than "Rental Value"

If the necessary suspension of your "operations" produces a Business Income loss payable under this policy, we will pay for the actual loss of Business Income you incur during the period that:

(a) Begins on the date property (except "finished stock") is actually repaired, rebuilt or replaced and "operations" are resumed; and

(b) Ends on the earlier of:

(i) The date you could restore your "operations" with reasonable speed, to the level which would generate the business income amount that would have existed if no direct physical loss or damage occurred; or

(ii) 60 consecutive days after the date determined in (1)(a) above.

However, Extended Business Income does not apply to loss of Business Income incurred as a result of unfavorable business conditions caused by the impact of the Covered Cause of Loss in the area where the described premises are located.

Loss of Business Income must be caused by direct physical loss or damage at the described premises caused by or resulting from any Covered Cause of Loss.

(2) "Rental Value"

     If the necessary "suspension" of your "operations" produces a "Rental Value" loss payable under this policy, we will pay for the actual loss of "Rental Value" you incur during the period that:

(a) Begins on the date property is actually repaired, rebuilt or replaced and tenantability is restored; and

(b) Ends on the earlier of:

(i) The date you could restore tenant occupancy, with reasonable speed, to the level which would generate the "Rental Value" that would have existed if no direct physical loss or damage occurred; or

(ii) 60 consecutive days after the date determined in (2)(a) above.

However, Extended Business Income does not apply to loss of "Rental Value" incurred as a result of unfavorable business conditions caused by the impact of the Covered Cause of Loss in the area where the described premises are located.

Loss of "Rental Value" must be caused by direct physical loss or damage at the described premises caused by or resulting from any Covered Cause of Loss.

d. Interruption Of Computer Operations

(1) Under this Additional Coverage, electronic data has the meaning described under Additional Limitation—Interruption Of Computer Operations.

(2) Subject to all provisions of this Additional Coverage, you may extend the insurance that applies to Business Income and Extra Expense to apply a "suspension" of "operations" caused by an interruption in computer operations due to destruction or corruption of electronic data due to a Covered Cause of Loss. However, we will not provide coverage under this Additional Coverage when the Additional Limitation – Interruption Of Computer Operations does not apply based on Paragraph A.4.d. therein.

(3) With respect to the coverage provided under this Additional Coverage, the Covered Causes of Loss are subject to the following:

(a) If the Causes Of Loss—Special Form applies, coverage under this Additional Coverage—Interruption Of Computer Operations is limited to the "specified causes of loss" as defined in that form, and Collapse as set forth in that form.

(b) If the Causes Of Loss—Broad Form applies, coverage under this Additional Coverage—Interruption Of Computer Operations includes Collapse as set forth in that form.

(c) If the Causes Of Loss Form is endorsed to add a Covered Cause of Loss, the additional Covered Cause of Loss does not apply to the coverage provided under this Additional Coverage—Interruption Of Computer Operations.

(d) The Covered Causes of Loss include 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. But there is no coverage for an interruption related to manipulation of a computer system (including electronic data) by any employee, including a temporary or leased employee, or by any entity retained by you or for you to inspect, design, install, maintain, repair or replace that system.

(4) The most we will pay under this Additional Coverage – Interruption of Computer Operation is $2,500 (unless a higher limit is shown in the Declarations) for all loss sustained and expense incurred in any one policy year, regardless of the number of interruptions or the number of premises, locations or computer systems involved. If loss payment relating to the first interruption does not exhaust this amount, then the balance is available for loss or expense sustained or incurred as a result of subsequent interruptions in that policy year. A balance remaining at the end of a policy year does not increase the amount of insurance in the next policy year. With respect to any interruption which begins in one policy year and continues or results in additional loss or expense in a subsequent policy year(s), all loss and expense is deemed to be sustained or incurred in the policy year in which the interruption began.

(5) This Additional Coverage – Interruption Of Computer Operations does not apply to loss sustained or expense incurred after the end of the "period of restoration," even if the amount of insurance state in (4) above has not been exhausted.

 Analysis

 Although these items are described as additional coverages, they do not provide separate limits of insurance but instead extend the basic business income coverage with no increase in the limit of insurance.

