Monthly limit of indemnity

Business income agreed value

Extended period of indemnity

 Modifications of Basic Business Income Coverage

 Although the business income coverage forms refer to optional coverages, these are actually modifications to the basic provisions of the forms themselves. The coverage selected is activated by appropriate entries on the declarations page. The first three options—maximum period of indemnity, monthly limit of indemnity, and agreed value—are mutually exclusive. Only one of them may be applied to any one item of business income coverage. The fourth option—extended period of indemnity—may be used alone or with options two or three but not option one, maximum period of indemnity.

 Maximum Period of Indemnity

 Optional coverage one is called maximum period of indemnity. It deletes the coinsurance penalty and substitutes a provision stating that the most the insurer will pay for the total loss of business income and extra expense is the lesser of: the amount of loss sustained during the 120 days immediately following the beginning of the period of restoration or the limit of insurance shown in the declarations.

 Since both the maximum and monthly periods of indemnity include the "period of restoration" as a defined term, it is appropriate to review the definition. The "period of restoration" is the period of time that begins seventy-two hours after the time of direct physical loss or damage. The loss or damage must be caused by or result from any covered cause of loss at the described premises. The period of restoration ends on the earlier of the date when the property at the described premises should be repaired, rebuilt, or replaced with reasonable speed and similar quality, or the date when business is resumed at a new permanent location. Coverage ends when the property should be repaired, rebuilt, or replaced; therefore, the insured could not delay in effecting repairs, thinking that there was no reason to rush.

 The definition clarifies that the period of restoration does not include any increased period of time caused by the enforcement of any ordinance or law, or any requirement to monitor, test for, treat, or clean up any pollutants. The period of restoration does not end with the expiration date of the policy.

 Monthly Limit of Indemnity

 Optional coverage two is titled monthly limit of indemnity. This option deletes the coinsurance provision and substitutes a monthly limit of insurance, which can be either one-third, one-fourth, or one-sixth of the total limit of insurance shown in the declarations. To activate this option, the appropriate fraction is entered in the space provided on the declaration page. If the monthly loss exceeds the fractional amount indicated, the insurer will still pay no more than that amount. For example, if the limit of insurance is $120,000, and the fraction selected is one-fourth, the maximum available for any month under this coverage is $30,000.

 Unlike the maximum period of indemnity option, which applies to the first 120 days immediately following the loss, coverage with the monthly limit of indemnity option applies for the entire period that it takes to resume operations (and, under the extended business income additional coverage of the basic form, thirty days beyond). The only limitations are the actual stated limit of insurance and that the coverage for loss of business income shall not exceed the indicated fraction of the total limit for each thirty consecutive days after the beginning of the period of restoration. So with a one-fourth monthly limit, if the actual loss in any of the thirty day periods is less than one-fourth of the limit of insurance, loss extending beyond the 120 days could be covered (again subject to the one-fourth monthly limit) until the limit of insurance is exhausted.

 It is important to remember that the monthly limit of indemnity applies only to loss of business income and does not apply to extra expense, which is not subject to a fractional monthly limit. With a loss involving only extra expense, the entire coverage limit can be applied to extra expenses incurred to maintain or quickly restore production, regardless of when they are incurred.

 Business Income Agreed Value

 Optional coverage three, agreed value, provides the means for suspending the coinsurance provision on a year-to-year basis. This optional provision is activated by entering the amount of the agreed value in the appropriate space on the declarations page and by submitting completed business income report/work sheet form CP 15 15 10 12 showing actual business income values for a twelve-month period already completed, and estimated values for the twelve months to come after that completed period. Form CP 15 15 carries a statement requiring the signature and official title of an official of the insured, certifying that the report is a true and correct report of values as required under the policy for the periods indicated and that the agreed value for the period of coverage is the stated dollar amount based on the stated coinsurance percentage.

The business income report/work sheet becomes a part of the policy provisions, so understatement of values, where there is evidence of deliberate intent, could be viewed as material misrepresentation, voiding the insurance entirely rather than reducing the amount of recovery. But in the absence of such evidence, there is no penalty for understatement of values (at least, so far as the policy itself is concerned).

The agreed value is the appropriate coinsurance percentage (it must be 50 percent or higher) of the coming year's estimated values. As long as at least this amount of insurance is carried, the application of the coinsurance provision is suspended for the twelve months covered by the report (unless the policy expires before the end of that time).

If less insurance is carried than the agreed value, the insured's recovery of loss is reduced in proportion to the deficiency (the company will not pay more than the amount of the loss multiplied by the business income limit of insurance divided by the agreed value), regardless of whether the amount of insurance carried is adequate to satisfy the coinsurance provision. So in a time of declining business, where the initial current policy year estimate proves to be too high and the insured wishes to reduce the amount of insurance to reflect the reduced business, with the agreed value option the insured must complete a new work sheet with the revised estimate and change the agreed value amount shown in the policy along with reducing the amount of insurance. Otherwise, the reduced amount of insurance will be insufficient to provide for complete recovery of loss.

 When the business income coverage is divided among two or more policies, the total amount of the agreed value is shown in the space for agreed value on the declarations rather than each insurer's individual portion of the total. The sum of the limits of insurance for all of the individual policies of the insured (or business income coverage parts) sharing the coverage should equal the agreed value.

 Unlike Business Income Premium Adjustment endorsement, CP 15 20 06 95, the agreed value option makes no provision for the time delay that normally accompanies the development of business income values.

If policy expiration is tied to the fiscal year and the past year's values are reported as actual values and next fiscal year is shown as estimated values, there could be a delay past expiration while the insured develops the new values. In the interim, the coinsurance clause will apply.

This can be avoided by setting the policy expiration sufficiently after the end of the insured's fiscal year to allow time to develop fiscal year figures to use on renewal. The report can then show the fiscal year values as actual values and the estimate for the twelve months of the policy year—rather than the fiscal year—as estimated values. So the new work sheet can be developed from fiscal year values before policy expiration and attached to the policy at inception with no lapse in the suspension of coinsurance.

 The agreed value optional coverage is not to be used with policies having the following forms attached: CP 15 08 10 12 (Business Income from Dependent Properties—Broad Form); CP 15 09 10 12 (Business Income from Dependent Properties—Limited Form); and CP 15 20 06 95 (Business Income Premium Adjustment Endorsement).

 Extended Period of Indemnity

 Optional coverage four, extended period of indemnity, is used to extend the period of coverage under the extended business income additional coverage (see Business Income (and Extra Expense) Coverage Form) from the sixty days provided in the basic form to any of seven longer options up to 360 days. Thirty day additional increments are available up to 180 days, then ninety day increments to 360 days. This extension option is activated by inserting the appropriate number of days in the space provided on the declarations page.

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

Original post:  November 13, 2017

Reviewed: July 5, 2022