CPCU 551: Chapter 9

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hborgert
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18266
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CPCU 551: Chapter 9
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2010-05-08 21:54:45
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Business Income Extra Expense Insurance
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CPCU 551: Chapter 9
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  1. What key conditions must be fulfilled for business income coverage to apply during a suspension of operations?
    • - Actual loss of buisness income you sustain
    • - Due to the necessary suspension of operations
    • - During the period of restoration
    • - Caused by direct physical loss of or damage to property at the described premises
    • - Loss or damage caused by a covered cause of loss
  2. Under an actual loss sustained form of business income coverage, is it necessary for the insured to have been making a net profit to be able to colect for loss of business income? Explain.
    No. A business operating at a net loss can sustain a business income loss if a suspension of operations increases the net loss beyond what had been expected.
  3. When does the period of restoration begin and end?
    The period of restoration begins sevety-two ours afer the physical loss occurs. (for purposes of extra expense coverage, it begins immediately after the loss occurs.) The period of restorarion ends when the property should, with reasonable speed and similar quality, be repaired or replaced; or when business is resumed at a new permanent location--whichever occurs first.
  4. Does the expiration of the policy affect coverage for the period of restoration?
    No. As long as the physical loss occurs during the policy period, the Business Income (and Extra Expense) Coverage Form will cover for the duration of the period of restoration, even if the policy expires before the period of restoration ends.
  5. What property must be physically damaged for business income coverage to apply?
    The damaged property can be any real or personal property at the described premises, or personal property in the open or in a vehicle within 100 100 feet of the described premises. the property can be owned by the insured or by others. It need not be property that is covered under the insured's commercial property insurance.
  6. What are five types of extra expense that an interrupted retail business might incur to continue its operations?
    They might incur rent for a temporary store location, moving costs, costs of equipping the temporary location, payemnt fo overtime wages to expedite building repairs, and payment of above-market prices to obtain replacement merchandise promptly.
  7. The causes of loss form contain some exclusions that apply only to the Business Income (with extra Expense) Coverage Form. Summarize these exclusions.
    • 1) Damage to finished stock and the time required to reproduce finished stock.
    • 2) Increase in loss resulting from delay in rebuilding or repairing because of interference by strikers at the location of the rebuilding or repairing.
    • 3) Loss resulting from the suspension, lapse, or cancellation of any license, lease or contract.
    • 4) Los resulting from any damage to radio or televiosion antennas, including satelite dishes.
    • 5) Any other consequential loss.
  8. What four criteria must be met for Civil Authority additonal coverage to apply?
    • 1) A covered cause of loss must have caused the damage to proerty other than that at the described premises.
    • 2) Access to the area immediately surrounding the damaged property must be prohibited by action of civil authority as a result of the damage.
    • 3)The described premises must be within the area just described and not more than one mile from the damaged property.
    • 4) The action of the civil authority must have been taken either in response to dangerous physical conditions resulting from the damage or continuation of the covered cause of los that caused the damage; or to enable a civil authority to have unimpeded access to the damaged property.
  9. How does regular business income coverage differ from the Extended Business Income (EBI) additional coverage with regard to when the coverage begins and ends?
    The basic business income coverage ends when the period of restoration ends. EBI coverage extends for thirty days the period for which the insured will be reimbursed for loss of business income.
  10. How does the Alterations and New Buildings additional coverage differ from the Newly Acquired Locations coverage extension with regard to each of these:
    a. Location(s) at which loss is covered.
    b. Additonal amounts of insurance.
    • a. Alterations and New Buildings applies only at the described premises. Newly Acquired Locations applies at new locations in addition to the described premises.
    • b. Alterations and New Buildings does not provide additional insurance beyond the regular limit. Newly Acquired locations provides up to an additional $100,000 at each new location.
  11. How does the Business Income (and Extra Expense) Coverage Form differ from the Building and Personal Property Coverage Form (BPP) with regard to duties in the event of loss?
