Insurance Community University Business Income--The Five Key Considerations in Limit Setting 1  The webinar will begin shortly.  There is no audio at this time.  This presentation is being recorded for your viewing pleasure at a future date.  The attendance and proctor forms are available under ‘Materials’ in the Webinar’s Console to the right.  The PowerPoint presentation is also available under ‘Materials’.  You will receive the course number for your state near the end of class.  Use the ‘chat’ window for questions on the content.  100% Participation in Polling Questions is required to receive credit for this class. Even if you do not intend to receive credit, please participate in the polls.

Insurance Community University Welcome to your Insurance Community University All of you are currently on mute – Un-mute your own system – Telephone Option Select Telephone on your screen Dial in the PIN number so that your number becomes active – Microphone and/or Speaker Option You can use this option if you have a headset that you use with your computer Audio 2

Insurance Community University Participation & Chat Window You will receive information from the monitor via the ‘Chat’ window. – Please locate window in the control panel Q & A is welcomed during the presentation and at the end of the presentation You will find the question box on your control panel – Write your question in that box and send it to the presenter/organizer The presenter will take those questions in the order submitted 3

Insurance Community University DOI Requirements When you see a slide with the hand up symbol, touch the “hand” icon on your control panel – Click ONCE only If you do not raise your hand, the monitor will be in contact with you in the chat box If you are in a group, the designated proctor is responsible to make certain you are all in attendance at all times 4 = Hand is down

Insurance Community University Polling Throughout the class we will be conducting periodic polls We need 100% participation on the polls The polls are intended to check participation but also to create discussion topics throughout the presentation 5

Insurance Community University Forms To Complete for CE After class ends – Return attendance form – Proctors – return your form to address address is in chat window or in sent to you today 6

Insurance Community University DOI Requirements We will file your hours with the DOI after the completion of this webinar and we have received the attendance form. You have 48 hours to return the form You will be sent a Certificate of Attendance/Completion by . Please retain this for your records for five years. 7

Insurance Community University Internet Disruption If the presenter looses internet connection STAY ON THE LINE The administrators will communicate with you

Insurance Community University Internet Failure If the internet fails and all participants are kicked off line by Go To Training or other source then the seminar will be terminated You will receive instructions by as to how we will proceed This is a precautionary notice, only 9

Insurance Community University This class is being recorded Available in the University The archived class does NOT qualify for CE

Insurance Community University Disclaimer Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. This instructional materials provided by Insight is intended as a general guideline and any interpretations provided by the instructor or the creator(s) of this material do not modify or revise insurance policy language. In providing these materials, the authors assume neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided. Copyright 2010 – 2014 All Rights Reserved 11

Insurance Community University Your Instructor Today Laurie Infantino, CIC, AFIS, CISC, ACSR, CISC, CRIS President and Co-Founder of The Insurance Community Center

Insurance Community University Setting A Business Income Limit It is all about TIME, MONEY and EXPOSURE to RISK

Insurance Community University Polling Question #1 & #2 14

Insurance Community University Responsibilities Your insured knows “their” business – Vulnerabilities – Tolerance Levels – Business decisions they have made to mitigate loss Your insured must provide you with the financial information you need to set an adequate limit based on their past and future financial information

Insurance Community University Responsibilities You must understand the importance of setting the correct limit for: – Providing minimum limits (coinsurance) – Providing limits for a long term loss (more than the policy term) – Providing limits for the period to regain their income after re-opening – Providing limits for endorsements that are added

Insurance Community University Follow the MONEY Sale of Furniture?? Financing???? Association lose money??? OR The Management Company??? Prepaid LIFETIME Estates Other Income

Insurance Community University Course Objectives 1.Brief overview of the three forms available as relates limit setting 2.Coinsurance Selection 4.Setting Limits/Worksheet 5.Projection

Insurance Community University Business Income Form  Pay for the Financial loss due to Direct Physical Loss  To Property  At the “insured premises” Subject to definition and extensions  Damaged by a Covered Cause of Loss  For a value and time frame described in the insurance contract 19

Insurance Community University Course Objective #1 Brief Comparison of Forms as relates setting limit

Insurance Community University Intent of Form Regardless of the form chosen, the INTENT of the coverage is the same. Pay for the net profit that would have been earned and on-going operating expenses

Insurance Community University Accounting terms and Insurance terms are NOT the same Insurance – Net profit= sales minus cost of goods – All operating expenses are included in the “net profit” definition Accounting – Net Profit= sales minus cost of goods and operating expenses – The operating expenses are eliminated from this figure

Insurance Community University Coinsurance Automatic ONLY one that has insurance to value requirement Maximum Period of Indemnity 120 days Monthly Limitation 1/3, ¼, 1/6 Overview of the Three Forms

Insurance Community University Business Income Defined We will pay for the actual loss of Business Income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration". The "suspension" must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations.

