BUSINESS INTERRUPTION INSURANCE: A MUSTHAVE

A severe property loss, such as damage from a fire orexplosion, can cause significant financial hardship. Althoughmost companies have Property insurance in place to protectthemselves against such losses, the income lost during ashutdown can be even more devastating. Without the rightcoverage in place, the company might suffer a blow from whichit will be difficult to recover. Business Interruption insurance might be the one thing that keeps the company in business.

The standard Business Interruption policy promises to pay forbusiness income lost due to a necessary suspension ofoperations caused by loss of or damage to the businesspremises. For coverage to apply, the cause of loss must be onethe policy insures against, such as fire, lightning, windstorm, or aircraft. It is important to understand that “businessincome” does not necessarily mean “profits.” The policy defines “business income” as the net income (profit or lossbefore income tax) that the firm would have earned, plus continuing normal operating expenses. Therefore, the policywill not bail out a company that was headed for a period of unprofitability. If the company was expecting a $100,000loss and continuing expenses (including payroll) of $150,000, the most the policy will pay is $50,000 ($150,000expenses less $100,000 loss.)

When a loss occurs, the insurer will determine the actual loss the business sustained. To do this, it will examine thecompany’s financial statements for the time periods leading up to the loss. It will determine which costs were fixed,such as debt payments, permits, and salaries. It will also separate out costs tied directly to sales, such as the costof producing goods not yet produced. Finally, it will calculate the company’s expected profit or loss for the period.The sum of expected profit or loss and normal continuing expenses equals the actual loss sustained.

The actual period of the loss might differ from the period the insurer calculates. The insurer will pay for businessincome lost during the “period of restoration.” This period begins 72 hours after the damage occurs to the premises. Itends on the date the damaged property should be repaired, rebuilt or replaced with reasonable speed and similarquality or on the date when business resumes at a new permanent location, whichever is earlier. If the businessowner is slow to approve architectural plans or if rebuilding takes longer because the owner decided to makeimprovements, the insurer will not pay for the entire period of loss. Also, the insurer will reduce the loss period if thecompany can reasonably take steps to shorten it. These steps might include using temporary facilities, shifting workto undamaged sections of the building, or adding work shifts to make up for lost production.

If the company has to spend extra funds to reduce the amount of lost income, the insurer will cover at least some ofthem. Examples are additional rent for a temporary location, express shipping charges necessary to get machinery inplace sooner, and increased construction costs to hasten the repairs. The insurer will not pay more than the amountof income the company would have lost, and it will only pay for expenses that actually reduce the business incomeloss.

Many options are available with Business Interruption insurance, having to do with the length of the recovery period,amounts available each month, required amounts of insurance, and others. To help determine those options that afirm might need, a thorough discussion with one of our insurance agents is in order. This coverage is too important toa firm’s survival for anyone to treat it casually.

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UNDERSTANDING BLANKET COVERAGE FOR ADDITIONAL INSUREDS

Any contractor who has been in business for a while is familiar with
Additional Insured coverage. This coverage insures an outside
organization, usually a project owner or general contractor, under the
contractor’s own policy. It is often a requirement for construction
projects, and it can be the source of insurance disputes if not handled
correctly.

Owners and general contractors who hire subcontractors are also
assuming responsibility for issues that arise during the project. If sparks
from a welder hired by the general contractor start a fire that damages
the building next door, the building’s owner will likely sue both the welder
and the GC. The GC does not want liability for the welder’s actions since it cannot control them. In addition, the GC has the power in the relationship, since it makes the hiring decisions and controls the purse.


Therefore, most construction contracts require a subcontractor to assume the GC ’s liability for losses that arise from the sub’s work on the job. The sub finances this additional liability through contractual liability coverage on its Commercial General Liability policy and by covering the GC as an additional insured on that policy.

Traditionally, insurance companies have covered an additional insured by attaching an endorsement to the policy. This endorsement lists the additional insured by name and insures it against liability arising from the named insured ’songoing operations. This works well if the insured has relatively few requests for this coverage. However, it presents some risks of errors.

The subcontractor might forget to tell its insurance agent that it needs the endorsement. The
agency staff might fail to send the request to the insurance company. The insurance company might receive the agent’s request and never act on it. Any of these scenarios may cause the company to deny coverage to the GC when a loss occurs, forcing the GC to submit a claim to its own company. The GC may then sue the subcontractor for breach of contract. Because of the potential pitfalls, organizations that receive many requests to add additional insureds often want their insurance companies to provide a blanket additional insureds endorsement.

A blanket endorsement typically provides automatic coverage for any organization
that the named insured has agreed to cover under the terms of a written agreement. This eliminates the need to send individual requests for each additional insured, saving time and effort and reducing the chance that an error will lead to an uncovered loss. However, these endorsements also have their disadvantages. The standard ISO endorsement provides coverage only if a written agreement requires the named insured to cover the additional insured. If there is no written contract, or that contract does not require additional insured coverage, the endorsement will not provide it. Also, it provides coverage only while the named insured’s operations for the additional insured are ongoing. When the sub’s work is finished, so is the GC’s additional insured coverage. That could be a problem if something in the sub’s work causes
injuries or damages months or years later. Further, the endorsement’s wording could allow an insurance company to deny coverage for an accident that occurs while the sub’s work is ongoing but that is not reported until after the sub’s work is finished.

One of our insurance agents experienced in writing coverage for contractors can be a good source of advice and information about blanket additional insured endorsements. Many insurance companies have their own endorsements that differ from the standard. For example, some guarantee advance notice to the additional insured if the policy iscancelled. It is well worth it for a contractor to spend some time investigating the different coverage options.

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