Restaurant Coinsurance and Business Income After a Fryer Fire
Casa Verde is a restaurant insured under a commercial property policy with a building limit of $600,000, an 80% coinsurance clause, a $5,000 deductible, and a $250,000 combined business income and extra expense limit. A fryer fire causes $300,000 of building damage. The replacement cost of the building at the time of loss is $900,000. The restaurant closes for five months. The insured documents $100,000 of lost net income, $20,000 of continuing normal operating expenses, and $25,000 of extra expense to operate from a rented food truck. The insurer pays the building loss without a coinsurance penalty because "the limit was close to the loss." The insured asks the public adjuster to review the payment and the business income claim.
1. Calculate the building payment under the 80% coinsurance clause. Show each step.
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Replacement cost at time of loss is $900,000. Required insurance is 80% of $900,000, or $720,000. The insured carried $600,000, so it is underinsured. Coinsurance payment equals carried divided by required, multiplied by the loss, capped at the policy limit. $600,000 divided by $720,000 equals 0.8333. 0.8333 times $300,000 equals $250,000. Then apply the $5,000 deductible: $245,000. Because $250,000 is below the $600,000 limit, the limit does not cap it further. The insurer's statement that the limit was close to the loss ignores the coinsurance formula. The adjuster should verify the statement of values and whether the insured has a margin clause or inflation guard endorsement that could change the result.
2. Calculate the business income and extra expense payment and explain the period of restoration.
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Business income equals net income loss plus continuing normal operating expenses: $100,000 plus $20,000 equals $120,000. Extra expense is $25,000. Total is $145,000, within the $250,000 combined limit. The period of restoration begins at the date of direct physical loss and ends when the property could be repaired with reasonable speed and similar quality, not when the insured actually reopens. Five months is reasonable if the repair scope supports it. The insured must show mitigation, such as the food truck reducing loss; extra expense should not duplicate income. The deductible applies to the property loss, and the business income coverage may have a separate deductible; confirm the form. If the business income limit is separate, no coinsurance penalty applies to it unless the form has a business income coinsurance clause; many forms use actual loss sustained with a limit.
3. What if Casa Verde had reported $720,000 instead of $600,000? What if it had a blanket $2,000,000 limit covering three locations?
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At $720,000, required insurance equals $720,000, so the ratio is 1.0. The building payment would be $300,000 minus the $5,000 deductible, or $295,000. At a blanket $2,000,000 limit covering three locations, coinsurance is tested against the total blanket limit and total values, not each building separately, if the policy provides blanket insurance. If total values across all locations are such that the blanket limit satisfies 80% of total values, no penalty applies. But if the blanket limit is less than 80% of total values, a penalty applies to the total loss. The adjuster should obtain the statement of values and the blanket coinsurance clause; do not assume the blanket limit eliminates coinsurance.