    The Business Income (and Extra Expense) Coverage Form and the BPP require the same duties after loss except that the Business Income (and Extra Expense) Coverage Form additionally requires the insured to resume all or part of its operations as quickly as possible (if the insured intends to resume operations).
  12. Why might the insured's compliance with the Business Income (and Extra Expense) Coverage Form Coinsurance condition result in an amount of insurance that is greater than the insured's actual loss exposure?
    The coinsurance basis used in determining compliance with the coinsurance clause includes net income and all operating expenses (other than those that are specifically excluded). Because these operating expenses can include expenses that would not continue during a business interruption, the coinsurance basis can be greater than the insured's actual loss exposure.
  13. Under the Maximum Period of Indemnity option, what limitations are placed on recovery?
    The maximum period of indemnity option limits recovery to loss sustained up to 120 days following the physical loss, not to exceed the limit of insurance.
  14. In a Business Income (and Extra Expense) Coverage Form covering on a Monthly Limit of Indemnity basis, what is the effect of the fraction 1/4 being shown in the declarations?
    A fraction of 1/4 means that the insurer will pay no more than one-fourth of the limit of insurance for each period of thirty consecutive days.
  15. How is the amount of insurance determined when the Buisness Income (and Extra Expense) Coverage Form Agreed Value optional coverage is chosen?
    The insured must submit a completed and signed business income worksheet. The coinsurance basis calculated in the worksheet is multiplied by the applicable coinsurance percentage to arrive at the limit needed to satisfy the agreed value requirement.
  16. How does the Business Income (without Extra Expense) Coverage Form differ from the Business income (and Extra Expense) Coverage Form?
    The Business Income (and Extra Expense) Coverage Form covers extra expenses regardless of whether they reduce the loss of business income, where as the Business Income (without Extra Expense) Coverage Form covers extra expenses only to the extent taht they reduce the business income loss.
  17. How does the Expenses to Reduce Loss additional coverage in the business Income (Without Extra Expense) Coverage Form differ from the extra expense coverage included in the Buiness Income (and Extra Expense) Coverage Form?
    Both extra expense coverage and the additional coverage for expenses to reduce loss cover the same types of expenses. The main difference is that the additional coverage for expenses to reduce loss covers these expenses only to the etent that they reduce the business income loss, whereas extra expense coverage covers most of these expenses regardless of whether they reduce the business income loss.
  18. What are the two advantages of coverage under the Business Income (and Extra Expense) Coverage form (as opposed to coverage under the Extra Expense Coverage Form)?
    • Two advantages of coverage under the Business Income (and Extra Expense) Coverage Form are that:
    • 1) it provides both the needed extra expense coverage and business income coverage, and
    • 2) it does not limit the amount of coverage for extra expense to a certain percentage per month of the amount of insurance.
  19. How does the Limits on Loss Payments condition in the Extra Expense Coverage Form encourage insurance to value?
    It limits recovery for certain time periods to stipulated percentages of the overall limit of insurance and therefore encourages insurance to value.
  20. What type of organization might benefit from blanket business income coverage?
    An organization with multiple interdependent locations might benefit from the blanket business income coverage. Such an organization could, because of an interruption at one of its locations, lose far more business income than the single-location limit that might otherwise apply to that location.
  21. How does limiting and/or excluding ordinary payroll coverage benefit an insured regarding the coinsurance requirement?
    It allows the insured to satisfy the coinsurance requirement witha smaller amount of insurance.
  22. What three variable should be considered before limiting or excluding ordinary payroll during a period of extended business interruption?
    • These three variable must be considered before limiting or excluding ordinary payroll during a period of extended business interruption:
    • - the labor market might be tight and hiring new employees might be difficult
    • - training new employees might be expensive
    • - union or other contracts might require salary continuation
  23. Whay might an organization prefer to use the Discretionary Payroll Expense endorsement instead of the ordinary payroll coverage options?
    To keep key employees on the payroll during business interruptions even if the specified employees are not necessary to resume operations.
  24. What types of business are eligible for the Power, Heat and Refrigeration endorsement?
    The Power, Heat, and Refrigeration Deduction endorsement is avaiable only to manufacturing and mining firms.
