The Other Time Element Coverages
The impact of recent high-profile natural catastrophes has brought to the forefront the need for businesses to have appropriate time element insurance coverage in place. With this raised awareness, agents and brokers are more frequently asking their clients how they will respond if their company has a serious interruption of business, to determine how each time element program will be built.
While there is no doubt that discussions about setting appropriate loss of income and extra expense limits are important, agents and brokers should also vet with their clients the full range of time element coverages. The following article will review a few of these coverages that may make sense for certain businesses.
Off-Premises
Service interruption, civil authority and ingress/egress coverages are important for those businesses with operations that are vulnerable to a utility service interruption or lack of premises access. As is the case with most time element losses, the off-site damage causing the service interruption needs to be of the type covered under the business’ policy. In addition, other coverage restrictions may apply such as a waiting-period, a time deductible, a limited number of covered days, or even how far away from the premises the utility must be located in order for there to be coverage.
For example, Liberty Mutual counsels businesses to consider purchasing coverage to address specific power outage scenarios such as 1) a manufacturing interruption caused by a power outage due to flooding at the local electric substation or 2) lost sales due to phone or computer outages. Keep in mind that losses from downed local utility poles may not be compensable unless coverage is provided for damage to overhead transmission lines. Also, power may be restored within the policy’s designated waiting period.
Coverage for loss due to action of a civil authority and ingress/egress is also important for businesses with operations that are vulnerable to events that may block customer access to an insured’s business or vice versa. An example of an ingress/egress loss could be a situation where customers are denied access to a business’ premises when the road leading to the business floods. However, the business would only be covered if both ingress/egress and flood coverage were provided. This type of coverage is often restricted to events occurring within a designated distance from the insured’s location, usually stated in miles, and the off-premises damage needs to be of the type covered by the insured’s policy.
Contingent Business Income
Contingent business income coverage can help protect customers with exposure to property damage occurrences when there is a loss at a direct supplier or customer location. Many insurers also offer coverage for lost income due to occurrences at what are often called “leader locations.”
An example of a leader location loss would involve a clothing store that loses sales due to reduced foot traffic after closure of a damaged anchor store located in the mall. Recovery of contingent lost income may be reimbursed as long as the peril that caused the damage at the customer or supplier location is a covered peril under the business’ policy. So, if agents and brokers work with clients who are dependent upon a few customers or suppliers, or on an anchor retail store, they should investigate this form of coverage.
Extended Period of Restoration
Purchasing extended period of restoration — or indemnity — coverage is a viable option for firms that require additional time and funds, beyond their property’s physical restoration, to rebuild sales and attempt to regain market share after reopening.
Consider the example of a grocery store that suffers a shut down due to a covered peril that has a competitor across the street. Once repairs are completed and the store’s doors reopen, sales are unlikely to fully rebound to pre-loss levels given some defection of customers to the competitor. This coverage can extend the restoration period, by a stated number of days, to allow time for the store to entice customers back and bring sales up to pre-loss levels.
Ordinary Payroll
Another key property coverage for many businesses includes ordinary payroll coverage. This is especially important for companies that have employees whose skills are in high demand and who the company would want to retain during an interruption period. In addition, ordinary payroll coverage can help companies that want to keep employees on the payroll during a shut down if the firm is a highly visible employer in the area and covets goodwill in the community.
Most loss of income forms automatically include full payroll coverage, (i.e. 365 days) so the question agents and brokers should ask their clients is: “But, how many days of coverage are needed?” If a business employs predominantly unskilled workers, it may not be prudent to pay these employees for extended periods of time if they can be easily replaced upon reopening.
Alternative Inventory Valuation
Another way to insure a portion of business income is to provide coverage for finished goods inventory at its normal cash selling price. When finished goods are destroyed due to a covered loss, a business would collect the normal earnings it would have received as if the damaged goods had been sold. In this way, a separate business interruption loss would be averted. In fact, most business interruption forms exclude any loss related to damage to finished goods in order to avoid the potential to “double dip” by receiving lost profit paid both directly on the lost goods and under loss of income coverage.
Some businesses elect not to purchase loss of income coverage, relying only on recovery of selling price for their finished goods, in the event the goods are damaged. This choice, however, does not address the situation where the business is exposed to losses to its buildings and equipment. In these situations, traditional time element coverage is still needed.
Additional Expense
Lastly, additional expense is a coverage provided by most insurers, including Liberty Mutual, to reimburse funds spent on reasonable and necessary costs that help expedite the process of reopening a business. Many companies, after crunching the numbers, often realize that their additional expense coverage limits are inadequate. To determine appropriate limits use the extra expense worksheets provided by insurers and work with clients to complete the worksheets in conjunction with standard business interruption paperwork.
Periodic review of clients’ operations, including appropriate time element coverages, should be part of routine due diligence. Every policy should be reviewed individually because policy language will dictate the coverage. A solid risk management program will have coverages in place that go beyond the traditional business income and extra expense coverage forms. By looking a little closer at additional time element options for clients, agents and brokers can help their clients move closer toward the ultimate goal of mitigating the impact of serious losses.