Is the 72-hour waiting period for business income losses a part of the BOP?

QWith reference to the 72-hour waiting period in the BOP policy for business income, is this an endorsement to be attached to the BOP policy or is it in the policy? Exactly what does it say?

BONNIE YOW, CLAIMS EXAMINER, Southern Guaranty Insurance Companies, Greensboro, North Carolina

AThe 72-hour waiting period for business income was first introduced into the ISO Businessowners policy in the January 1996 version of the policy. At that time, the section containing Business Income referred to "the period of restoration." Let's look at the actual wording:

4. Additional Coverages...

d. Business Income

(1) Business Income

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 the described premises, including personal property in the open (or in a vehicle) within 100 feet, caused by or resulting from any Covered Cause of Loss...

Business Income coverage is provided for the insured's suspension of operations during the "period of restoration." Remember that in ISO policies, those words or phrases that are contained in quotation marks have special definitions provided within the policy agreement itself. So to fully understand the coverage and the 72-hour waiting period, we need to review the definition of the period of restoration. Which states:

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 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".

So to answer your question, the 72-hour waiting period is found within the policy under the definition of period of restoration located in the businessowners property definitions.

The definition explains that the 72-hour waiting period applies to business income only, not to extra expense, and begins after a direct physical damage covered cause of loss occurs that results in a business income loss.

What this all boils down to is this: first a covered physical damage loss must occur. When that physical damage loss results in a suspension of the insured's operations (not when the initial physical damage occurs but when the operations are actually suspended), that is when the business income loss begins and when the 72-hour waiting period begins. The 72-hour waiting period does not reduce the period of restoration (one year). It merely delays the starting time of the period of restoration.

In the ISO Commercial Property program (whether a stand-alone monoline property policy or part of a commercial package policy) there is an endorsement available to reduce the 72-hour waiting period to 24 hours. The ISO BOP does not have a similar endorsement at this time although a number of insurers have developed company-specific versions. Company-specific versions have even been developed to eliminate the waiting period entirely.

QWe're looking at an inland marine policy with a replacement cost endorsement attached. The language used on the endorsement is similar to that used in the commercial property form.

Would the insured be entitled to replace a scheduled piece of equipment that is destroyed in a covered loss with a brand new piece of equipment of the same type?

One of the scheduled items is an old road grader, worth about $15,000. A new replacement would cost about $90,000.

This same question applies to the replacement of damaged business personal property under the commercial property form. The insurer's option to pay as little as "replacement cost on the same premises with other property of 'comparable material and quality'" leaves me with doubts. I could not find a concise treatment of this issue in PF&M, FC&S, CPCU or ARM books.

JOSEPH ZINOBILE, AIS, ARM, CIC, The Zigmund Company, LTD., Harrisburg, PA

AThere are two issues to replacement cost in your question--one for inland marine and one for business personal property. We will address the inland marine issues first.

Let's look first at the wording of the Replacement Cost endorsement you provided. CM 71 16-Replacement Cost Valuation:

"The value of property will be its replacement cost (without deduction for deprecation). We will not pay more for any 'loss' on a replacement cost basis than the least of:

1. The Limit of Insurance applicable to the property;

2. The cost to replace the property with other property

(a) Of comparable material and quality; and

(b) Used for the same purpose; or

3. The amount you actually spend that is necessary to repair or replace the property..."

You first question is: "Would the insured be entitled to replace a scheduled piece of equipment which is destroyed in a covered loss with a brand new piece of equipment of the same type?" The answer is NO. In order to receive replacement cost coverage, the inland marine floater must have the replacement cost endorsement attached to it for the specific item. Next, the limit of insurance for the covered item must be the replacement cost limit. So in the example mentioned, the old road grader valued at $15,000 must have the replacement cost endorsement applying, and the limit shown must be either $90,000 or the amount to replace with like kind and quality.

But that is not the final qualification. While the insurer should not be deducting for depreciation when the replacement cost endorsement is attached, the insurer has the option to "replace the property with other property of comparable material and quality; and used for the same purpose." Very simply, this means that if an insured has an old road grader that has been very well maintained, is in excellent shape and is of the best quality design, the insurer must replace with like kind and quality--up to the policy limit. This may mean a brand new grader, but not always. If the old grader were below average, had not been maintained, etc., the insurer is only obligated to replace it with a piece of equipment of similar quality up to the policy limit. The insurer does not have to replace the old dilapidated equipment with brand-new equipment.

Replacement cost coverage is similar but works a little differently in the Building and Business Personal Property Coverage Form-CP 00 10. The difference is the potential application of a coinsurance penalty for not carrying the required minimum limit of insurance.

For those items that are so indicated on the declarations page, actual cash value is replaced by replacement cost in determining the value of the item. Replacement cost is clarified to be without deduction for depreciation.

There are several types of items to which replacement cost coverage does not apply:

* personal property of others

* contents of a residence

* manuscripts

* works of art, antiques, and rare articles, such as etchings, pictures, statuary marbles, bronzes, porcelains, and bric-a-brac

* "stock" ("stock" may be covered for replacement cost in the event that a separate item with its own limit of insurance has been designated in the declarations)

The insured always has the option to make a claim based on the actual cash value instead of the replacement cost coverage. There may be circumstances where it may be in the best interest of the insured to go to an actual cash value claim. Possible reasons may include:

* not wanting to rebuild on the same site

* repairing or rebuilding with different type construction or material

* insured decides not to use the property for the same purposes

* the realization that a coinsurance penalty would be enforced on a replacement cost basis, but the limit is adequate for actual cash value

* the decision to repair or rebuild is delayed for an extended period of time.

After the insured has made a claim on an actual cash value basis, the insured may still make an additional claim for the replacement cost coverage. The insured has this right as long as the insurer is notified of the insured's intent to do this, within 180 days after the loss or damage has occurred.

The insurer does not have to provide the replacement cost coverage payment for any loss or damage until:

* the lost or damaged property is actually repaired or replaced; and

* the repair or replacement is done as soon as is reasonably possible after the loss or damage. (The term reasonably possible is not defined.)

When replacement cost coverage is used as the valuation method, the amount will be determined based on whichever of the following three items is the least costly, subject to the conditions set forth in item f. to follow:

* the applicable limit of insurance for the lost or damaged property;

* the cost to repair or replace on the same premises with comparable or the same type material and quality and used for the same purposes; or

* the actual amount spent by the insured to make the necessary repairs or replacement to the lost or damaged property.

Other than coinsurance, the application of replacement cost on a business property and an inland marine coverage form are very much the same. The bottom line: the insurer does not have to replace the property with brand new.

©COPYRIGHT: The Rough Notes Magazine, 1998