Business Income Insurance



But any other loss of sales due to the fire must be recovered under the business income insurance, and any increase in expenses to maintain operations or hasten return to operations is covered by extra expense insurance, or, to the extent only that the business income loss is reduced by such expenses, by the additional expense feature of the business income insurance.

This is in contrast to the manufacturer’s selling price clause. Here the business income insurance applies to prevented manufacture by the insured rather than loss of sales. So the manufacturer’s selling price clause applies to finished goods manufactured by the insured but not yet sold or delivered, allowing recovery of the selling price (less unincurred expenses and customary discounts) of the finished goods, because this profit is not covered by the business income insurance.

Question: How does one adjust a business income claim when the insured business is losing money?


The approach to the claim settlement is the same as with a firm operating at a profit. However, it is necessary to ascertain what the extent of the loss of income for the period of interruption would have been had no interruption occurred, deduct this amount from the continuing expenses during the period of interruption, and pay the difference.

Historically, the business interruption policy language was not clear in this regard, giving rise to the argument that the income loss could be ignored and the full amount of continuing expense for the period of the interruption could be paid. This was never the intent, and the true intent was made clear on the newer business income forms.

Question: What about an otherwise profitable firm that has a new subsidiary faced with substantial start up or research and development costs, so that the combined result is an operating loss for the firm?


If the subsidiary is included with the parent firm, the same approach would apply as in the answer given to the last question. However, an alternative approach could be used.

Exclude the subsidiary from the parent’s business income insurance, and write a separate valued business income policy for the subsidiary. The valued amount of insurance can be based on the ongoing expenses of the subsidiary —plus some estimate of the future loss of income that an interruption at the subsidiary would produce— using a worst loss scenario.

Also, if the loss of valuable research and development (R & D) records would require replication of R & D work already performed, some amount could be added for this loss, or this loss could be covered using valuable papers insurance.

Question: How can a business protect itself when a major supplier is shut down by fire or other peril, so that the business cannot obtain needed materials to operate? What about the shutdown of a major customer?


Neither of these cases is covered by the business’s own business income or extra expense insurance, unless the supplier or customer is an affiliate or subsidiary of that business. (In that case, blanket business income coverage can be provided over both facilities.)

If this is not the case, either of these exposures can be covered by business income from dependent properties coverage (formerly known as contingent business interruption insurance). The Insurance Services Office (ISO) offers two endorsements for this coverage—Broad Form CP 15 08 and Limited Form CP 15 09 —either of which can be added to the firm’s business income form.

The Broad Form extends the firm’s own business income insurance to include one or more of the supplier’s or customer’s properties, with the same limits of insurance as at the firm’s location.

The Limited Form is used, whether the firm carries its own business income insurance or not, to cover with separate limits of insurance. It would also be used when a different insurer is used for this insurance than for the firm’s own business income or extra expense coverage.

There are four separate exposures that can be covered: