COVERAGE CONCERNS

COMMERCIAL LOSS OF EARNINGS INSURANCE

Recent hurricanes prove need for such coverage

By Roy C. McCormick

In last month's column we commented on some lessons to be learned from the recent hurricane losses in the Southeast. We focused primarily on personal lines losses. This month we'll examine a commercial lines coverage - loss of earnings - that has particular relevance in light of the recent hurricanes. As we noted last month, a senior economist of one of the nation's largest banking firms has commented, "Many retail stores and restaurants that are not chain-related are unlikely to have business interruption insurance and may not make it. I see a lot of bankruptcies."

How could such bankruptcies be avoided? Badly damaged business properties lacking insurance for loss of earnings were predominantly small or medium sized. Large corporations and chain-related businesses were far more likely to have this important protection. Why was this much-needed insurance not taken out by the many who might not make it?

Insureds often reject loss of earnings insurance for cost reasons. It is important for an agent to be able to discuss the potential for income loss and the protection available for it - all of this in layman's language. All counselors should review the fundamentals of loss of earnings insurance so that they can advise their clients accurately and with confidence.

Because it is primarily small businesses that lack coverage for earnings loss, it is wise to focus on the businessowners policy, the "homeowners style" package for which many are eligible. It is essential to know the eligibility profile for businessowners policies that an insurer has established. There are definite classification and underwriting considerations for writing a BOP, including size and activity.

A businessowners policy provides extensive building and personal property coverages and broad general liability insurance. It is unique in that it includes coverage for loss of earnings, due to insured hazard, on an "actual loss sustained" basis. Loss of income coverage for a limit specified in the declarations may be an option.

Unless a dollar limit has been specified in the declarations, business income or loss of income insurance covers the actual loss sustained by the interruption of operations during the period of restoration within 12 consecutive months following the date of direct physical loss or damage. As with any broad coverage, underwriting information in the application must be accurate.

Another bonus in businessowners policies is the inclusion of coverage for extra expenses incurred during the restoration period that reduce the earnings loss by contributing to the resumption of normal business activities. Examples include: rent for operation at an alternative location; performance by a friendly competitor of services normally provided by the insured; the additional cost of expediting delivery of materials for resumption of business; cost to research, replace or restore information on valuable papers and records.

When classification limitations or underwriting requirements make a small business ineligible for a BOP, comparable protection may be provided under packages developed by ISO, AAIS and individual insurers. They are used for larger risks but also may be issued for relatively small manufacturing, industrial, institutional and commercial operations. Apart from packages, monoline business interruption forms may be used to supplement property coverage.

Other considerations

Some small businesses operate at several locations. This requires the use of care in providing overall insurance arrangements, including loss of income coverage.

Coverage of "expediting expense" is a significant feature of loss of earnings or business interruption insurance. For example, the temporary rental of office space reduces the restoration period. However, full-fledged extra expense coverage is designed for businesses, including those of small and medium size, that must continue operations without interruption or with a minimum loss of time. Examples include, but are not limited to: newspaper and magazine publishers, laundries and dry cleaners, heating oil suppliers, homes for the elderly and office-oriented firms. Assurance of uninterrupted continuity of operations is essential so that customers won't shift their allegiance to competitors.

Loss of business income can be devastating to employer and employees. Coverage for it should be high on the list for frequent and careful reviews of commercial insurance accounts. Special attention should be paid to the exposures of each insured and the coverages in effect for them.

In the event of uninsured loss, an agent can minimize the potential for disputes by documenting an insured's nonacceptance of coverage recommendations. A notation in the insured's file can also serve as a reminder for future discussion of the subject. When the insured rejects a coverage that the insurance counselor thinks is essential, the counselor and the insured should initial a "not-wanted' statement.

The recent devastating hurricanes and the numerous tornadoes spawned by them have effectively called attention to a widespread loss of business income as well as the absence of available protection in the insurance programs of many small and medium-sized businesses. We must not, however, think only in terms of loss caused by widespread catastrophes such as hurricanes, tornadoes, earthquakes and out-of-control forest and brush fires. For example, the owner of a small store can face loss of needed income from a fire or explosion confined to his or her property. For small businesses, loss of income insurance is essential. *

The author
Roy C. McCormick is a contributing editor with The Rough Notes Company.