What is covered?

When coverage applies

Extra expense

Extended loss after operations resume

Blanket coverage

Development of Forms

 Until the introduction of the current ISO business income coverage form, the predominant business interruption form in use was the gross earnings form. There were separate editions for mercantile and non-manufacturing risks and manufacturing risks (and even adaptations of these for use in the old special multiperil policy program). The difference between the two editions was in the basis for computing the gross earnings. For the mercantile and non-manufacturing forms, gross earnings were computed at net sales, less cost of goods and consumable supplies, for a twelve month period. For the manufacturing form, gross earnings were computed at net sales value of production, less cost of raw materials and consumable supplies, for the same period.

Both gross earnings forms covered the entire exposure under one item with no daily, weekly, or monthly limits on recovery. They did impose a requirement that insurance be carried to a specified proportion of business interruption value, expressed in terms of the annual gross earnings (as defined in the form) of the business, subject to the usual coinsurance limitation. As with earlier business interruption forms, these forms covered actual loss sustained but employed a different approach to the problem. In the gross earnings forms the reduction of gross earnings less charges and expenses that do not necessarily continue was the subject of coverage, and no mention was made of net profits or continuing expenses. The result, in terms of amount of loss payable under either form, was essentially the same—the terminology was different.

To provide the necessary flexibility of coverage, both gross earnings forms could be altered by endorsement to exclude or limit ordinary payroll. Two standard endorsements were available for use with the basic forms—one excluded ordinary payroll completely and the other provided coverage of ordinary payroll for a limited period: the insured's choice of 90, 120, 150, or 180 days.

 For insureds who wanted a less complicated form, there was earnings insurance (and it, too, was available in a special multiperil version). The earnings form was introduced in the mid-1950s in the hope that a simplified form would encourage small to medium businesses that had not been purchasing business interruption insurance to do so. The principal point of difference between the earnings and the gross earnings forms was that the earnings forms did not have a coinsurance requirement, substituting instead a percentage limitation on recovery as respects each consecutive thirty days of interruption. Most insurers did not require the insured to submit a work sheet showing operating figures for the business, allowing the insured simply to pick an amount of insurance and choose any one of three available monthly limits.

 This form was widely available to mercantile and nonmanufacturing risks and was subsequently made available to manufacturing risks as well. It was useful for businesses with exposure to only short term interruption or a low actual potential loss exposure in relation to insurable gross earnings, as well as insureds who were timid about revealing operating information about their businesses. The insured could choose a monthly limitation of 33-1/3 percent (three months of coverage), 25 percent (four months), or 16-2/3 percent (six months). The amount of insurance needed was the number of months covered times the maximum amount of earnings and continuing expenses that could be lost in one month's interruption.

Some businesses, such as banks and law firms, cannot afford to suffer any downtime. They require coverage for the added cost of keeping the business running. For instance, a bank that suffered damage due to a fire might move to a temporary location until the damage is repaired. The extra expense form provided coverage for firms that must stay in business after a fire or other catastrophe, regardless of the cost to do so. Extra expense insurance did not pay for loss from interruption of business but paid the expenses to stay in business on an emergency basis without limiting payment to the amount of the business interruption loss that it prevents.

The extra expense coverage was written with a limit of insurance representing the worst total amount of extra expense the insured might incur in a worst loss situation. A set of percentage limits (40 percent for one month, 70 percent for two months, and 100 percent for three or more months was common, but other percentages and number of months were also available) provided for recovery of the stated percentage of the limit when the period of restoration did not exceed one, two, or whatever number of months. But unlike the earnings forms, the percentage limitation did not apply to the amount of expense incurred in any one month but only to the number of months required for restoration of normal operations. For a loss of two months, for example, the insured with $100,000 of extra expense coverage could recover up to $70,000 (70 percent of $100,000), all or any part of which could be expended immediately or at any time during the two months until restoration is completed. The 40 percent ($40,000) one-month limit would not apply.

