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By Edward A. Schirick, C.P.C.U., C.I.C., C.R.M.
Camp directors don't spend enough time considering the risks of business
interruption. Inadequate preparation increases the risk of financial loss
and carries with it potentially catastrophic implications for the future
of the business.
Business Interruption insurance is also known as Business Income insurance,
or Time Element insurance. It is written as part of the property insurance
policy, but is a separate coverage part, distinct from the insurance purchased
to protect the value of buildings and contents.
The generally accepted purpose of Business Interruption insurance, or
Loss of Business Income as it is more commonly known today, is to replace
the earnings of your business including certain continuing operating expenses,
just as if no interruption of your business had occurred. In the camp
business, whether you run a day or resident camp, the purpose of this
insurance is to help you stay open no matter what the cost.
Business Interruption Basics
Most of the camp underwriters use the same contract language, the Business
Income (and Extra Expense) Coverage Form. This form has two main features:
1) Loss of Income protection, and 2) Extra Expense insurance.
Loss of Income means 1) "Net income before income taxes that would
have been earned or incurred" and 2) "Continuing normal operating
expenses incurred, including payroll." Business income can include
rental income, too.
The policy pays the actual loss of business income sustained during
a period of restoration (the period when facilities are being rebuilt,
or repaired) when operations are suspended.
Extra Expense means "necessary expenses you incur during the 'period
of restoration' that you would not have incurred if there had been no
direct physical loss or damage to property caused by or resulting from
a Covered Cause of Loss."
The insurance company will pay any Extra Expense to avoid, or reduce
the suspension of business and to continue your operations at your location,
or at a replacement location. If you can't stay in business following
a property loss the insurance company will pay any Extra Expense to repair,
or replace any property, or research, replace, or restore lost information
on damaged valuable papers and records if the expense reduces the amount
of the loss that you would otherwise be claiming under the Loss of Income
coverage.
"Period of Restoration" means that period of time, which begins
either immediately, or within twenty-four, or seventy-two hours (depending
upon how your coverage is set up) following the direct physical loss to
your covered property and ends on the earlier of:
- The date the property should be repaired, or rebuilt with reasonable
speed and similar quality; or
- The date when business is resumed at a new permanent location.
"Period of Restoration" does not include any additional time
to repair or rebuild necessitated by the enforcement of any building code,
or law governing repair, or construction. Coverage can be extended for
this additional period, if any, through an endorsement called Increased
Period of Restoration when the Causes of Loss form has been amended to
include Building Ordinances.
Extended Business Income
If a covered cause of loss forces suspension of your operations, which
results in a loss of income claim, Extended Business Income pays the actual
loss you sustain for a period of time following resumption of your operations.
Typically this period is limited to thirty or sixty days, but coverage
can be extended for up to one year or more. This coverage is designed
to reimburse a business for ongoing loss of income as the business tries
to regain the level of income it had before the loss. This protection
is specific to your business. It does not respond to loss of income attributable
to unfavorable business conditions caused by the impact of a covered cause
of loss in the area where your business is located. An example of this
is the unfavorable business conditions that existed following the eruption
of Mount St. Helens, or in lower Manhattan following the 9/11 disaster.
Direct Damage Required
The underlying principle for Business Income insurance is that there must
be direct damage to property at the premises listed in the insurance policy
for coverage to be activated. There is an exception to this principle
for actions of a civil authority, but it is very limited.
Order of Civil Authorities
The insurance company will pay you for actual loss of Business Income
and necessary Extra Expense when a civil authority prohibits access to
your insured premises due to direct physical loss or damage to property
nearby. The damage to the other property must be from a cause of loss
included in your policy.
The Business Income protection begins seventy-two hours after the order
and only lasts for three consecutive weeks. Extra Expense insurance begins
immediately and lasts for three consecutive weeks, or when your Business
Income coverage ends.
Determining the Limit of Insurance
Establishing a limit of insurance for Business Interruption/Loss of Income
insurance requires completion of a worksheet. Your insurance broker can
provide you with a worksheet. The other document you'll need will be last
year's income and expenses and this year's budget. Complete the worksheet
as best you can. Enlist the help of your accountant if necessary. Enter
the information in each of the categories on the worksheet, and send it
back to your insurance broker for a quote.
Coinsurance
Completion of the Business Income Worksheet permits the insurance company
to waive the coinsurance clause if they are so inclined. This is advantageous.
Otherwise, if coinsurance applies, you might not be fully reimbursed for
your loss if the limit of insurance does not equal the percentage of coinsurance
shown in the policy.
Sample Triggers for Business Income Insurance
Now that we have identified some of the basics of Business Income and
Extra Expense insurance, let's look at some examples and explore how the
insurance responds to them.
Your Dining Hall Burns to the Ground
You are awakened by noise and the smell of smoke. You look out your window
to see your dining hall with flames breaking through the roof. It is a
total loss.
This is the classic case. Business Income and Extra Expense insurance
would be triggered by this event, because fire is a covered cause of loss,
which resulted in direct damage to the property.
The insurance company should respond pretty swiftly to this scenario.
Given the short time within which income is earned the claim department
will want to keep you open if at all possible. This is where the Extra
Expense portion of the policy responds by paying for a large tent, a field
kitchen, paper plates, plastic utensils, tables and chairs, etc., so you
can continue to feed everyone.
If some parents withdraw their children, any loss of income would be
covered.
Order of a Civil Authority
A forest fire approaches your area. The local authorities order an evacuation.
Under this scenario, Loss of Income and Extra Expense insurance will
respond, but only for three consecutive weeks. What you do with everyone
in the mean time is another and perhaps bigger issue.
Suppose the situation involved an earthquake, would the outcome be different?
Under these circumstances, there would be no coverage for Business Interruption
unless your property insurance policy included insurance for earthquake
as a covered cause of loss.
What if you evacuated before the local authorities required it? Any
loss you incurred in this situation might be questionable. A good case
could be made for coverage however, but some discussion might be needed.
A Bomb Threat
You receive a phone call that a bomb has been planted on the camp premises.
You call the police and decide to evacuate the property until the police
bomb squad has a chance to search all the buildings and premises. This
situation is picked up by the local media and almost immediately some
parents contact you and decide to take their children out of camp.
How does your Business Income and Extra Expense insurance respond? A
bomb threat won't trigger your insurance. Most likely there will be no
coverage for any expense you incurred in the emergency evacuation or for
any loss of income unless there is direct damage to your premises.
A bomb explodes on your premises, but fortunately no one is injured.
There is damage to a building. How does the insurance respond? Normally,
an explosion would be a covered cause of loss. But, in this example, it
is possible this act could be considered an act of terrorism. If terrorism
is a covered cause of loss in your property insurance then it is likely
coverage would be afforded. If terrorism is excluded coverage for the
Loss of Income, Extra Expense might not apply.
Different Exposures/Different Needs
Do day camps and resident camps have different Loss of Income and Extra
Expense insurance needs? Definitely! While day and resident camps are
similar in many respects, there are different exposures to loss and different
responses necessary.
For example, day camps may be able to operate at temporary premises
much easier than a resident camp. Differences such as this should be considered
when doing risk management planning and when establishing the limits of
insurance for Loss of Income and Extra Expense coverage.
Remember, insurance does not respond to all of the risks of business
interruption. Don't limit your thinking to events that just cause physical
damage to your property. Consider the entire range of risks and include
methods for reducing, transferring, or avoiding them in your risk management
planning.
Originally published in the 2005 Spring issue
of The CampLine.
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