EDITOR'S NOTE

Air travel. Telephone and video conferencing. Overnight delivery. Fax machines. Email. The Internet. Mobile communications.

Today, there are few things companies whose operations encompass multiple locations won't do to stay connected. Much attention is paid to items that support and underscore the affiliation and interdependence of each site on the other—and ultimately on the whole.

Unfortunately, that same priority is not always given the firm's insurance program, especially when it comes to understanding and addressing the coverage that recognizes that interdependency—and how a loss at one facility can have a dramatic, unforeseen impact on the overall income of the business, even though each site seems to be properly insured.

It is a well-known fact that a substantial number of businesses never fully recover after suffering a major property loss and interruption of their business operations. While there may be a reasonable recovery of the loss of physical property, there is all too frequently insufficient, if any, “time element” insurance in place to protect against the interruption to operations. So while many expenses continue during the interruption, there is an inadequate, if any, insurance in place to pay these ongoing expenses and the lost profits when operations are suspended.

“Time element” is a term used to describe the group of coverages that, rather than covering direct physical damage to property, apply to loss of income, loss of profits, increased costs to sustain operations, loss of rental income, and similar losses, when premises are damaged by an insured cause of loss. Our concern within this article is with “business income” (formerly known as “business interruption” and before that as

“use and occupancy”) and “extra expense” insurance.

It is a fairly simple matter to arrange appropriate time element coverage for a typical small or medium-sized business, normally with one location—a store or factory, an office or perhaps a warehouse. As we shall see in a moment, however, that procedure becomes a bit more complex when comparable protection must be arranged for a firm operating multiple sites. But before we get to that, let's look at the fundamental valuation and coverage issues that should be taken into consideration in establishing a sound program at any level.

Coinsurance vs. agreed value
A frequent disappointment experienced by insureds following a business income loss is the imposition of a coinsurance penalty. The coinsurance clause requires the insured to carry an amount of business income insurance equivalent to a stipulated percentage (most commonly 50 percent – 80 percent with ordinary payroll excluded)