Business Interruption Risks

by Edward A. Schirick, C.P.C.U., C.I.C., C.R.M.

Camp directors don't spend enough time considering the risks of business interruption. Inadequate preparation increases the risk of financial loss and carries with it potentially catastrophic implications for the future of the business.

Business Interruption insurance is also known as Business Income insurance, or Time Element insurance. It is written as part of the property insurance policy, but is a separate coverage part, distinct from the insurance purchased to protect the value of buildings and contents.

The generally accepted purpose of Business Interruption insurance, or Loss of Business Income as it is more commonly known today, is to replace the earnings of your business including certain continuing operating expenses, just as if no interruption of your business had occurred. In the camp business, whether you run a day or resident camp, the purpose of this insurance is to help you stay open no matter what the cost.

Business Interruption Basics

Most of the camp underwriters use the same contract language, the Business Income (and Extra Expense) Coverage Form. This form has two main features: 1) Loss of Income protection, and 2) Extra Expense insurance.

Loss of Income means 1) "Net income before income taxes that would have been earned or incurred" and 2) "Continuing normal operating expenses incurred, including payroll." Business income can include rental income, too.

The policy pays the actual loss of business income sustained during a period of restoration (the period when facilities are being rebuilt, or repaired) when operations are suspended.

Extra Expense means "necessary expenses you incur during the 'period of restoration' that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss."

The insurance company will pay any Extra Expense to avoid, or reduce the suspension of business and to continue your operations at your location, or at a replacement location. If you can't stay in business following a property loss the insurance company will pay any Extra Expense to repair, or replace any property, or research, replace, or restore lost information on damaged valuable papers and records if the expense reduces the amount of the loss that you would otherwise be claiming under the Loss of Income coverage.

"Period of Restoration" means that period of time, which begins either immediately, or within twenty-four, or seventy-two hours (depending upon how your coverage is set up) following the direct physical loss to your covered property and ends on the earlier of:

  1. The date the property should be repaired, or rebuilt with reasonable speed and similar quality; or
  2. The date when business is resumed at a new permanent location.

"Period of Restoration" does not include any additional time to repair or rebuild necessitated by the enforcement of any building code, or law governing repair, or construction. Coverage can be extended for this additional period, if any, through an endorsement called Increased Period of Restoration when the Causes of Loss form has been amended to include Building Ordinances.

Extended Business Income
If a covered cause of loss forces suspension of your operations, which results in a loss of income claim, Extended Business Income pays the actual loss you sustain for a period of time following resumption of your operations.

Typically this period is limited to thirty or sixty days, but coverage can be extended for up to one year or more. This coverage is designed to reimburse a business for ongoing loss of income as the business tries to regain the level of income it had before the loss. This protection is specific to your business. It does not respond to loss of income attributable to unfavorable business conditions caused by the impact of a covered cause of loss in the area where your business is located. An example of this is the unfavorable business conditions that existed following the eruption of Mount St. Helens, or in lower Manhattan following the 9/11 disaster.

Direct Damage Required
The underlying principle for Business Income insurance is that there must be direct damage to property at the premises listed in the insurance policy for coverage to be activated. There is an exception to this principle for actions of a civil authority, but it is very limited.

Order of Civil Authorities
The insurance company will pay you for actual loss of Business Income and necessary Extra Expense when a civil authority prohibits access to your insured premises due to direct physical loss or damage to property nearby. The damage to the other property must be from a cause of loss included in your policy.

The Business Income protection begins seventy-two hours after the order and only lasts for three consecutive weeks. Extra Expense insurance begins immediately and lasts for three consecutive weeks, or when your Business Income coverage ends.

Determining the Limit of Insurance
Establishing a limit of insurance for Business Interruption/Loss of Income insurance requires completion of a worksheet. Your insurance broker can provide you with a worksheet. The other document you'll need will be last year's income and expenses and this year's budget. Complete the worksheet as best you can. Enlist the help of your accountant if necessary. Enter the information in each of the categories on the worksheet, and send it back to your insurance broker for a quote.

Completion of the Business Income Worksheet permits the insurance company to waive the coinsurance clause if they are so inclined. This is advantageous. Otherwise, if coinsurance applies, you might not be fully reimbursed for your loss if the limit of insurance does not equal the percentage of coinsurance shown in the policy.

Sample Triggers for Business Income Insurance

Now that we have identified some of the basics of Business Income and Extra Expense insurance, let's look at some examples and explore how the insurance responds to them.

Your Dining Hall Burns to the Ground
You are awakened by noise and the smell of smoke. You look out your window to see your dining hall with flames breaking through the roof. It is a total loss.

This is the classic case. Business Income and Extra Expense insurance would be triggered by this event, because fire is a covered cause of loss, which resulted in direct damage to the property.

The insurance company should respond pretty swiftly to this scenario. Given the short time within which income is earned the claim department will want to keep you open if at all possible. This is where the Extra Expense portion of the policy responds by paying for a large tent, a field kitchen, paper plates, plastic utensils, tables and chairs, etc., so you can continue to feed everyone.

If some parents withdraw their children, any loss of income would be covered.

Order of a Civil Authority
A forest fire approaches your area. The local authorities order an evacuation.

Under this scenario, Loss of Income and Extra Expense insurance will respond, but only for three consecutive weeks. What you do with everyone in the mean time is another and perhaps bigger issue.

Suppose the situation involved an earthquake, would the outcome be different? Under these circumstances, there would be no coverage for Business Interruption unless your property insurance policy included insurance for earthquake as a covered cause of loss.

What if you evacuated before the local authorities required it? Any loss you incurred in this situation might be questionable. A good case could be made for coverage however, but some discussion might be needed.

A Bomb Threat
You receive a phone call that a bomb has been planted on the camp premises. You call the police and decide to evacuate the property until the police bomb squad has a chance to search all the buildings and premises. This situation is picked up by the local media and almost immediately some parents contact you and decide to take their children out of camp.

How does your Business Income and Extra Expense insurance respond? A bomb threat won't trigger your insurance. Most likely there will be no coverage for any expense you incurred in the emergency evacuation or for any loss of income unless there is direct damage to your premises.

A bomb explodes on your premises, but fortunately no one is injured. There is damage to a building. How does the insurance respond? Normally, an explosion would be a covered cause of loss. But, in this example, it is possible this act could be considered an act of terrorism. If terrorism is a covered cause of loss in your property insurance then it is likely coverage would be afforded. If terrorism is excluded coverage for the Loss of Income, Extra Expense might not apply.

Different Exposures/Different Needs

Do day camps and resident camps have different Loss of Income and Extra Expense insurance needs? Definitely! While day and resident camps are similar in many respects, there are different exposures to loss and different responses necessary.

For example, day camps may be able to operate at temporary premises much easier than a resident camp. Differences such as this should be considered when doing risk management planning and when establishing the limits of insurance for Loss of Income and Extra Expense coverage.

Remember, insurance does not respond to all of the risks of business interruption. Don't limit your thinking to events that just cause physical damage to your property. Consider the entire range of risks and include methods for reducing, transferring, or avoiding them in your risk management planning.

Originally published in the 2005 Spring issue of The CampLine.