 Civil Authority

 The 2007 form revised the additional coverage for civil authority. The coverage now applies if the insured premises are nor more than one mile from the damaged property. The action of civil authority must be taken in response to dangerous physical conditions resulting from the damage or to enable civil authorities to have unimpeded access to the property. The period of coverage was also extended from three to four weeks.

 The civil authority additional coverage extends the business income and extra expense coverage to include loss caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any covered cause of loss. For instance, if a fire at a building down the block from the insured location causes the police to close the street for a week for inspections and debris removal, coverage will apply.

 Coverage for business income begins seventy-two hours after action by the civil authorities, immediately after civil action for extra expense. The coverage continues for up to four consecutive weeks from the date of the action for business income, and for extra expense, until business income coverage ends.

 Aside from the seventy-two hour time deductible, this language is broader than that of the similar clause in the old gross earnings business interruption and extra expense policies. Those forms limited coverage to loss involving property adjacent to the insured premises. Courts have also held that damage to adjacent property is necessary to trigger business income coverage. For example, the court in Syufy Enterprises v. The Home Ins. Co., No. 94-0756 FMS, 1995 WL 129229 (N.D. Cal. Mar. 22, 1995) said that a company's closure during an officially imposed curfew did not constitute a business income loss. Following the verdict in the case of the officers accused of beating Rodney King and the subsequent riots in Los Angeles, civil authorities imposed dusk-to-dawn curfews in cities such as Los Angeles, San Francisco, and Las Vegas. Syufy owned theaters in those cities and opted to close them during the curfew. The court ruled that there was no riot-induced damage within close proximity to Syufy's theaters, and thus no coverage.

 Alterations and New Buildings

 Alterations and new buildings additional coverage is similar to extension of coverage in older gross earnings business interruption and extra expense forms. However, the older forms did not mention coverage for new structures as does form CP 00 30. (The coverage for machinery incidental to the occupancy of new buildings does not extend to structures either under form CP 00 30.) Under the old form, CF 15 05, the coverage applied to both business interruption and extra expense. Only business income is mentioned in form CP 00 30, but with the change in coverage arrangement—extra expense is also an additional coverage in form CP 00 30—the extra expense coverage can also be read as extending to new buildings, alterations, and additions.

 Extended Business Income

 Extended business income additional coverage provides coverage as a part of the basic business income coverage that under old gross earnings business interruption policies was available only at added charge as an optional endorsement. This coverage pays for additional loss of business income after property other than finished stock is actually repaired and operations are resumed, with reasonable speed, until the business generates the business income amount that would have existed had no loss occurred.

 The 2012 revision increased the basic coverage's applicable time limit from thirty consecutive days after resumption of operations to sixty days.. A longer extended period of indemnity can be provided by inserting a higher number in the space provided on the declarations for extended period of indemnity. That number of days then replaces the sixty days extension shown for the coverage.

 Extended business income is designed to enable the insured to recapture its market position following the completion of repairs and the resumption of operations. For example, a retailer that endured a long closure for repairs may not see its customers return right away. The loss of income during this period would be covered by extended business income.

 Loss caused by unfavorable business conditions is not covered. This clause was added to prevent claims like those that arose following Hurricane Andrew where the hurricane was so devastating to a large geographical area that many business were never restored to the income level they enjoyed before the hurricane. The coverage is intended to allow the rebuilding of clientele after a business is closed due to an insured peril damaging property on the premises and not due to the peril damaging a large geographical area, thereby causing a local depression of business conditions.

 The form also distinguishes between loss of income other than rental value and loss of rental value. This distinction is made in the extended business income additional coverage merely because the same distinction is made in the general insuring agreement. The same restrictions apply to loss of rental value regarding generally unfavorable business conditions caused by an insured peril as apply to loss of business income.

 Interruption of Computer Operations

 While the forms contain a limitation for interruption of computer operations (discussed previously), this additional coverage gives back a small amount of coverage for business income for losses arising from certain types of computer interruptions. Coverage is extended, subject to the provisions of the additional coverage, when the suspension of operations caused by an interruption in computer operations results from a covered cause of loss. For instance, up to $2,500 of business income coverage may be available if a hacker tampers with a company's network and causes it to crash, temporarily interrupting business operations. The covered causes of loss are subject to varying circumstances depending on the form used by the insured.

