Chapter 7

Question 1

Provide four sources of business interruption losses and an example of each:

Answer 1

i) Physical damage to business
Example: Fire destroys business, customers cannot make purchases.
ii) Failure of public utilities
Example: Ice storm damages power lines and power goes out for several weeks. Sales in the business plummet.
iii) Transportation related accidents
Example: Railcar containing hazardous gas overturns causing evacuation to town. Because of the accident, sales cease.
iv) Physical damage to neighbouring premises.
Example: Your client, who is a tenant in a shopping mall, experiences drop in sales when anchor store burns to the ground.

Question 2

Identify three sources of funding available to businesses when their operations are interrupted.

Answer 2

i) Capital reserves
ii) Bank loans
iii) Business interruption insurance proceeds

Question 3

What are the two key coverages provided by business interruption policies?

Answer 3

i) Insure the net profit of the business which it could have earned had there been no loss
ii) Insure the expenses that occur during period of business interruption

Question 4

What is the period of indemnity provided by Gross Earnings forms?

Answer 4

Coverage begins on the date of destruction or damage and continues for time necessary to repair or replace damaged property.

Question 5

What is the period of indemnity provided by Profits forms?

Answer 5

Coverage begins on the date of destruction or damage and continues until the pre-loss sales have been re-established.

Question 6

Identify four characteristics common to all Business Interruption policies and briefly explain each:

Answer 6

i) Insure same perils covered by property insurance
Explanation: Coverage on the property policy triggers coverage under business interruption policies.
ii) Contracts of Indemnity
Explanation: Claim payments based on amounts business could have earned had the loss not occurred.
iii) Indemnity period not limited by policy expiration
Explanation: When losses occur during policy period, coverage will not end upon policy expiration.
iv) Payment for expenses to reduce loss

Question 7

What are three examples of expenses to reduce loss that would be insured by Business Interruption policies?

Answer 7

i) Over-time salaries to contractors repairing business
ii) Promotional materials required to provide awareness of new business location of insured business
iii) Extra charges to bring in needed equipment by air instead of by truck

Question 8

Why should insureds cover their gross profit and not just their net profit?

Answer 8

By insuring gross profit of businesses, coverage would be available for necessary continuing expenses and not just lost net profit.

Question 9

What may happen if only the gross profit shown on insured’s financial statements are insured? (Hint: ‘trending’)

Answer 9

When only gross profit shown on financial statements is insured, clients would find themselves in a position of under-insurance.
This is because future trends in business have not been considered.

Question 10

Why should businesses operating with a loss purchase business interruption?

Answer 10

When operating with a loss, businesses are less able to withstand even short interruption of business.

Question 11

When using old financial statements to establish amount of insurance, what problems could be encountered?

Answer 11

Clients may be underinsured because future trends were not considered.

Question 12

What are two factors to consider when deciding which form of business interruption insurance to purchase?

Answer 12

i) Nature of business
ii) Types of perils most likely to cause losses

Question 13

What type of employee salaries may not be considered a “necessary continuing expense”?

Answer 13

Ordinary payroll

Question 14

Explain the due diligence and dispatch provision found in the Gross Earnings forms.

Answer 14

Everyone involved in the restoration of the business must act with due diligence and dispatch.

Question 15

What are two situations which could cause insureds to purchase the 50% Co-Insurance option on Gross Earnings forms?

Answer 15

i) When sales are consistent from month to month.
ii) When interruption will likely be short.

Question 16

State the four provisions of the Premium Adjustment Clause found in Gross Earnings forms.

Answer 16

i) Application for premium adjustment must be made within 12 months of expiry of policy.
ii) When losses were paid during policy term, premium is considered to be fully earned.
iii) 50% Co-insurance basis forms are eligible for refunds up to 25% of premium.
iv) 80% Co-insurance basis forms are eligible for refunds up to 50% or premium.

Question 17

When will payment be made when there has been an interruption by civil authority.

Answer 17

This coverage is available only when there has been damage to neighbouring premises from a peril insured under insured’s policy resulting in access being denied by civil authority

Question 18

How long will coverage be provided when there is an interruption by civil authority?

Answer 18

Coverage is available for two weeks when access is prohibited by order of civil authority.

Question 19

Explain the Due Diligence and Dispatch provisions of the Profits forms:

Answer 19

Only clients are required to exercise due diligence and dispatch

Question 20

Describe how claims are paid with the Monthly Earnings Endorsement forms.

Answer 20

Claims are limited to 25% of the amount of insurance for any 30 consecutive calendar days.

Question 21

Define: Contributing Properties

Answer 21

These are properties clients are dependent upon to supply materials or goods.

Question 22

Define: Recipient Properties

Answer 22

These are properties clients are dependent upon to purchase their goods.

Question 23

Define: Magnet Properties

Answer 23

These are properties clients rely upon to draw large numbers of customers near their business.

Question 24

Describe the purpose of the Extra Expense form.

Answer 24

There are certain businesses that cannot afford to close during reconstruction after losses. This form pays extra expenses incurred to get back into business as soon as possible after an insured loss.

Question 25

When selecting an amount of coverage on an Extra Expense form, businesses should refer to a plan. What is the name of this plan and what is the basis of this plan?

Answer 25

Name of Plan: Business Recovery
Basis of Plan: Worst Case Scenario

Question 26

When your client has Extra Expense insurance in the amount of $20,000, how much coverage would be provided if the basis of settlement was 40, 70, 90, or 100 days?

Answer 26

$8000 when restoration period is less than 30 days.
$14,000 when restoration period is less than 60 days.
$18,000 when restoration period is less than 90 days.
$20,000 when restoration period is more than 90 days.

Question 27

Why should some insureds purchase Extra Expense along with their Gross Earnings or Profits forms?

Answer 27

Gross Earnings and Profits forms require clients to reduce amount of business interruption loss by more than extra expenses incurred while reducing loss. Extra Expense forms do not limit coverage in this way.

Question 28

What two types of fees can be insured by Business Interruption forms?

Answer 28

i) Auditor’s Fees
ii) Professional Fees