Civil Authority, Waiting Period, and a Supplier Fire
Beacon Fresh Market operates a single grocery store. Its business income and extra expense policy has a $1,000,000 limit, a 72-hour waiting period, and actual loss sustained coverage. On March 1, a fire in the restaurant next door causes the city fire marshal to close the sidewalk and street in front of Beacon's store for 12 days. Beacon's store is undamaged, but customers cannot reach it. During the closure, Beacon's average daily net sales are $12,000, its cost of goods sold and other variable expenses are $7,000 per day, and its continuing fixed expenses are $4,000 per day. It also spends $18,000 to rent a refrigerated trailer for the 12 days to save perishable inventory. Separately, on March 20, a fire at Beacon's sole produce supplier's warehouse causes a 30-day produce shortage, and Beacon loses $60,000 in sales. The policy has no contingent business income endorsement. Beacon claims the full 12 days of lost income, the trailer cost, and the $60,000 supplier loss.
1. Calculate the business income loss payable for the civil authority closure, applying the waiting period. Show your daily business income calculation.
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Civil authority coverage applies because a covered cause of loss (the restaurant fire) damaged property other than Beacon's, and the fire marshal prohibited access to Beacon's premises. The 72-hour waiting period equals 3 days, so 12 days − 3 days = 9 compensable days. Daily business income loss is lost net sales minus saved variable expenses: $12,000 − $7,000 = $5,000 per day. The $4,000 of continuing fixed expenses is already reflected in the fact that those expenses continue; business income coverage is designed to cover the lost net income plus continuing expenses, and the $5,000 figure captures the reduction in business income after saved variable costs. 9 days × $5,000 = $45,000. The civil authority coverage under the form is also limited to four consecutive weeks, and 9 days is within that limit. The $1,000,000 policy limit is not a constraint here. If the policy has a separate dollar deductible, it would apply, but the stated 72-hour waiting period is the relevant time deductible.
2. Explain whether the $18,000 refrigerated trailer expense and the $60,000 supplier loss are covered.
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The trailer expense is extra expense. Extra expense covers reasonable expenses to avoid or minimize the interruption and to continue operations. Renting refrigeration to save perishable inventory during a civil authority closure is a reasonable extra expense. The 72-hour waiting period applies to extra expense as well, so the first 3 days are not covered. If the $18,000 is evenly spread over 12 days, the covered portion is 9/12 × $18,000 = $13,500, subject to the policy limit and any dollar deductible. If the expense was incurred entirely after the waiting period, the full $18,000 could be payable; the adjuster should review the invoices. The $60,000 supplier loss is not covered. Business income coverage responds to interruption caused by direct physical loss at the insured's premises or by civil authority. A loss at a supplier's warehouse is contingent business income, which requires a separate endorsement identifying the supplier. The policy has no such endorsement, so the claim fails even though the supplier's fire was a covered peril. The insured should consider adding contingent business income coverage for critical suppliers.