 The amount of additional coverage is limited to $2,500 for all loss sustained and expense incurred during any one policy year. The limit applies no matter how many interruptions occur or the number of insured premises or computer systems involved. The 2012 revision allows for a higher limit to be chosen by entry on the declarations. The additional coverage does not extend beyond the period of restoration.

 Coverage Extension

 4.   Coverage Extension

If a Coinsurance percentage of 50% or more is shown in the Declarations, you may extend the insurance provided by this Coverage Part as follows:

Newly Acquired Locations

a. You may extend your Business Income and Extra Expense Coverages to apply to property at any location you acquire other than fairs or exhibitions.

b. The most we will pay for loss under this Extension, for the sum of Business Income loss and Extra Expense incurred is $100,000 at each location, unless a higher limit is shown in the Declarations.

c. Insurance under this Extension for each newly acquired location will end when any of the following first occurs:

(1) This policy expires;

(2) 30 days expire after you acquire or begin to construct the property; or

(3) You report values to us.

We will charge you additional premium for values reported from the date you acquire the property.

The Additional Condition, Coinsurance, does not apply to this Extension.

 Analysis

 Both the CP 00 30 and the CP 00 32 forms provide a coverage extension to newly acquired locations (except fairs or exhibitions) if 50 percent or higher coinsurance is shown in the declarations for the business income coverage. The existence of exposure under the coverage will not cause a coinsurance penalty.

 The form offers a flat $100,000 of coverage, which is an increase in coverage for any policy with business income limits under $1,000,000. The 2012 revisions allows for higher limits to be entered in the declarations. The coverage begins when a new location is acquired or construction begins at a new location and ends when the first of the following occurs: (a) the policy expires; (b) thirty days elapse after date of acquisition or start of construction; or (c) values for the location are reported to the insurer. Additional premium is charged for the new location from the date of acquisition.

 The provision is relatively new for business income coverage. It parallels similar coverage that has long been provided for buildings and personal property coverage and is useful as a temporary form of automatic coverage for newly acquired or constructed locations until permanent coverage can be arranged. But, for locations acquired just before policy expiration, perhaps after renewal coverage has been ordered without knowledge of the new location, the coverage will expire with the policy. There is no provision for carrying the coverage over to the new policy for the remainder of the thirty days or until the location is recognized and values reported.

 Limits of Insurance

 B. Limits of Insurance

The most we will pay for loss in any one occurrence is the applicable Limit Of Insurance shown in the Declarations.

Payments under the following Additional Coverages will not increase the applicable Limit of Insurance:

1. Alterations And New Buildings;

2.Civil Authority;

3. Extra Expense; or

4. Extended Business Income.

The amounts of insurance stated in the Interruption Of Computer Operations Additional Coverage and the Newly Acquired Locations Coverage Extension apply in accordance with the terms of those coverages and are separate from the Limit(s) of Insurance shown in the Declarations for any other coverage.

 Analysis

 The limits of insurance section provides that payment of loss in any one occurrence is limited to the applicable limit of insurance shown in the declarations. However, the limit applicable to the interruption of computer operations and the newly acquired locations coverage extension is separate from the limit of insurance shown in the declarations.

 The clause also provides that payments under the four additional coverages shown in the form use up the business income limit of insurance.

 Loss Conditions

C. Loss Conditions     

The following conditions apply in addition to the Common Policy Conditions and the Commercial Property Conditions:

1. Appraisal

     If we and you disagree on the amount of Net Income and operating expense or the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser.

     The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the amount of Net Income and operating expense or amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. Each party will:

a. Pay its chosen appraiser; and

b. Bear the other expenses of the appraisal and umpire equally.

If there is an appraisal, we will still retain our right to deny the claim.

2. Duties In The Event Of Loss

a. You must see that the following are done in the event of loss:

(1) Notify the police if a law may have been broken.

(2) Give us prompt notice of the direct physical loss or damage. Include a description of the property involved.

(3) As soon as possible, give us a description of how, when, and where the direct physical loss or damage occurred.

(4) Take all reasonable steps to protect the Covered Property from further damage, and keep a record of your expenses necessary to protect the Covered Property, for consideration in the settlement of the claim. This will not increase the Limit of Insurance. However, we will not pay for any subsequent loss or damage resulting from a cause of loss that is not a Covered Cause of Loss. Also, if feasible, set the damaged property aside and in the best possible order for examination.