 Combined business interruption and extra expense insurance provided  protection against reduction of business income due to interruption of operations combined with extra expense insurance. It covered the loss of earnings from business interruption, the extraordinary expenses undertaken to restore operations quickly following loss, and the cost to maintain operations on an emergency basis to avoid loss of sales or production after a loss. Extraordinary expenses were covered regardless of the cost of doing so without the limitation on expense to reduce loss to the amount by which the earnings loss is reduced, contained in the earnings and the gross earnings forms.

 There were also a small number of standard but specialized forms for particular situations that under the current ISO program are brought in as coverage options of the business income forms. These optional coverages are discussed in the business income optional coverage pages; see Business Income Optional Coverages.

Currently, under the ISO simplified program, business income coverage is available through CP 00 30 10 12, Business Income (and Extra Expense) Coverage form, and through CP 00 32 10 12, Business Income (Without Extra Expense) Coverage Form. There are also several modifying endorsements for specialized needs that are available. These forms and endorsements are discussed later in this section.

 What Is Covered?

The purpose of business income insurance is to do for the insured during a period of business interruption what the business would have done had no loss occurred. Loss of business earnings, the prime source of money for continuing operating expenses, as well as profit (if any), is the subject of this coverage. Current business income forms in general cover the net income plus continuing normal operating expenses that businesses would have earned or incurred had no direct property damage loss occurred.

Visualizing a profit and loss statement is helpful in understanding the subject matter of business income insurance. In a mercantile operation, for example, the retailer's operating expenses and profit are derived from resale at a markup of goods purchased. The merchant buys goods from the manufacturer or wholesaler, for sale to the consumer. The difference in dollars between sales income and cost of goods purchased provides funds for operating expenses and profit – the basis of insurable interest under this coverage. Similarly, a manufacturing operation derives its income from the increase in value of materials that it converts to its product.

 There are some businesses that provide services with little or no sale of merchandise or manufacturing of a product. Examples include banks, bowling alleys, laundries, and legal or accounting firms. In these businesses, cost of goods or raw materials purchased is minimal, consisting mainly of consumable supplies, so nearly all of the income from the sale of the services is used to pay expenses and provide a profit.

 Since a business's earnings are the subject of business income insurance, earnings and the prospect of earnings are fundamental to the applicability of coverage. Obviously, if a business is idle and probably will remain so for an unspecified long time, there are neither present nor prospective earnings and no need or justification for business income coverage. However, the mere fact that a business is not currently operating does not necessarily eliminate the need for this coverage. If a business is definitely scheduled to resume operations at a certain time but the property is damaged or destroyed by an insured peril, it will lose earnings and, hence, a business income exposure exists. The exposure commences on the date operations were scheduled to resume. A seasonal business is one example of this situation.

 Similarly, insurance can be written for a business operator whose premises are under construction. Loss to an uncompleted building postpones the date of occupancy, and any loss of earnings from the date business operations should have begun can be insured.

 Also, this coverage can properly be written for businesses whose earnings are sufficient to meet all or part of the operating expenses but not sufficient to show a profit. Some businesses, although currently unable to produce a profit, still have a substantial loss of business income exposure in the form of continuing expenses if a suspension of business occurs. Coverage is needed to the extent that those expenses were earned prior to loss. But note that, for businesses not operating at a profit, close underwriting scrutiny is necessary. In addition, the amount collectible will be reduced by the normal net loss.

 When Coverage Applies

Another consideration of business income insurance is that recovery applies only for the time required to repair or replace damaged property with the exercise of due diligence and dispatch, or as noted in the current business income coverage form, "with reasonable speed" so that normal operations can be resumed. This criterion is the yardstick that measures the amount of loss to be paid. This restoration period applies for the time required to rebuild or repair the buildings and equipment, replace the merchandise or raw materials, and, for a manufacturing establishment, to bring unfinished products to the same point of manufacture that had been reached at the time of the loss.

