Restaurant Fire: Coinsurance Penalty Plus a Seasonal Business Income Loss
Harborlight Grill leases its space and insures only business personal property and business income. The policy shows $600,000 on business personal property (replacement cost, 80% coinsurance, no agreed value), a $5,000 deductible, and $250,000 of business income including extra expense. An independent appraisal puts the BPP replacement cost at $900,000. A December fire destroys $300,000 of BPP at replacement cost ($240,000 actual cash value) and halts operations for four months. Lost gross profit would have been $65,000 per month in December and January, then $35,000 per month. Temporary kitchen space costs $22,000.
1. Compute the property payment, showing the coinsurance calculation.
Read the worked answer
Step 1 - Required insurance.
$900,000 × 80% = $720,000 required
Step 2 - Coinsurance fraction.
$600,000 carried ÷ $720,000 required = 0.8333
Step 3 - Apply to the loss.
$300,000 × 0.8333 = $250,000
Step 4 - Deductible.
$250,000 − $5,000 = $245,000 payable
What this means: the insured absorbs $55,000 of the loss through the penalty plus the $5,000 deductible, and is only 83.3% insured. Note that the loss payment is based on the replacement cost figure because the policy is written on a replacement-cost basis; the $240,000 ACV figure is irrelevant unless the insured elects not to repair and the form permits ACV settlement.
A common error is applying the coinsurance percentage to the limit or to the ACV. It is applied to the amount of loss, capped at the limit.
2. Compute the business income and extra expense payment, and explain why the seasonal spike is recoverable.
Read the worked answer
Business income measures actual loss during the period of restoration.
- December: $65,000
- January: $65,000
- February: $35,000
- March: $35,000
- Lost gross profit: $200,000
- Extra expense: $22,000
- Total: $222,000
The $250,000 limit is not breached, so $222,000 is payable in full (subject to any business income deductible and to ordinary payroll provisions if the form limits payroll expense).
The December/January spike is recoverable because business income is not an average of the prior year's monthly earnings. It is the actual loss sustained during the period of restoration. A fire that wipes out a restaurant in its two best weeks produces a larger loss than the same fire in July, and the policy responds to that actual loss.
Two constraints to check: (1) the period of restoration ends when the property could reasonably be repaired with due diligence, not when the insured actually reopens; and (2) if the insured had a separate extra expense limit rather than a combined one, the $22,000 would be handled in its own bucket.
3. The insured asks whether buying the full $900,000 limit would have been 'too much insurance.' What do you recommend, and how does an agreed value endorsement change the analysis?
Read the worked answer
Recommend a limit that satisfies coinsurance, not the maximum available.
- The minimum to avoid a penalty is $720,000 (80% of $900,000). Buying $900,000 means paying premium for $180,000 the insured is unlikely to collect, since a total loss is capped by the actual loss and the limit.
- A middle course: carry $720,000–$750,000, and confirm the valuation clause and the coinsurance percentage rather than assuming 80%.
Agreed value changes the mechanics entirely. With an agreed value endorsement, the coinsurance condition is suspended for the policy term, so a partial loss is paid without the fraction - but the insured must accept the value the carrier sets and generally must report values. It converts a math problem into a valuation discipline.
Other recommendations:
- Add extended period of indemnity - losses continue after reopening while business rebuilds.
- Verify ordinance or law coverage, since a leased restaurant in an older building may face code upgrades on rebuild.
- Consider whether the lease makes the landlord responsible for build-out, and whether tenant improvements belong in the BPP limit.
- Review the business income limit against peak-season exposure, not annual averages.