(5) As often as may be reasonably required, permit us to inspect the property proving the loss or damage and examine your books and records. Also permit us to take samples of damaged and undamaged property for inspection, testing and analysis, and permit us to make copies from your books and records.

(6) Send us a signed, sworn proof of loss containing the information we request to investigate the claim. You must do this within 60 days after our request. We will supply you with the necessary forms.

(7) Cooperate with us in the investigation or settlement of the claim.

(8) If you intend to continue your business, you must resume all or part of your "operations" as quickly as possible.

b.  We may examine any insured under oath, while not in the presence of any other insured and at such times as may be reasonably required, about any matter relating to this insurance or the claim, including an insured's books and records. In the event of an examination, an insured's answers must be signed.

 Analysis

 The loss conditions section of forms CP 00 30 and CP 00 32 is similar to those of the Building and Personal Property Coverage Form, CP 00 10 10 12 (see Building and Personal Property Coverage Form), but with some modifications applying to the business income form. The section on appraisal is identical except for the reference to net income and operating expense instead of value of property.

 The section on duties in the event of loss of business income lists the same requirements of the insured after loss as the building and personal property form except there is no requirement for an inventory of property. Instead, a requirement is added that the insured resume all or part of the operations as quickly as possible.

 The requirement that the insured take all reasonable steps to protect the property after loss was modified in the 1995 edition to stipulate that the property be protected from "further damage," as opposed to "from further damage by a covered cause of loss," as the earlier form read. The also states that the insurer will pay for subsequent loss or damage that results from a covered cause of loss.

 Another requirement is that the insured permit the insurer to take samples of damaged and undamaged property for inspection, testing, and analysis and permit the insurer to make copies from books and records of the named insured.

 With the addition of the interruption in computer operations limitation and additional coverage, the 2002 form eliminated the limitation for electronic media and records. This section provided that loss of business income from direct physical loss of or damage to electronic media and records (computer software, but not the computer hardware) is limited to the longer of the time it takes to restore other property at the premises damaged by the same occurrence or sixty days. The limitation did not apply to extra expense.

 Loss Determination

 3. Loss Determination

a. The amount of Business Income loss will be determined based on:

(1) The Net Income of the business before the direct physical loss or damage occurred;

(2) The likely Net Income of the business if no loss or damage had occurred, but not including any Net Income that would likely have been earned as a result of an increase in the volume of business due to favorable business conditions caused by the impact of the Covered Cause of Loss on customers or on other businesses.

(3)  The operating expenses, including payroll expenses, necessary to resume "operations" with the same quality of service that existed just before the direct physical loss or damage; and

(4) Other relevant sources of information, including:

(a) Your financial records and accounting procedures;

(b) Bills, invoices and other vouchers; and

(c) Deeds, liens or contracts.

b.     The amount of Extra Expense will be determined based on:

(1) All expenses that exceed the normal operating expenses that would have been incurred by "operations" during the "period of restoration" if no direct physical loss or damage had occurred. We will deduct from the total of such expenses:

(a) The salvage value that remains of any property bought for temporary use during the "period of restoration," once "operations" are resumed; and

(b) Any Extra Expense that is paid for by other insurance, except for insurance that is written subject to the same plan, terms, conditions and provisions as this insurance; and

(2) Necessary expenses that reduce the Business Income loss that otherwise would have been incurred.

 Analysis

 Determining the amount of a loss under a business income policy has always been a matter of negotiation because the insuring agreement promises to pay an unknowable amount of business income lost while the insured is not operating. Who can say for certain how much business income the insured would have earned had no loss occurred?

 The loss determination section of the form sets forth the criteria on which the loss will be based, but most of them merely establish a basis for estimating the loss. For example, the net income of the firm just before the loss occurred should give an indication of what the business income would have been after the occurrence of the loss. Yet, the net income after the loss might have been about to increase substantially as, for example, when the loss occurs to a retail establishment just before the Christmas season starts. This expected Christmas sales increase would be taken into consideration when calculating the business income loss.

 However, an expected windfall increase in net income resulting from the covered cause of loss that caused the damage is not to be used in determining the loss. This clause was also added as a result of Hurricane Andrew. For example, a building contractor who suffered a business income loss from the hurricane is not allowed to argue that his business income loss should be based on an expected large increase in building repair business as a result of the hurricane.