Insurance Community University Polling Question #3 25 Do you write either the monthly limitation form or maximum period of indemnity form for any of your business clients?

Insurance Community University Non Coinsurance Forms Maximum Period – Limited to 120 days – Set limit for 120 days (profits plus continuing operating expenses)

Insurance Community University Limit Of Insurance $100,000 How it “pays” Date Of Loss $100,000 Limit120 Days Payment Period BEGINS $60,000$10,000 Payment Period ENDS Remaining $10,000 Of Coverage Is Not Available

Insurance Community University Maximum Period of Indemnity Limit Setting Choose “highest” four months NOTE: If anticipate ONLY 4 months there will typically not be as much “abatable” operating expenses. For an insured that has a lot of redundancy Still must Project MonthProfitsExpensesTotal May$25,000$5,000$30,000 June$40,000$22,000$66,000 July$48,000$29,000$77,000 August$22,000$14,000$36,000 Total 4 month$209,000

Insurance Community University Maximum Period of Indemnity Two major concerns with increasing this limit – Period of Indemnity Extension for loss of income after physical restoration – Add in amount of time chosen and an amount for that period – ALWAYS have Building Ordinance Increased Period of Restoration

Insurance Community University Maximum Period of Indemnity 4 month limit $209,000 Add 90 day extension $41,000 $250,000

Insurance Community University Maximum Period of Indemnity CAUTION 120 days coverage $250,000 limit available The “physical loss” lasts 6 months (180 days) NO coverage for the 60 additional days of restoration Restoration is complete and continues to lose profits for 2 months after opening. Remainder of limit available

Insurance Community University Non Coinsurance Forms Monthly Limit – Contains maximum per month – Set based on total time needed for profits and continuing operating expenses – Make sure have enough for largest month

Insurance Community University Limit of Insurance $100,000 1/4 Monthly Limit of Indemnity how it pays $100,000 (1/4) Amount Available each 30 days $25,000 Amount Loss Proven $25,000$20,000$15,000$10,000 Amount Available in subsequent months 0$ 5,000$10,000$15,000 Total Amount Available In Succeeding Months $30,000 Not To Exceed $25,000 In Any 30 Consecutive Days

Insurance Community University Monthly Limit of Indemnity Limit Setting (figuring 4 months) Determine how long the business could be closed Make sure to set limits for the highest months NOTE: If anticipate ONLY 4 months there will typically not be as much “abatable” operating expenses. Still must Project MonthProfitsExpensesTotal May$25,000$5,000$30,000 June$40,000$22,000$66,000 July$48,000$29,000$77,000 August$22,000$14,000$36,000 Total 4 month$209,000

Insurance Community University Maximum Period of Indemnity 4 month limit $209,000 Add 90 day extension $41,000 $250,000

Insurance Community University Difference The difference in the monthly limitation is that the MOST that can be collected in any 30 day period is $62,500 The best choice of percentages is 1/3 because it would allow the insured the MOST in any 30 day period $250,000 divided by 3= $83,333 $250,000 divided by 4= $62,500 $250,000 divided by 6 = $41,666

Insurance Community University Coinsurance selection and suspension of Coinsurance Course Objective #2

Insurance Community University Polling Question #4 38

Insurance Community University Coinsurance The Business Income form is a coinsurance form unless one of the other options is chosen The Declarations Page will be where the limit of insurance appears and the type of business income form chosen If it is a coinsurance form then typically a percentage will appear after the amount of insurance (50%-125%)

Insurance Community University Coinsurance ONLY The coinsurance has an “insurance to value” requirement based on the Business Income Worksheet The Business Income Worksheet basically requires the amounts for the total sales revenue (first page of worksheet) from which the cost of the goods and other allowable deductions are subtracted (second page)

Insurance Community University Coinsurance Form The only two events that will stop the coinsurance form from paying anything additional are: – Physical Restoration – Exhaust the limits of insurance INDEMNITY NOT RESTRICTED TO THE 12 MONTH POLICY PERIOD

Insurance Community University Coinsurance selection and suspension of Coinsurance

Insurance Community University It is NOT that hard It is an insurance to value clause Coinsurance is different on a Commercial Property form—it is NOT a reduction method. (80/90/100) Coinsurance on a BI form is a reduction method. It tells you how much of the annual profit and operating expenses projected into the policy period that you chose to insure. (50-125%)

Insurance Community University Percentages Reflect the Amount Carried (begin with $1,000,000 Sales minus Cost of Goods) $500,000 (50%) $600,000 (60%) $700,000 (70%) $800,000 (80%) $900,000 (90%) $1,000,000 (100%) $1,250,000 (125%) 44

Insurance Community University Determining Coinsurance To determine how coinsurance works, must review the “coinsurance requirement statement” and the “coinsurance payment statement” in the insurance policy. 45

Insurance Community University 46 Payment Statement for Coinsurance (Coverage) A.Coverage 1.Business Income Business Income means the: a. Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and b. Continuing normal operating expenses incurred, including payroll.

