9.4 Business Income and Extra Expense

Time-Element Coverage

Business Income (BI) is a time-element coverage — it pays for loss that occurs over a period of time following direct physical damage to covered property by a covered cause of loss. The ISO form is Business Income (and Extra Expense) Coverage Form CP 00 30; a version covering business income only is CP 00 32.

BI restores the insured's earnings during the period of restoration — the time it should take, with reasonable speed, to repair or replace damaged property. The period begins 72 hours after the loss (the default waiting period) unless an endorsement removes it, and ends when property is restored or the business resumes operations elsewhere (whichever is sooner).

What Business Income Equals

Business Income = Net Income (profit or loss) that would have been earned + Continuing normal operating expenses (including payroll).

The insurer pays the net profit the business would have earned plus expenses that continue even though operations stopped — rent, loan payments, key payroll, taxes. It does not pay expenses that cease (e.g., raw-material purchases not needed during shutdown).

Worked example: A store earns $40,000/month net income and has $30,000/month continuing expenses. A covered fire shuts it for 3 months. BI loss = ($40,000 + $30,000) × 3 = $210,000, subject to the limit and coinsurance.

Extra Expense and Coinsurance Options

Extra Expense pays the additional costs to continue operating during the restoration period — renting a temporary location, leasing equipment, paying overtime — above normal operating costs. Standalone Extra Expense Coverage (CP 00 50) is used by businesses (data centers, newspapers) that must stay open at almost any cost.

BI coinsurance options are 50%, 60%, 70%, 80%, 90%, 100%, or 125%, applied to the 12-month projected business income. Two BI options remove coinsurance:

• Monthly Limit of Indemnity — caps monthly recovery at a fraction (1/3, 1/4, 1/6) of the limit; no coinsurance.
• Maximum Period of Indemnity — pays for up to 120 days with no coinsurance.
• Agreed Value — suspends coinsurance entirely when the insurer accepts a stated value.

Related Additional Coverages and Traps

• Extended Business Income — continues BI after the property is restored, while income climbs back to normal; default 60 days (extendable).
• Civil Authority — pays BI/Extra Expense when a government order prohibits access to the premises due to covered damage to nearby property; coverage begins 72 hours after the order and lasts up to 4 weeks (Civil Authority) / generally 30 consecutive days.
• Off-premises utility services require an endorsement (CP 04 17) — not automatic.

Trap

BI requires direct physical loss by a covered cause first. A pandemic shutdown with no physical damage triggers no BI, and most forms add a virus/bacteria exclusion. The 72-hour waiting period is the default; do not confuse it with a flat deductible.

How the BI Coinsurance Worksheet Operates

BI coinsurance compares the limit carried to a percentage of the 12-month projected business income (net income plus continuing expenses the insured would have earned in the 12 months after the loss began, per the worksheet on form CP 15 15). If a business projects $1,200,000 of 12-month business income and selects 50% coinsurance, the required limit is $600,000.

Worked example: the insured carries only $450,000 against a $600,000 requirement and suffers a $200,000 BI loss. Ratio = $450,000 / $600,000 = 0.75, so the insurer pays 0.75 × $200,000 = $150,000; the insured absorbs the $50,000 coinsurance penalty. Choosing a higher coinsurance percentage lowers the rate per dollar but raises the limit you must carry — a common reason insureds elect Maximum Period of Indemnity or Agreed Value to avoid the worksheet entirely.

Dependent Properties and Ordinary Payroll

A business can also lose income when a key supplier or customer (not the insured's own premises) is damaged. Dependent Property coverage (also called Contingent Business Income, form CP 15 08/CP 15 09) restores income lost because a contributing, recipient, manufacturing, or leader location suffers covered damage — for example, a parts maker whose sole supplier burns down.

Ordinary payroll (wages of non-key employees) is included by default but can be limited or excluded to lower premium; the insured may cap it at 60, 90, or 120 days so essential staff stay covered while routine payroll is trimmed. A frequent trap: an insured excludes ordinary payroll to save premium, then cannot recover hourly-worker wages during a long shutdown. Distinguish Business Income (lost earnings) from Extra Expense (added costs to keep going) — a stem describing rented temporary space is Extra Expense, not BI.

What Business Income Coverage Pays

The Business Income (and Extra Expense) Coverage Form (CP 00 30) replaces the income a business loses when a covered cause of loss suspends operations. It pays two things: net income (net profit or loss the business would have earned) plus continuing normal operating expenses, including payroll, during the period of restoration.

The Period of Restoration

The "should be repaired" standard is heavily tested: an insured who drags out repairs cannot extend the period of restoration, and the coverage ends on the date a diligent owner would have reopened.

Extra Expense and the Coinsurance Connection

Extra Expense pays the additional costs to avoid or minimize the suspension - renting temporary space, expediting repairs, leasing substitute equipment. Business income forms use a coinsurance percentage based on 12 months of income, so under-reporting projected income triggers the same penalty as under-insuring a building. The Monthly Limit of Indemnity, Maximum Period of Indemnity, and Agreed Value options modify or waive coinsurance - the candidate should know which option fits a seasonal business.

Civil Authority, Dependent Property, and Ordinary Payroll

Three extensions appear regularly: Civil Authority pays lost income when a government order bars access because of damage to nearby property (subject to a distance limit and a time cap); Dependent (Contingent) Business Income covers income lost when a key supplier, customer, or "leader" property is damaged; and ordinary payroll can be limited or excluded by endorsement to lower premium. A complete business-income question often combines the waiting period, the period of restoration, and one of these extensions.