  25. How might the Business Income Premium Adjustment endorsement benenfit the insured?
    The premium adjustment endorsement can benefit the insured by basing the earned premium for the policy period on the actual exposure as reported by the insured. Thus, the insured will pay for no more insurance than is actually needed.
  26. What triggers coverage under the business income from dependent properties endorsement?
    Coverage under the dependent properties endorsments is trighered by physical loss cause by a covered peril to the described property (not the insured's property), resulting in a shutdown or reduction of the insured's operations.
  27. Explain how a school's or college's business income loss exposure differs from a typical merchandising or manufacturing organization?
    If a school suffers a physical loss, it may have to cancel classes for an entire semester or academic year, even though the damage can be repaired in a shorter period. Thus, the school loses an entire semester's or year's income, whereas most other insured's could resume operations after repairing their property.
  28. What triggers coverge under the Utility Services - Time Elemnt endorsement?
    Coverage under the utility services endorsement is triggered by an interruption of utility service resulting from physical loss by a covered peril to a designated type of utility service property located outside the building.
  29. How can the operation of building laws increase the length of a business interruption?
    If a building law reuires certain enhancements in the reconstructed building, making these enhancements can increase the length of time requiredfor completing the building.
  30. How does a valued business income policy limit coverage for total shutdowns and partial interruptions?
    For total shutdowns, a valued business income policy usually pays a specified amount for each day the insured's business is interrupted. Partial interruptions are covered in proportion to the percentage that the business is reduced. If, for example, the insured sufferes a 50 percent reduction in production, it will collect 50 percent of the daily limit for each day that it suffers 50 percent reduction.
  31. The offices of Company A are located in a building leased from Company Z. Company A is the named insured under a Business Income (and Extra Expense) Coverage Form. The building is damaged by a covered peril. Explain how the following facors would afect the insured's recovery.
    A. Company Z, the building owner, took an extra ten days trying unsuccessfully to bring down the lowest of four bidders to a still lower price for repairs.
    A. Company Z's tactics were probably unreasonable under the circumstances. However, Company Z is not the insured, and so its unreasonable delay would not be held against Company A. If Company Z were the insured, the insureer would be justified in not covering additioanl business income loss resulting from the unreasonable delay.
  32. The offices of Company A are located in a building leased from Company Z. Company A is the named insured under a Business Income (and Extra
    Expense) Coverage Form. The building is damaged by a covered peril. Explain how the following facors would afect the insured's recovery.
    B. A truckers' strike delayed for twenty days delivery of a necessary steel beam from the manufacturer to the repair site.
    B. As long as the striking truckers did not picket or otherwise interfere at the construction site, the additional loss caused by the strike would not be excluded.
  33. The offices of Company A are located in a building leased from Company Z. Company A is the named insured under a Business Income (and Extra
    Expense) Coverage Form. The building is damaged by a covered peril. Explain how the following facors would afect the insured's recovery.
    C. Workers at the repair site went on strike and picketed the repair site for fifteen days until the contractor renewed its contractor with its employees under terms demanded by the employees' union.
    C. Because the picketing occured at the construction site, any delay resulting from the strike would not be covered.
  34. The offices of Company A are located in a building leased from Company Z. Company A is the named insured under a Business Income (and Extra
    Expense) Coverage Form. The building is damaged by a covered peril. Explain how the following facors would afect the insured's recovery.
    D. Company A, the tenant, neglected to order necessary supplies in time for arrival when repairs were completed; they arrived three weeks later.
    D. The insurer would probably be justified in not paying for additional business income loss resulting from Company A's lack of "reasonable speed" in ordering new supplies.
  35. City Parking Garage (CPG) is insured under a Business Income (and Extra Expense) Coverage Form with a limit of $1 million and 70% coinsurance. Ten months into the policy period, CPG's garage is damaged by earthquake, a covered cause of loss under CPG's policy. Repair of the garage will take four months, during which time CPG will sustain a business income loss of $680,000. CPG's net income and operating expenses for the twelve months following policy inception (minus those expenses that can be excluded for coinsurance purposes) would have been $2 million.
    a. Does the amount of insurance carried by CPG meet coinsurance requirements?