Insurance Community University Coinsurance Requirement Statement The Net Income (Net Profit or Loss before income taxes) and Operating expenses including payroll expenses that would have been earned or incurred had not loss occurred by your “operations'” at the described premises for the 12 months following the inception, or last previous anniversary date. 47

Insurance Community University Payment vs. Requirement The form intends to pay ONLY those expenses that continue but begins with a requirement to insure for ALL operating expenses whether they continue or not.

Insurance Community University Coinsurance Selection PROFIT + CONTINUING OPERATING EXPENSES PROFIT + ALL OPERATING EXPENSES This is the MINIMUM amount of insurance that needs to be carried for the 12 months of the policy period

Insurance Community University Coinsurance Selection $1,000,000 $2,000, % $1,000,000 (50%) $100,000 (PROFIT) + $900,000 (CONTINUING OPERATING EXPENSES) $100,000 (PROFIT) + $1,900,000 (ALL OPERATING EXPENSES)

Insurance Community University Does it make sense??? People will say if the business is out of business for a year they need 100% coinsurance True only if there are NO abatable operating expenses

Insurance Community University Does it make sense??? People will say that if a business estimates they will be out of business for 6 months they need 50% coinsurance Maybe. In a short shutdown there are less abatable operating expenses which means there are MORE continuing operating expenses

Insurance Community University When does a business need 125% Coinsurance? Minimum abatable operating expenses Long term shutdown

Insurance Community University Expenses Looking at the LONG shutdown (total loss) Looking at the SHORT shutdown (partial loss) The average Business Income claim lasts two weeks in length

Insurance Community University See Exhibit #1 Coinsurance Worksheet

Insurance Community University 56 Suspending Coinsurance with Agreed Value Indicated on the Declarations Page Coinsurance suspended until 12 months after effective date or expiration. Business Income Report/Work Sheet (CP 15 15) must be submitted to the company This date must be advanced every year or coinsurance is automatically reinstated. Agreed Valued does NOT agree to the value

Insurance Community University Course Objective #3 Setting Limits for the Work Sheet

Insurance Community University Polling Question #5 58

Insurance Community University How To Begin Obtain a current financial statement from the insured with the notes that would accompany the exhibits. Remember that this would be historical. Obtain any further historical information that might be necessary to apply a feasible projection.

Insurance Community University How To Begin Discuss with the client any intentions for change or expansion in their operation for the period of time that the policy will be in force. Make certain the client knows to report to you any changes that they may make so that you can adjust their coverage in term. Review the financial exhibits with the client so that you have a clear understanding of the operation.

Insurance Community University Cover Page of the Worksheet Declares key issues prior to completion of the sheet Exhibit #2

Insurance Community University Worksheet (Exhibit #3) These are MINIMUM limits Must Complete the Column for the prior years financial information – This is NOT the limit of insurance Must complete the column for the “projection” into the 12 month policy period – This is the basis for coinsurance

Insurance Community University Course Objective #4 Projection Setting the REAL Limit

Insurance Community University Period of Indemnity Defined Begins with Covered Property Loss - (Note: 72 hour waiting period is only for business Income, not extra expense) Ends when property should be repaired or relocated Period of Indemnity is NOT tied into financial restoration—only physical restoration 64

Insurance Community University Projection ($) 12month prior ($) 12 month policy period Physical Restoration Physical Restoration Building Ordinance Contract periods Financial Restoration ( days)

Insurance Community University 66 Factors to consider in time Just a few! Time to relocate Time to rebuild Time to adjust the loss Time to draw up architectural plans Time to conduct engineering studies

Insurance Community University 67 Factors to consider in time Just a few! Time to obtain competitive bids from contractors Time to secure permits Time for actual construction Time to replace equipment Time to replace stock

Insurance Community University Things to remember The amount of insurance is based on the 12 months of the policy period The prior years figures is not the amount of insurance we may need Coinsurance is based on the 12 months of the policy period Losses may last longer then 12 months

Insurance Community University Always Suspend Coinsurance Blanket Add Building Ordinance Increased Period of Restoration Add Extended period of Indemnity Write the combination Business Income and Extra Expense form to have benefit of EE Project…project…project!

Insurance Community University Business Income is only a Band-Aid It is all about Understanding the Risk; and Risk Managing the Risk

Insurance Community University Please Hold Up Your Hand 71

Insurance Community University Upcoming Classes 4/8Flood 410Workers Compensation 5 Key Issues 4/8Flood Insurance 4/15Construction Contracts 4/22Insight on Insurance Proposals and Submissions