These revisions affect 11 coverage forms, all 3 causes of loss forms, 24 coverage endorsements, and a number of schedule endorsements. This article summarizes the changes to the business income and extra expense coverage form (CP 00 30).
During the first two quarters of 2001, new Insurance Services Office, Inc. (ISO), commercial property forms and endorsements bearing an October 2000 edition date became available for use in a majority of jurisdictions. The 2000 revisions to the ISO commercial property portfolio affect 11 coverage forms, all 3 causes of loss forms, 24 coverage endorsements, and a number of schedule endorsements.
This article reviews the changes made to the 2000 edition of the business income and extra expense coverage form (CP 00 30). A summary of the changes to CP 00 30 appears at the end of the discussion.
Definition of "Suspension" Added
Like the business interruption coverage forms that preceded it, the business income and extra expense coverage form is designed to provide coverage for income loss that results from direct property damage from a covered cause—regardless of whether the suspension of the insured's operations is partial or total. In recent years, however, some insurers have interpreted the phrase "necessary suspension of your operations" to mean only a complete cessation of all of the insured's operations and have refused to pay for otherwise covered business income loss because the insured's operations did not completely cease during the period of restoration. Unfortunately, some courts accepted this argument.
To prevent such misinterpretations, a definition of the term "suspension" has been added to the definitions section of the 2000 edition of the form. This definition clearly establishes that a suspension means either the slowdown or the cessation of the insured's business activities (or, with respect to rental value coverage, the untenantability of part or all of the premises.)
Net Income for Manufacturers Clarified
Manufacturers often produce goods many months in advance of the date when they are actually sold. As a result, an insured manufacturer might not suffer any reduction in income during the "period of restoration" (basically, the time between the date of damage and the date when repairs are complete). Instead, the manufacturer's income loss would be suffered later, when the goods that would otherwise have been produced during the period of restoration are not available for sale. Accordingly, the calculation of the amount of business income loss suffered by a manufacturer must include the sales value of the goods that would have been produced during the period of restoration.
Pre-1986 ISO business interruption forms were very explicit on this point. In fact, there were two separate business interruption forms—one for manufacturers and another for non-manufacturers—primarily to address this very point. However, none of the prior editions of the business income coverage form include language that directly addresses the distinction between manufacturers and non-manufacturers.
The 2000 edition includes new language that is intended to eliminate any doubt as to whether insured manufacturers have coverage for the sales value of the goods that would have been produced during the period of restoration, even if no income loss is suffered during that time. The business income provision (provision A.1) includes an explicit statement that, for insured manufacturers, net income includes the net sales value of production.
Insuring Agreement "Premises" Definition
In the insuring agreement of the 2000 edition of the business income and extra expense coverage form, the language of the definition of "premises" for insured tenants has been revised to make it clear that, even if there is no damage to the property in the insured's space, income loss that results from damage to property in other portions of the building (or on other portions of the site) is covered.
The 1995 edition clearly establishes coverage with respect to income loss resulting from damage to routes within the building used to gain access to the insured's premises. However, the language of the 2000 edition is broader and clearer still. It specifies that, for any insured occupying only a portion of the building housing the insured's premises, the insured's premises includes not only the space occupied by the insured, but also all areas of the building, and of the site where the building is located, that service or allow access to the insured's space.
For all insureds, the insuring agreement of the 2000 edition also specifies that, with respect to personal property in the open or in a vehicle, the "premises" includes the area within 100 feet of the site (as opposed to within 100 feet the building). The language of prior editions is unclear on this point.
Extra Expense Coverage for Alterations and New Buildings
In the 2000 edition of the business income and extra expense coverage form, the alterations and new buildings additional coverage has been broadened to apply to extra expense loss as a result of damage to alterations and new buildings at insured locations. In prior editions, this additional coverage applies to business income loss only.
Extra Expense Coverage for Newly Acquired Locations
The newly acquired locations coverage extension in the 2000 edition also has been broadened to apply to extra expense loss, whereas prior editions cover only business income loss. The $100,000 limit established in the newly acquired locations provision applies to business income and extra expenses combined, rather than separately to each. Keep in mind that the coverage provided by this extension is temporary; it applies for up to 30 days after acquisition or start of construction.
Maximum Period of Indemnity Option Applies to Extra Expense
The maximum period of indemnity option in the 2000 edition has been revised to apply to both business income and extra expense loss. In prior editions, it applies only to business income loss. Note, however, that this change is not a broadening of coverage.
Including both business income and extra expense in the maximum period of indemnity option has the effect of limiting loss recovery for both business income and extra expense to the amount of loss suffered in the 120 days immediately following the form's 72-hour waiting period deductible. In the 1995 and prior editions, this option only limits the insured's business income loss.
Coinsurance Provision Clarification
In the 2000 edition of the form, a few words have been added to the coinsurance provision to make it very clear that any coinsurance penalty applies only to business income loss recovery. The coinsurance provision does not apply to the extra expense coverage provided by the form.
Although it may be wise to specifically consider anticipated extra expenses in selecting a business income limit, the only consequence of not doing so is the possibility of inadequate insurance in the event of a total loss.
Correction to Extended Period of Indemnity Coverage Option
In the 2000 edition, a reference to subparagraph (1)(b) of the extended period of indemnity coverage option, which was inadvertently omitted in the 1995 edition, has been added to this provision. References to both subparagraphs of the extended business income coverage provision are needed to make it clear that the extended period of indemnity option applies to income from any source.
Summary of Changes
Below is a summary of the changes made in the 2000 edition of the business income and extra expense coverage form (CP 00 30).
Summary of Changes to 2000 Edition CP 00 30
Definition of "Suspension." A definition of the term "suspension" has been added to the definitions section of the form, to make it clear that a complete cessation of operations is not required. Since it is a defined term, quotation marks have been placed around the word "suspension" wherever it appears in the form.
Business Income Provision. The explanation of business income (provision A.1) has been revised to specify that net income for insured manufacturers includes the net sales value of the goods that would have been produced during the period of restoration.
Insuring Agreement. The insuring agreement has been revised to specify that (1) for all insureds, the "premises" includes the area within 100 feet of the site on which the building is located, with respect to personal property in the open or in a vehicle, and (2) for insured tenants, the "premises" includes any area within the building or on the site that services or is used to gain access to the insured's space.
Alterations and New Buildings. This additional coverage has been broadened to provide extra expense coverage for alterations and new buildings at existing locations.
Newly Acquired Locations. This coverage extension has been broadened to provide expense coverage for newly acquired locations.
Maximum Period of Indemnity. This option has been revised to apply to (and thus limit loss recovery for) extra expense as well as business income.
Coinsurance. The coinsurance provision has been revised to make it clear that no coinsurance penalty applies to extra expense coverage.
Extended Period of Indemnity Option. A subparagraph reference that was inadvertently omitted in the 1995 edition has been added to this coverage option.
Upcoming articles will outline the changes to the 2000 editions of the causes of loss forms (CP 10 10, CP 10 20, and CP 10 30) and some key endorsements. (The changes to the building and personal property coverage form (CP 00 10) were described in a previous article.)
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