Within this standard of reasonable speed, the actual time required to rebuild or replace can vary considerably, depending upon conditions at the time of loss. For example, weather, availability of materials, labor, and transportation, can, and often do, affect the time needed to restore the property. Considering all the variables involved, chances are that even the most reasonable and well-intentioned estimators will not be in exact agreement, to the day or perhaps even to the week, as to when the business might be resumed.

 The thrust of the provision is two-pronged. It puts the insured on notice that any unreasonable delay by anyone will not be tolerated; thereby eliciting the insured's cooperation in keeping pressure on contractors and suppliers, and it gives the insurance company an avenue to escape the consequences of such delays on the part of anyone involved in the restoration. But, the insurer also has an incentive to adjust the property and business income claims promptly, enabling the insured to proceed with restoration, as delay in claim settlement extends the time given the insured to restore operations and increases the amount of the loss.

Interference at the insured premises by strikers or others with rebuilding or replacing the property or with the resumption or continuance of business is specifically excluded. Because the reference is to delay by interference at the premises, an increase of loss caused by a strike elsewhere—such as one affecting material suppliers or transportation lines—is covered.

The insured is also required to use all means possible to reduce the loss—by partial operation if possible or by the use of other available facilities. If such action entails extra expense, the expense falls within the coverage of the contract. In the current ISO business income (with extra expense) form, extra expenses to maintain or more quickly restore operations are covered even beyond the amount by which they reduce the loss of business income.

 Extra Expense

Some businesses by their very nature will make every effort to continue operations—perhaps by using other facilities, for example—no matter how serious the damage to their own property and regardless of the cost. Examples are newspapers, dairies, and banks. For such risks, the principal need is extra expense insurance.

Some types of businesses may not be able to avoid a temporary suspension following severe damage. To avoid long-term loss of customers beyond the time that normal operations can be restored and the business income coverage no longer applies, they will spend any amount of money necessary to restart operations. Other businesses have some operations that must go on and other operations that could be suspended. One example is a newspaper and printing firm, in which the newspaper publication must continue but job printing can be interrupted. For such an operation, a combination of business earnings and extra expense insurance is needed.

 Extended Loss after Operations Resume

A common complaint about recovery under previous forms of business income insurance was that the full loss to the business was limited to the time required to restore the property. For example, a popular restaurant in a remote location, if damaged and forced to close, would need regular business income insurance to cover the loss during reconstruction, but it would undoubtedly suffer an additional loss beyond that time until its clientele is fully reestablished. And, losses occurring during the lag between physical reopening and the time when business is operating at the level it was before the loss occurred were not covered under the standard business interruption forms. To insure such losses under business interruption policies, an optional endorsement was used, extending the period of indemnity to include this lag. Under the current ISO business income coverage form this feature is built into the form with a thirty-day limit and the option to increase the number of days of coverage as needed.

 Blanket Coverage

When an insured has interdependent operations in two or more separately rated buildings or at more than one location, and when a loss at one location will curtail business at other locations, blanket business income insurance is ordinarily recommended.

Blanket coverage may also be arranged when the separate locations are independent of one another, but the principal advantage here, if any, is cost. If the average rate results in lower overall costs than would be the case with each location covered separately, then blanketing might be advised. Otherwise, the necessity of adjusting any loss on the basis of the business being done at all covered locations (for coinsurance purposes) may offset any blanketing advantage.

Incidentally, blanket business income insurance should not be confused with contingent business interruption insurance (business income from dependent properties coverage under the current ISO program). Blanket insurance covers two or more separately rated units of the insured's own operations. Contingent insurance covers the loss that the insured will suffer if the operation of a key supplier, customer, or leader property on which the insured's operations are dependent is shut down by an insured peril. A leader property is property not owned, controlled, or operated by an insured but that attracts customer's to the insured's business. An example is an anchor store in a mall that attracts patrons who pass by the insured's specialty shop nearby.

Includes copyrighted material of Insurance Services Office, Inc., with its permission.

Reviewed: September 24, 2019

Reviewed: July 1, 2022