    • $1,000,000 = $1,000,000
    • 0.70 x $2,000,000 $1,400,000
    • CPG does not meet coinsurance requirements, becaue the amount of insurance caried is less than the amount required.
  36. City Parking Garage (CPG) is insured under a Business Income (and Extra Expense) Coverage Form with a limit of $1 million and 70% coinsurance. Ten months into the policy period, CPG's garage is damaged by earthquake, a covered cause of loss under CPG's policy. Repair of the garage will take four months, during which time CPG will sustain a business income loss of $680,000. CPG's net income and operating
    expenses for the twelve months following policy inception (minus those expenses that can be excluded for coinsurance purposes) would have been $2 million.
    b. How much will CPG be able to recover under its policy for the loss described?
    b. ($1,000,000/$1,400,000) x $680,000 = $485,714
  37. City Parking Garage (CPG) is insured under a Business Income (and Extra Expense) Coverage Form with a limit of $1 million and 70% coinsurance. Ten months into the policy period, CPG's garage is damaged by earthquake, a covered cause of loss under CPG's policy. Repair of the garage will take four months, during which time CPG will sustain a business income loss of $680,000. CPG's net income and operating expenses for the twelve months following policy inception (minus those expenses that can be excluded for coinsurance purposes) would have been $2 million.
    c. Assuming that rebuilding the garage follwoing a total loss would take 12 months, recommend an amount of business income and extra expense insurance and a coinsurance percentage that would meet CPG's needs better than its current policy.
    c. $2,000,000 limit with 100 percent coinsurance would cover the full exposure for aone-year period of restoration and would provide a rate lower that that for a lower coinsurance percentage. Other answers could be correct.
  38. Judy's store is insured under a Business Income (and Extra Expense) Coverage Form with the Maximum Period of Indemnity option and a limit of $100,000. Ignoring any dollar or time deductibles, how much would Judy's policy pay for each of the following business income losses? (All were caused by a covered peril.)
    a. How much would Judy's policy pay if Judy incurred a $60,000 loss during a sixty-day shutdown?
    a. Judy's policy would pay $60,000
  39. Judy's store is insured under a Business Income (and Extra Expense) Coverage Form with the Maximum Period of Indemnity option and a limit of $100,000. Ignoring any dollar or time deductibles, how much would Judy's policy pay for each of the following business income losses? (All were caused by a covered peril.)
    b. How much would Judy's policy pay if Judy incurred a $105,000 loss during a 100-day shutdown?
    b. Judy's policy would pay $100,000
  40. Judy's store is insured under a Business Income (and Extra Expense) Coverage Form with the Maximum Period of Indemnity option and a limit of $100,000. Ignoring any dollar or time deductibles, how much would Judy's policy pay for each of the following business income losses? (All were caused by a covered peril.)
    c. If Judy incurred a $110,000 loss during a 140-dat shutdown, what additional information would be needed to determine the amount of loss payable under her policy?
    c. How much loss had been sustained as of day 120?
  41. Each of the following businesses wants to insure its business income exposure under a Business Income (and Extra Expense) Coverage Form with the Monthly Limit of Indemnity option. For each set of facts below, recommend an appropriate fraction and limit of insurance that would be used in connection with the Monthly Limit of Indemnity option.
    a. Business A's highest month of net profit and continuing expenses is $12,000. The maximum duration of a shutdown is estimated to be four months.
    a. Business A: 1/4; $48,000
  42. Each of the following businesses wants to insure its business income exposure under a Business Income (and Extra Expense) Coverage Form with the Monthly Limit of Indemnity option. For each set of facts below, recommend an appropriate fraction and limit of insurance that would be used in connection with the Monthly Limit of Indemnity option.
    b. Business B's highest month of net profit and continuing expenses is $20,000, The maximum durantion of a shutdown is estimated to be three months.