 Resumption of Operations

 c. Resumption Of Operations

We will reduce the amount of your:

(1) Business Income loss, other than Extra Expense, to the extent you can resume your "operations," in whole or in part, by using damaged or undamaged property (including merchandise or stock) at the described premises or elsewhere.

(2) Extra Expense loss to the extent you can return "operations" to normal and discontinue such Extra Expense.

d. If you do not resume "operations," or do not resume "operations" as quickly as possible, we will pay based on the length of time it would have taken to resume "operations" as quickly as possible.

4.  Loss Payment

We will pay for covered loss within 30 days after we receive the sworn proof of loss, if you have complied with all of the terms of this Coverage Part and:

a. We have reached agreement with you on the amount of loss; or

b. An appraisal award has been made.

 Analysis

 The resumption of operations clause is similar in intent to the clause of the same name in the old gross earning business interruption form, but it is more emphatic in its language. On form CP 00 30, the insurer "will reduce the amount of" (a) business income loss, other than extra expense, to the extent the insured can resume operations in whole or part by using damaged or undamaged property including merchandise or stock at the insured premises or elsewhere, and (b) extra expense loss to the extent the insured can return operations to normal and discontinue such extra expense. Under old gross earnings forms, such reduction simply "shall be taken into account in arriving at the amount of loss." If the insured does not resume operations or does not resume operations as quickly as possible, CP 00 30 will pay based on the length of time it would have taken to resume operations as quickly as possible.

The resumption of operations clause on CP 00 32, business income coverage form (without extra expense), reads the same as that on CP 00 30 except that reference to extra expense is deleted.

 The last loss condition refers to loss payment. It states that loss will be paid within thirty days after the insurer receives the sworn proof of loss, provided the insured has complied with all terms of the coverage, and agreement has been reached on the amount of the loss or an appraisal award has been made.

 Coinsurance

 D. Additional Condition

Coinsurance

If a Coinsurance percentage is shown in the Declarations, the following condition applies in addition to the Common Policy Conditions and the Commercial Property Conditions.

We will not pay the full amount of any Business Income loss if the Limit of Insurance for Business Income is less than:

1. The Coinsurance percentage shown for Business Income in the Declarations; times

2. The sum of:

(a) The Net Income (Net Profit or Loss before income taxes), and

(b) Operating expenses, including payroll expenses,

that would have been earned or incurred (had no loss occurred) by your "operations" at the described premises for the 12 months following the inception, or last previous anniversary date, of this policy (whichever is later).

Instead, we will determine the most we will pay using the following steps:

Step (1) Multiply the Net Income and operating expense for the 12 months following the inception, or last previous anniversary date, of this policy by the Coinsurance percentage;

Step (2) Divide the Limit of Insurance for the described premises by the figure determined in step 1; and

Step (3) Multiply the total amount of loss by the figure determined in Step 2.

We will pay the amount determined in Step (3). or the limit of insurance, whichever is less. For the remainder, you will either have to rely on other insurance or absorb the loss yourself.

In determining operating expenses for the purpose of applying the Coinsurance condition, the following expenses, if applicable, shall be deducted from the total of all operating expenses:

(1) Prepaid freight—outgoing;

(2) Returns and allowances;

(3) Discounts;

(4) Bad debts;

(5) Collection expenses;

(6) Cost of raw stock and factory supplies consumed (including transportation charges);

(7) Cost of merchandise sold (including transportation charges);

(8) Cost of other supplies consumed (including transportation charges);

(9)  Cost of services purchased from outsiders (not employees) to resell, that do not continue under contract;

(10) Power, heat and refrigeration expenses that do not continue under contract (if form CP 15 11 is attached);

(11) All payroll expenses or the amount of payroll expense excluded (if form CP 15 10 is attached); and

(12) Special deductions for mining properties (royalties unless specifically included in coverage; actual depletion commonly known as unit or cost depletion – not percentage depletion; welfare and retirement fund charges based on tonnage; hired trucks).

Example 1 (Underinsurance):

When: The Net Income and operating expenses for the 12 months following the inception, or last previous anniversary date, of this policy at the described premises would have been: $400,000

     The Coinsurance percentage is :50%

     The Limit of Insurance is:$150,000

     The amount of loss is:$80,000

Step (1)  $400,000 x 50% = $200,000

      (the minimum amount of insurance to meet your Coinsurance requirements)

Step (2)  $150,000 ÷ $200,000 = .75

Step (3)  $ 80,000 x .75 = $60,000

We will pay no more than $60,000. The remaining $20,000 is not covered.

