Restaurant Business Interruption, Coinsurance, and Extended Period
A fire closed a Honolulu restaurant for four months. The business-income policy has a $500,000 limit, 80% coinsurance, actual loss sustained, a 12-month extended period of indemnity, and $50,000 extra expense. Annual net sales were $1,200,000; cost of goods sold is 40%. Before the fire, monthly operating expenses were: payroll $20,000 (of which $12,000 continues), rent $10,000 (continues), utilities $2,000 ($1,000 continues), insurance $1,000 (continues), marketing $3,000 (stops), and other $4,000 (stops). The insured projects that after reopening it will operate at 60% of pre-loss revenue for two months during the extended period, with the same gross margin and $24,000 monthly continuing expenses. Extra expense to lease a temporary kitchen and keep catering revenue was $36,000. The carrier paid only $80,000 and says the coinsurance penalty and extended period bar further payment. Your client asks for a full calculation and a documentation plan.
1. Calculate the monthly gross earnings, the four-month business-income loss, and the coinsurance penalty.
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Monthly net sales are $1,200,000 / 12 = $100,000. Cost of goods sold is 40%, or $40,000. Monthly gross earnings are $100,000 - $40,000 = $60,000. Continuing expenses are payroll $12,000 + rent $10,000 + utilities $1,000 + insurance $1,000 = $24,000. Noncontinuing expenses are payroll $8,000 + utilities $1,000 + marketing $3,000 + other $4,000 = $16,000. Monthly business-income loss is gross earnings minus noncontinuing expenses: $60,000 - $16,000 = $44,000. For four months, the loss is 4 x $44,000 = $176,000. Coinsurance is tested against annual gross earnings: $60,000 x 12 = $720,000. The required limit is 80% x $720,000 = $576,000. The policy limit is $500,000, so the coinsurance ratio is $500,000 / $576,000 = 0.8681. The payable business-income loss before extra expense is $176,000 x 0.8681 = $152,778, subject to the $500,000 limit. The carrier's $80,000 payment is well below this calculation.
2. How should the two-month extended-period loss be calculated?
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The extended period is not a license to pay lost revenue; it compensates for lost gross earnings during the reasonable time needed to restore the business after repairs. At 60% of pre-loss revenue, monthly sales are $60,000. Cost of goods sold at 40% is $24,000, so actual gross earnings are $36,000. Normal gross earnings are $60,000, so the gross earnings shortfall is $24,000 per month. If the same $24,000 of continuing expenses continues and no noncontinuing expenses are saved, the business-income loss remains $24,000 per month. Over two months, the extended-period loss is $48,000. If some noncontinuing expenses are actually saved, subtract those savings from the $48,000; do not add continuing expenses twice. Add the four-month loss of $176,000 to the extended-period loss of $48,000 for a total business-income loss of $224,000. Apply the coinsurance ratio of 0.8681: $224,000 x 0.8681 = $194,444. The $36,000 extra expense is evaluated under the separate $50,000 extra expense limit; absent contrary wording, it is not subject to the business-income coinsurance ratio. The combined payable amount is approximately $194,444 + $36,000 = $230,444, within the $500,000 aggregate.
3. What documentation should the adjuster assemble to support the calculation and rebut the carrier's position?
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Obtain three years of tax returns, profit-and-loss statements, sales tax reports, and monthly sales records to prove the $1,200,000 annual net sales and the 40% cost of goods sold. Reconcile payroll registers, rent invoices, utility bills, insurance premiums, marketing invoices, and other expenses to separate continuing from noncontinuing costs. Document the period of restoration with the contractor's schedule, permits, inspection records, and fire marshal reports. For the extended period, prepare a month-by-month projection showing the 60% revenue ramp, customer counts, reservations, catering contracts, and marketing plan; support the two-month duration with actual post-reopening results if available. Obtain the temporary kitchen lease, catering invoices, and proof that the $36,000 extra expense avoided or reduced the business-income loss. Prepare a claim summary that shows gross earnings, noncontinuing expenses, coinsurance ratio, and extra expense separately. Request the carrier's coinsurance worksheet and its basis for denying the extended period. If the carrier disputes the projection, offer a documented compromise or appraisal, and preserve the insured's right to challenge the coinsurance calculation if the policy's gross earnings definition differs from the one used here.