    b. Business B: 1/3; $60,000
  43. Each of the following businesses wants to insure its business income exposure under a Business Income (and Extra Expense) Coverage Form with the Monthly Limit of Indemnity option. For each set of facts below, recommend an appropriate fraction and limit of insurance that would be used in connection with the Monthly Limit of Indemnity option.
    c. Business C's highest month of net profit and continuing expenses is $50,000. The maximum duration of a shutdown is estimated to be six months.
    c. Business C: 1/6; $300,000
  44. For each of these situations, identify one or more endorsements or coverage options designed specifically for tailoring the business income and extra expense insurance to meet the insured's needs. Explain how each endorsement or coverage option identified would benefit the insured.
    a. The insured is a private boarding school.
    a. Business Income Changes - Educational Institutions endorsement. This endorsement recognizes a school's sources of income and provides a specialized version of extended business income coverage to address a school's critical time periods.
  45. For each of these situations, identify one or more endorsements or coverage options designed specifically for tailoring the business income and extra expense insurance to meet the insured's needs. Explain how each endorsement or coverage option identified would benefit the insured.
    b. The insured is heavily dependent on one supplier and on one buyer.
    b. Business Income From Dependent Properties endorsement. This endorsement covers the insured against business income losses resulting from damage to property at the supplier's or buyer's premises.
  46. For each of these situations, identify one or more endorsements or coverage options designed specifically for tailoring the business income and extra expense insurance to meet the insured's needs. Explain how each endorsement or coverage option identified would benefit the insured.
    c. The insured has several locations that are highly interdependent.
    c. Blanket insurance. This covreage option allows full blanket limit to apply at any or all premises.
  47. For each of these situations, identify one or more endorsements or coverage options designed specifically for tailoring the business income and extra expense insurance to meet the insured's needs. Explain how each endorsement or coverage option identified would benefit the insured.
    d. The insured is a small business without the ability to forecast future revenues and expenses accurately.
    d. Maximum Period of Indemnity or Monthly Limit of Indemnity. They eliminate coinsurance, which would be difficult for the insured to comply with if it cannot forecast revenues and expenses accurately.
  48. For each of these situations, identify one or more endorsements or coverage options designed specifically for tailoring the business income and extra expense insurance to meet the insured's needs. Explain how each endorsement or coverage option identified would benefit the insured.
    e. The insured is a manufacturer whose operations consume an extraordinary amount of electricity.
    e. Power, Heat, and Refrigeration Deduction endorsement. By deducting these expenses, the insured can purchase a lower amount of insurance and still comply with the coinsurance requirement.
  49. For each of these situations, identify one or more endorsements or coverage options designed specifically for tailoring the business income and extra expense insurance to meet the insured's needs. Explain how each endorsement or coverage option identified would benefit the insured.
    f. The insured has a large workforce of unskilled laborers.
    f. Ordinary Payroll Limitation or Exclusion endorsement. By limiting or excluding ordinary payroll, the insured can purchase a lower amount of insurance and still comply with the coinsurance requirement.
  50. How much would the insured recover in each of these situations?
    A. Coverage: Businsess income coverage with 120-day Maximum Period of Indemnity option, $100,000 limit.
    Month 1 -- $ 40,000
    Month 2 -- $ 30,000
    Month 3 -- $ 20,000
    Month 4 -- $ 10,000
    Month 5 -- back in business
    • A.
    • Month 1 -- $ 40,000
    • Month 2 -- $ 30,000
    • Month 3 -- $ 20,000
    • Month 4 -- $ 10,000
    • Total -- $100,000
  51. How much would the insured recover in each of this situation?
    Coverage: Business income coverage with Monthly Limit of Indemnity option; 1/6 is the fraction shown in the declarations, $120,000 limit.
    Loss:
    Month 1 -- $40,000
    Month 2 -- $30,000
    Month 3 -- $20,000
    Month 4 -- $14,000
    Month 5 -- back in business
    • 1/6 of $120,000 = $20,000
    • Month 1 -- $20,000
    • Month 2 -- $20,000
    • Month 3 -- $20,000
    • Month 4 -- $14,000
    • Total -- $74,000

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