9.4 Business Income and Extra Expense

What Business Income Insurance Does

Business Income (and Extra Expense) Coverage (CP 00 30) is time-element coverage: it pays for income the insured loses while operations are suspended because of direct physical loss to covered property by a covered cause of loss. It is not direct-damage coverage — the building damage is paid by the BPP. There must be a covered direct-damage trigger first; a power outage with no physical damage to the insured's property does not trigger Business Income unless a utility-services endorsement is added.

Business Income equals net income (net profit or loss before taxes) that would have been earned plus continuing normal operating expenses, including payroll. Two ISO forms exist: CP 00 30 (Business Income with Extra Expense) and CP 00 32 (Business Income without Extra Expense).

The Period of Restoration

Loss is paid only during the period of restoration: it begins 72 hours after the physical loss (the time-deductible waiting period) and ends on the earlier of (a) the date the property should be repaired or replaced with reasonable speed and like quality, or (b) the date business resumes at a new permanent location. The clock runs on reasonable repair time, not on how long the insured actually drags out repairs.

Extra Expense

Extra Expense pays the additional costs the insured incurs to avoid or minimize the suspension of business and to continue operations — renting temporary space, leasing equipment, paying overtime, expediting deliveries. A separate Extra Expense Coverage Form (CP 00 50) exists for businesses (data centers, service firms) that must stay open at any cost and have little ordinary income loss.

Coinsurance and a Worked Example

Business Income uses a coinsurance percentage (50, 60, 70, 80, 90, 100, or 125 percent) applied to the 12-month projected business income (net income plus continuing expenses). If the limit carried is below the required amount, the same penalty formula applies: Payment = Loss x (Limit Carried / Limit Required).

A business projects $1,000,000 of annual business income and selects 50 percent coinsurance, so the required limit is $500,000. It carried only $400,000. A covered fire causes a $300,000 income loss. Payment = $300,000 x ($400,000 / $500,000) = $240,000. Selecting a higher coinsurance percentage means a higher required limit but a lower rate per $100.

Optional Coverages That Suspend Coinsurance

Civil Authority and Dependent Property

Civil Authority coverage pays Business Income and Extra Expense when a government order prohibits access to the premises because of direct physical loss to nearby property (within one mile) by a covered cause; it begins 72 hours after the order and lasts up to 4 weeks. Dependent (Contingent) Property coverage, added by endorsement (CP 15 08), responds when a key supplier, customer, manufacturer, or anchor store (a "leader location") suffers a covered loss that suspends the insured's own operations.

How Ordinary Payroll Is Handled

By default the BPP business income form includes ordinary payroll in continuing expenses, but the insured can buy a limited or excluded ordinary-payroll option to lower premium — keeping only the payroll of executives and key employees needed during restoration. A manufacturer that would lay off line workers immediately after a fire might exclude ordinary payroll; a professional firm that must retain staff to resume quickly should keep it. On the exam, ordinary payroll is the wages of all employees except officers, executives, department managers, and key contract employees.

Choosing a Coinsurance Percentage

The higher coinsurance percentages exist for businesses with long restoration periods. A seasonal or specialized operation that could take more than a year to rebuild selects 125 percent so the limit covers income beyond 12 months. A business that could restore quickly may pick 50 percent, accepting a higher rate per $100 in exchange for a lower required limit. Selecting the Monthly Limit of Indemnity or Maximum Period of Indemnity option waives coinsurance entirely and suits insureds who want to skip the projection worksheet.

Common Traps

• Period of restoration starts 72 hours after loss and ends at reasonable repair time, not actual time taken.
• Business Income needs a direct physical loss trigger; standalone utility failure is not covered without endorsement.
• Civil Authority requires damage to nearby property and is time-limited (begins after 72 hours, up to 4 weeks).
• Extra Expense aims to minimize the income loss; it is not a blank check for unrelated costs.