1. Insurance Community University www.InsuranceCommunityUniversity.com 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.

2. Insurance Community University www.InsuranceCommunityUniversity.com 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 2 Audio

3. Insurance Community University www.InsuranceCommunityUniversity.com 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

4. Insurance Community University www.InsuranceCommunityUniversity.com 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

5. Insurance Community University www.InsuranceCommunityUniversity.com 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

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

7. Insurance Community University www.InsuranceCommunityUniversity.com 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 email. Please retain this for your records for five years. 7

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

9. Insurance Community University www.InsuranceCommunityUniversity.com Setting A Business Income Limit It is all about TIME, MONEY and EXPOSURE to RISK

10. Insurance Community University www.InsuranceCommunityUniversity.com Polling Question #1 & #2 10

11. Insurance Community University www.InsuranceCommunityUniversity.com 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

12. Insurance Community University www.InsuranceCommunityUniversity.com Responsibilities You must explain the intent of the Business Income Form therefore you must understand it yourself You must explain 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

13. Insurance Community University www.InsuranceCommunityUniversity.com Course Objectives 1.Importance of valuing the “property form” correctly as relates stock AND mark up 2.Brief overview of the three forms available as relates limit setting 3.Coinsurance Selection 4.Setting Limits/Worksheet 5.Projection

14. Insurance Community University www.InsuranceCommunityUniversity.com Course Objective #1 “Stock” in Commercial Property vs Business Income

15. Insurance Community University www.InsuranceCommunityUniversity.com Putting The Business Income Form Into Perspective 15 Commercial Property Business Income Cause of Loss

16. Insurance Community University www.InsuranceCommunityUniversity.com Commercial Property Form  Pay for the Direct Physical Loss  To Covered Property  At the “insured premises” Subject to definition and extensions  Damaged by a Covered Cause of Loss  For a value described in the insurance contract 16

17. Insurance Community University www.InsuranceCommunityUniversity.com 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 17

18. Insurance Community University www.InsuranceCommunityUniversity.com Business Income Claims Can stem to loss to various types of property – Buildings – Equipment – “Stock”—This is the most complex issue The Question: How does the Commercial Property Form cover “profits” and “operational” expenses as relates stock?

19. Insurance Community University www.InsuranceCommunityUniversity.com Polling Question #3 19

20. Insurance Community University www.InsuranceCommunityUniversity.com Stock sold but not delivered Valuation of Stock under Business Personal Property Evaluate at Selling Price Unsold “Finished Stock” Excluded in Cause of Loss Form Manufacturers Selling Price Future Value of Production Business Income Form

21. Insurance Community University www.InsuranceCommunityUniversity.com What questions you must ask Is all the stock pre-sold If NOT what percentage of the stock is pre-sold Must review definition of “stock” in the property form to make certain it includes raw, in process and finished. Understand: the business income form does NOT pay for stock that is pre-sold

22. Insurance Community University www.InsuranceCommunityUniversity.com Course Objective #2 Brief Comparison of Forms as relates setting limit

23. Insurance Community University www.InsuranceCommunityUniversity.com Regardless of the form chosen, the INTENT of the coverage is the same

24. Insurance Community University www.InsuranceCommunityUniversity.com Coinsurance Automatic Maximum Period of Indemnity 120 days Monthly Limitation 1/3, ¼, 1/6 Overview of the Three Forms

25. Insurance Community University www.InsuranceCommunityUniversity.com 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.

26. Insurance Community University www.InsuranceCommunityUniversity.com 26 Business Income Defined Net Income (Net Profit or Loss before income taxes) that would have been earned plus continuing normal operating expenses incurred, including payroll.

