Basics of Time Element Insurance
Domain 4 - Basics of Time Element Insurance
This domain tests business income, extra expense, the period of restoration, coinsurance options, and the extensions that continue income after repairs.
Business income and extra expense
Business Income (CP 00 30) covers the net income the business would have earned plus continuing normal operating expenses, including payroll, during the period of restoration. Extra Expense pays the extra costs needed to avoid or minimize suspension - temporary leases, overtime, outsourcing, expedited shipping - even if business income loss is avoided.
Period of restoration
Begins 72 hours after the direct physical loss (the waiting period can be reduced or eliminated by endorsement) and ends when the property could reasonably be repaired, rebuilt, or replaced with reasonable speed, or when operations resume at a new permanent location. It does not end when the insured actually finishes repairs if a reasonable insured could have finished sooner.
Coinsurance and options
Business income coinsurance percentages are 50/60/70/80/90/100%, applied to the business income exposure - the BI that would be lost during the period of restoration after the worst loss. Payment = (limit purchased ÷ (coinsurance % × exposure)) × loss. Alternatives include Agreed Value (suspends coinsurance), Maximum Period of Indemnity (typically 120 days, no coinsurance), and Monthly Limit of Indemnity (1/3, 1/4, or 1/6 of the limit per month, no coinsurance).
Worked example
Exposure is $1,000,000, coinsurance 80%, limit purchased $600,000. Required = $800,000. A covered loss causes $200,000 of business income loss. Payment = (600,000 ÷ 800,000) × 200,000 = $150,000. Had the insured bought $800,000, the full $200,000 would be paid, subject to the limit and deductible.
Related coverages
Extended business income continues after the period of restoration - default 30 days. Civil authority covers BI and extra expense when an order prohibits access to the premises because of covered damage to nearby property, starting 72 hours after the action for up to four consecutive weeks. Newly acquired locations and interruption of computer operations are limited.
Traps
- Counting payroll as a continuing expense but forgetting ordinary payroll can be excluded by endorsement.
- Measuring BI only as lost profit; continuing expenses count too.
- Applying coinsurance to extra expense - it is not subject to coinsurance.
- Forgetting the 72-hour waiting period and the civil authority limits.