Property and Casualty Insurance · Property Insurance · 8 min read
Business Income and Extra Expense
- Define business income, extra expense, and the period of restoration under standard commercial property insurance forms.
- Explain how coverage extensions and options, including Civil Authority, Extended Business Income, and dependent property coverages, respond to business interruptions.
- Compare the rules for coinsurance in business income coverage with alternative options that suspend coinsurance requirements.
Understanding Business Income Coverage
Direct physical damage to a building or personal property can shut a company down entirely. Building coverage can pay to repair covered damage to walls, and business personal property coverage can pay for covered inventory loss, but neither by itself pays for lost business income. Business income coverage protects against lost income caused by covered direct physical loss of or damage to property, including qualifying damage away from your premises when an extension applies. A direct physical loss from a covered cause of loss must occur to trigger business income coverage.
Under standard Insurance Services Office (ISO) forms, business income is defined as net income plus continuing normal operating expenses, including payroll. Net income means the net profit or loss before income taxes that would have been earned or incurred if the loss had not occurred. Continuing operating expenses are normal business costs that continue during a suspension, such as insurance premiums, mortgage interest, and salaries that the business keeps paying. Costs that stop during a shutdown, such as electricity for machinery that is turned off, are not included as continuing operating expenses in a business income claim.
To apply this coverage correctly, you must understand the policy terms for business activity. Under standard ISO business income forms, operations include your business activities at the premises listed in the declarations and, when rental value coverage applies, the tenantability of those premises. A suspension means a slowdown or complete cessation of your business activities; when rental value coverage applies, it also includes the premises becoming partly or wholly untenantable. Insurers may offer business income coverage through standard ISO forms or through their own proprietary forms and endorsements.
Common mistakes
- Assuming the period of restoration ends when the policy expires. It only ends when the property should be repaired, rebuilt, or replaced with reasonable speed and similar quality, or when business resumes at a new permanent location, even if the policy expires during repairs.
- Applying the 72-hour time deductible to extra expense coverage. The 72-hour waiting period applies to business income coverage, but extra expense coverage begins immediately after direct physical loss.
- Believing business income coinsurance is calculated using historical income from the prior policy term. Business income coinsurance applies to the projected net income and operating expenses for the 12 months following the policy's inception or last anniversary date, whichever is later.
- Confusing contributing and recipient locations. Contributing locations supply raw materials, goods, or services to the insured, whereas recipient locations buy or accept the insured's finished goods or services.
Key points
- Business income coverage reimburses net profit or loss before taxes plus continuing operating expenses, including payroll, following direct physical loss from a covered cause of loss.
- Under standard ISO forms, the period of restoration for business income begins 72 hours after direct physical damage, functioning as a time deductible.
- Extra expense coverage pays necessary additional costs, such as temporary rent or equipment leasing, to minimize or avoid suspension, and it begins immediately after loss without a waiting period.
- Standalone extra expense forms serve entities like banks and hospitals that must stay open, and they may use payment schedules such as 40 percent (30 days or less), 80 percent (31 to 60 days), and 100 percent (over 60 days).
- Civil Authority coverage responds when access to premises within one mile of covered off-premises damage is prohibited by government order, providing up to four consecutive weeks of income coverage after a 72-hour delay.
- Coinsurance can be suspended using options such as Agreed Value, Maximum Period of Indemnity (lesser of policy limit or 120 days), or Monthly Limit of Indemnity (fractions such as one-third, one-fourth, or one-sixth).
- Dependent properties coverage protects against interruption caused by covered physical damage to contributing, recipient, manufacturing, or leader locations.
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