Whenever a coinsurance or agreed value clause is used on business income insurance (generally a requirement with blanket coverage), determining the correct insurable business income values is critical. Moreover, there are some significant differences between general accounting practices and terminology, and those applying to business income valuations, especially for manufacturing firms.
With either coinsurance or agreed value policies, a statement of business income values must be filed periodically (annually with agreed value). This form must be carefully completed. With coinsurance policies, underreporting of values can lead to severe underinsuring. The result — a coinsurance penalty on the business income loss if enough insurance is not carried — will be even greater if business income values increase after the effective or anniversary date of the policy and before a loss occurs.
With the agreed value policy the statement of values becomes a part of the business income policy. This statement sets forth the business income values to be insured, which are agreed to in advance by both the insured and insurer, thereby eliminating the coinsurance clause. (Note that a new statement of values must be filed annually by the required date in the agreed value clause. If the statement is late or not refiled, the coinsurance clause will apply until a new statement is filed, extending the agreed value clause for another year.)
For manufacturing firms, business income is based not on annual sales but on annual “sales value of production;” a concept not commonly used in...