Example 2 (Adequate Insurance):

When:     The Net Income and operating expenses for the 12 months following the inception, or last previous anniversary date, of this policy at the described premises would have been: $400,000

     The Coinsurance percentage is: 50%

     The Limit of Insurance is: $200,000

     The amount of loss is: $80,000

The minimum amount of insurance to meet your Coinsurance requirement is $200,000 ($400,000 x 50%). Therefore, the Limit of Insurance in this Example is adequate and no penalty applies. We will pay no more than $80,000 (amount of loss).

This condition does not apply to Extra Expense Coverage.

 Analysis

 The coinsurance clause applies if a coinsurance percentage is inserted in the space for it on the declarations page. A significant change was made in its application, as compared to the gross earnings business interruption forms. Instead of being based on the insured's gross earnings for the twelve months immediately following a loss, the clause in forms CP 00 30 and CP 00 32 bases it on the twelve months following inception or last previous anniversary of the policy, whichever is later. This is advantageous to insureds, as they are required to anticipate values only for the current policy year and insure accordingly. It is no longer necessary to anticipate what the values might be for a full year beyond the date of loss, which, when loss occurs late in the policy term, will cover a period extending nearly two years beyond policy inception.

 Business growth during the policy year, not anticipated when the initial insurable values were estimated, can still cause underinsurance if the amount of insurance is not increased appropriately after the accelerated growth has become apparent.

 The coinsurance clause does not relate to gross earnings of the insured. Instead, it is based on the sum of net income (net profit or loss before income taxes) and all operating expenses, including payroll expenses, that would have been earned by the operations at the insured premises for the twelve months of the current policy term had no loss occurred. The language is different—building up from continuing expenses and adding profit, rather than starting with sales and deducting cost of goods as under the old gross earnings form—but the effect is the same. And, as can be seen from the Business Income Report and Work Sheet, CP 15 15, and from the discussion comparing that work sheet to the gross earnings work sheet—see Business Income Work Sheet Comparison—the result from developing business income insurable values for coinsurance is the same as that from the gross earnings work sheet.

 It is important to understand that the business income work sheet is used solely for estimating the amount of coverage needed to satisfy the coinsurance clause. It is not used as a tool for developing the amount of a loss that has occurred. The loss amount is determined by following the loss determination clause found in the loss conditions section on the form. See The Business Income Work Sheet—Step by Step for more on how calculating the work sheet differs from calculating the amount of the loss.

 Included in the coinsurance section are examples of how the clause operates, both when enough insurance is carried and when there is a deficiency.

 Optional Coverages

 E. Optional Coverages

If shown in the Declarations, the following Optional Coverages apply separately to each item.

1. Maximum Period Of Indemnity

a. The Additional Condition, Coinsurance, does not apply to this Coverage Form at the described premises to which this Optional Coverage applies.

b. The most we will pay for the total of Business Income loss and Extra Expense is the lesser of:

(1) The amount of loss sustained and expenses incurred during the 120 days immediately following the beginning of the "period of restoration"; or

(2) The Limit Of Insurance shown in the Declarations.

2.    Monthly Limit Of Indemnity

a. The Additional Condition, Coinsurance, does not apply to this Coverage Form at the described premises to which this Optional Coverage applies.

b. The most we will pay for loss of Business Income in each period of 30 consecutive days after the beginning of the "period of restoration" is:

(1) The Limit of Insurance, multiplied by

(2) The fraction shown in the Declarations for this Optional Coverage.

Example:

When: The Limit of Insurance is: $120,000

The fraction shown in  the Declarations for this Optional Coverage is ¼

The most we will pay for loss in each period of 30 consecutive days is: $30,000 

($120,000 x ¼ = $30,000)     

If, in this example, the actual amount of loss is:

     Days 1-30     $40,000

     Days 31-60     20,000

     Days 61-90     30,000

$90,000

We will pay:

     Days 1-30     $30,000

     Days 31-60     20,000

     Days 61-90     30,000

$80,000

The remaining $10,000 is not covered.

3. Business Income Agreed Value

a. To activate this Optional Coverage:

(1) A Business Income Report/Work Sheet must be made a part of this policy and must show financial data for your "operations":

(a) During the 12 months prior to the date of the Work Sheet; and

(b) Estimated for the 12 months immediately following the inception of this Optional Coverage.

(2) The Declarations must indicate that the Business Income Agreed Value Optional Coverage applies, and an Agreed Value must be shown in the Declarations. The Agreed Value should be at least equal to:

(a) The Coinsurance percentage shown in the Declarations; multiplied by

(b) The amount of Net Income and Operating Expenses for the following 12 months you report on the Work Sheet.

b. The Additional Condition, Coinsurance, is suspended until:

(1) 12 months after the effective date of this Optional Coverage; or

(2) The expiration date of this policy;

     whichever occurs first.

c. We will reinstate the Additional Condition, Coinsurance, automatically if you do not submit a new Work Sheet and Agreed Value:

(1) Within 12 months of the effective date of this Optional Coverage; or

(2) When you request a change in your Business Income Limit of Insurance.

d. If the Business Income Limit of Insurance is less than the Agreed Value, we will not pay more of any loss than the amount of loss multiplied by:

(1) The Business Income Limit of Insurance; divided by

(2) The Agreed Value.

Example:

When: The Limit of Insurance is:  $100,000

The Agreed Value is:      $200,000

The amount of loss is:      $80,000

Step (1) $100,000 ÷ $200,000 = .50

Step (2): . 50 x $80,000 = $40,000

We will pay $40,000. The remaining $40,000 is not covered.

4. Extended Period Of Indemnity

 Under paragraph A.5.d., Extended Business Income, the number 60 in subparagraphs (1)(b) and (2)(b) is replaced by the number shown in the Declarations for this Optional Coverage.

 Analysis

 Forms CP 00 30 and CP 00 32 include four optional provisions, which are activated by appropriate entries on the declarations page. Though described in the form as "optional coverages," they are actually modifying clauses that amend provisions of coverage already included in the business income coverage form.

 For a more detailed discussion of the optional coverages, See Business Income Optional Coverages.

 Definitions

 F. Definitions

1. "Finished stock" means stock you have manufactured.

     "Finished stock" also includes whiskey and alcoholic products being aged, unless there is a Coinsurance percentage shown for Business Income in the Declarations.

     "Finished stock" does not include stock you have manufactured that is held for sale on the premises of any retail outlet insured under this Coverage Part.

2. "Operations" means:

a. Your business activities occurring at the described premises; and

b. The tenantability of the described premises, if coverage for Business Income Including "Rental Value" or "Rental Value" applies.

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 or compliance with 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."

4. "Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

5. "Rental Value" means the Business Income that consists of:

a. Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred as rental income from tenant occupancy of the premises described in the Declarations as furnished and equipped by you, including fair rental value of any portion of the described premises which is occupied by you; and

b. Continuing normal operating expenses incurred in connection with that premises, including:

(1) Payroll; and

(2) The amount of charges which are the legal obligation of the tenant(s) but would otherwise be your obligations.

6. "Suspension" means:

a.The slowdown or cessation of your business activities; or

b.That a part or all of the described premises is rendered untenantable, if coverage for Business Income including "Rental Value" or "Rental Value" applies.

 Analysis

 Several definitions, already referred to at various points in this discussion, are included in this section. A seventy-two hour waiting period after the time of the direct physical loss was added for business income coverage, but not for extra expense coverage. The period ends on the date when business is resumed at a new permanent location.

 It should be mentioned here that the time limits on the period of restoration can be increased by the use of endorsement CP 15 31 09 17.  Briefly, the endorsement changes the period of restoration so that it includes any increased period required to repair or reconstruct the property to comply with the minimum standards of any ordinance or law in force at the time of loss to the property. See Extra Expense Insurance.

 The exception of finished stock at insured retail outlets, added to the finished stock definition, does not include stock manufactured for retail outlets until it is physically at the outlet.

 The aged whiskey provision under finished stock is included as standard. Previously, the rules provided for adding similar wording to the finished stock definition only for distilleries, wineries, and (optionally) breweries. But the earlier language did not exempt the property when a coinsurance percentage was shown.

 The form defines suspension. This was added in an attempt to clarify to the insured when a necessary suspension of operations exists.

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