27. Insurance Community University www.InsuranceCommunityUniversity.com Polling Question #4 27

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

29. Insurance Community University www.InsuranceCommunityUniversity.com Coinsurance selection and suspension of Coinsurance Course Objective #3

30. Insurance Community University www.InsuranceCommunityUniversity.com Polling Question #5 30

31. Insurance Community University www.InsuranceCommunityUniversity.com 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%)

32. Insurance Community University www.InsuranceCommunityUniversity.com 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)

33. Insurance Community University www.InsuranceCommunityUniversity.com Coinsurance Form The only two events that will stop the coinsurance form from paying anything additional are: – Physical Restoration – Exhaust the limits of insurance

34. Insurance Community University www.InsuranceCommunityUniversity.com Coinsurance selection and suspension of Coinsurance

35. Insurance Community University www.InsuranceCommunityUniversity.com 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 profit and operating expenses you chose to insure. (50-125%)

36. Insurance Community University www.InsuranceCommunityUniversity.com 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%) 36

37. Insurance Community University www.InsuranceCommunityUniversity.com 37 Coinsurance Rating Factors Business Income WITHOUT Extra Expense Coinsurance Percentage MercantileManufacturingRental Properties 125%.55.65.50 100%.60.70.55 90%.65.75.60 80%.70.80.65 70%.75.85.70 60%80.90.75 50%.901.05.85 No Coin2.302.452.10

38. Insurance Community University www.InsuranceCommunityUniversity.com 38 Coinsurance Rating Factors Business Income WITH Extra Expense Coinsurance Percentage MercantileManufacturingRental Properties 125%.60.70.55 100%.65.80.60 90%.70.85.65 80%.75.90.70 70%.80.85.75 60%.901.00.80 50%1.001.15.90 No Coin2.502.652.30

39. Insurance Community University www.InsuranceCommunityUniversity.com Determining Coinsurance To determine how coinsurance works, must review the “coinsurance requirement statement” and the “coinsurance payment statement” in the insurance policy. 39

40. Insurance Community University www.InsuranceCommunityUniversity.com 40 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.

41. Insurance Community University www.InsuranceCommunityUniversity.com Coinsurance Requirement Statement We will not pay the full amount of any Business Income loss if the Limit of Insurance for Business Income is less than – The Coinsurance percentage shown for the Business Income in the Declarations; times 41

42. Insurance Community University www.InsuranceCommunityUniversity.com 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. 42

43. Insurance Community University www.InsuranceCommunityUniversity.com 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.

44. Insurance Community University www.InsuranceCommunityUniversity.com 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

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

46. Insurance Community University www.InsuranceCommunityUniversity.com Polling Question #6 Does the insured have enough insurance to pay the payroll if there is a 3 month shutdown?

47. Insurance Community University www.InsuranceCommunityUniversity.com Answer #6

48. Insurance Community University www.InsuranceCommunityUniversity.com Polling Question #7 Does the insured have enough insurance to pay all the payroll if there is a one year shutdown?

49. Insurance Community University www.InsuranceCommunityUniversity.com Answer #7 BUT, they would not incur that cost in a long term shutdown UNLESS they had to keep payroll on and then they would have need to provide more insurance

50. Insurance Community University www.InsuranceCommunityUniversity.com Polling Question #8 Does the insured have enough to pay the rent for a 5 month shutdown? YES if they have to under their lease

51. Insurance Community University www.InsuranceCommunityUniversity.com Answer #8 YES if they have to under their lease

52. Insurance Community University www.InsuranceCommunityUniversity.com Polling Question #9 Does the insured have enough to pay the rent for a year?

53. Insurance Community University www.InsuranceCommunityUniversity.com Answer #9 NO but they probably would not be contractually obligated to pay because of the abatement clause

54. Insurance Community University www.InsuranceCommunityUniversity.com 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

55. Insurance Community University www.InsuranceCommunityUniversity.com 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 and may be more, actually to maintain

56. Insurance Community University www.InsuranceCommunityUniversity.com When does a business need 125% Coinsurance Minimum abatable operating expenses Long term shutdown

57. Insurance Community University www.InsuranceCommunityUniversity.com Continuing vs. Non-Continuing Expenses and Limit Setting

58. Insurance Community University www.InsuranceCommunityUniversity.com Categorize Expenses Direct And Variable – Directly related to the operation of the business – Food is a direct expense to a restaurant and varies based on the volume of business— may relate to seasons

59. Insurance Community University www.InsuranceCommunityUniversity.com Categorize Expenses Indirect and Fixed/Variable – These costs are indirectly related to the direct sale and would continue even if the sales volume was decreased. – These include payroll, rent, utilities, equipment/auto leases – While these expenses may be fixed they may vary based on sales such as staff being reduced, moving into smaller space

60. Insurance Community University www.InsuranceCommunityUniversity.com Types of Expenses Rent Payroll Utilities Phones/Computer Equipment Vehicles Supplies Advertising Insurance Consulting/Professional Fees Travel Membership Subscription Transportation Warehousing

61. Insurance Community University www.InsuranceCommunityUniversity.com 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

62. Insurance Community University www.InsuranceCommunityUniversity.com See Exhibit #1 Coinsurance Worksheet

63. Insurance Community University www.InsuranceCommunityUniversity.com 63 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

64. Insurance Community University www.InsuranceCommunityUniversity.com Course Objective #4 Setting Limits for the Work Sheet

65. Insurance Community University www.InsuranceCommunityUniversity.com Polling Question #10 65

66. Insurance Community University www.InsuranceCommunityUniversity.com 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.

67. Insurance Community University www.InsuranceCommunityUniversity.com 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.

68. Insurance Community University www.InsuranceCommunityUniversity.com Cover Page of the Worksheet Declares key issues prior to completion of the sheet Exhibit #2

69. Insurance Community University www.InsuranceCommunityUniversity.com 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

70. Insurance Community University www.InsuranceCommunityUniversity.com Course Objective #5 Projection Setting the REAL Limit

71. Insurance Community University www.InsuranceCommunityUniversity.com Several Issues to Consider Twelve Months of the Policy Period Definition of Period Of Indemnity—it will cut you short Physical Restoration vs Financial Restoration Upgrades and Ordinances

72. Insurance Community University www.InsuranceCommunityUniversity.com 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 72

73. Insurance Community University www.InsuranceCommunityUniversity.com Period of Indemnity Defined Must extend the indemnity period with the Extended Period of Indemnity Policy expiration will not limit period Some forms have a 12 month “restoration period/indemnity”. Some companies will extend this restoration/indemnity 73

74. Insurance Community University www.InsuranceCommunityUniversity.com 74 Extended Business Income Extends the time that a business income loss will be paid after actually repaired, rebuilt or replaced, and "operations" are resumed. Ends when insured restores "operations" to previous conditions or 30 days after. Not additional insurance

75. Insurance Community University www.InsuranceCommunityUniversity.com Extended Business Income Automatically provided for 30 days in the ISO forms Number "30" replaced by number shown in Declarations. There are several options to choose from as extensions from 60, 90, 120, 150, 180, 270, 360 up to 730 days past the point of physical restoration. 75

76. Insurance Community University www.InsuranceCommunityUniversity.com Period of Indemnity Defined Period does not include extra time required due to building laws or pollution clean-up – Ordinance or Law—Increased Period of Restoration 76

77. Insurance Community University www.InsuranceCommunityUniversity.com Loss Payment Physical Restoration Complete—Period of Indemnity Ends Extended Business Income 30 automatic (60-730 Extension ) No Extension Available for Extra Expense Extra Expense ends at physical restoration Loss Occurs (EE) No Waiting Period Period of Restoration Begins Limits on Loss Payment Ends lesser of relocation or repair Loss Occurs (BI) BI Deductible 72 hours Reduce or Remove BI Period of Restoration Begins BI Period Ends at Physical Restoration + 30 days 77

78. Insurance Community University www.InsuranceCommunityUniversity.com 78 Factors To Consider For Limit In arriving at an adequate amount of insurance there are several steps to the “projection” process:

79. Insurance Community University www.InsuranceCommunityUniversity.com 79 Factors To Consider For Limit 1.**Utilizing historical information from the insured’s prior financial statement project into the 12 month policy period 2.**Amount necessary to comply with the coinsurance clause. 3.Project beyond the 12 month policy period if the insured’s physical loss, “like, kind and quality”, could last more than 12 months. Project maximum possible length of shutdown

80. Insurance Community University www.InsuranceCommunityUniversity.com 80 Factors To Consider For Limit 4.Project beyond the “like, kind and quality” physical restoration period into additional time made necessary to bring a building up to code 5.Project beyond the “physical restoration” period to the period of financial restoration (extended period of indemnity)

81. Insurance Community University www.InsuranceCommunityUniversity.com 81 Factors To Consider For Limit 6.Project into any protracted contract periods 7.Add in Amount of extra expenses needed to maintain operations or to reduce the shutdown.

82. Insurance Community University www.InsuranceCommunityUniversity.com Trending minimum 1 year prior to inception Policy Year Basis for Coinsurance Agreed Value Physical Length Down (Like, Kind, Quality) Loss Settlement Construction Physical Length Down (Ordinance or Law) Policy Year Other Options Financial Length Down

83. Insurance Community University www.InsuranceCommunityUniversity.com Projection Process Begin with the profit and all operating expenses as of the inception based on the previous year’s financial statement. Project the previous twelve month figure (A) by the anticipated growth during the twelve month policy period. Project annual projected figure (B) by anticipated physical length down. A. $_________ X ______ B. $_________ X______ C. $_________

84. Insurance Community University www.InsuranceCommunityUniversity.com Projection Process Increase amount in “C” by any additional time it takes to rebuild/replace to new codes/ordinances over an above like, kind and quality. Increase revised figure for “physical restoration” by the additional time for the insured to “financially” restore their operations. Caution: Review any specialty contracts that may cause a protracted period of indemnity. X_______ D. $__________ X_______ E. $_________

85. Insurance Community University www.InsuranceCommunityUniversity.com 85 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

86. Insurance Community University www.InsuranceCommunityUniversity.com 86 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

87. Insurance Community University www.InsuranceCommunityUniversity.com Determining Probably Maximum Loss

88. Insurance Community University www.InsuranceCommunityUniversity.com 88

89. Insurance Community University www.InsuranceCommunityUniversity.com Determining Probable Maximum Loss In setting limit a key consideration is what is the PML of the risk. In comes into focus is trying to set a realistic limit of insurance—not too much and not too little. Often this assessment is driven by the insured who insists that they do not need the limit that is being suggested because they just would not sustain that severe a loss in terms of time or dollar amount

90. Insurance Community University www.InsuranceCommunityUniversity.com Determining Probable Maximum Loss It gets back to basics of risk management – Risk Assessment – Risk Control – Risk Transfer

91. Insurance Community University www.InsuranceCommunityUniversity.com Determining Probable Maximum Loss A flow chart of the operation is mandatory

92. Insurance Community University www.InsuranceCommunityUniversity.com Determining Probable Maximum Loss Physical Risk Property Peril Catastrophic Financial Risk Business Risk Customers Operational Risk ReputationMarket 92

93. Insurance Community University www.InsuranceCommunityUniversity.com Determining Probable Maximum Loss Spread of Risk How Many Locations Where are they located Spread of Risk Redundancy of Operation Redundancy of Dependencies Spread of Risk Finished Goods Seasonality Alternative to Suppliers 93

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

95. Insurance Community University www.InsuranceCommunityUniversity.com 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 Insight do not modify or revise insurance policy language. The authors of these materials, Insight Insurance Consultants is a division of Insight Consulting and Management Inc. In providing these materials, Insight assumes 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 - 2011 All Rights Reserved Laurie: 714.803.5830 laurie@insurancecommunitycenter.comlaurie@insurancecommunitycenter.com Marjorie: 714.206.9583 Marjorie@insurancecommunitycenter.comMarjorie@insurancecommunitycenter.com www.insurancecommunitycenter.com 95