Loss consultants from Adjusters International are sometimes asked to review, from a claims perspective, the property and business interruption coverages of companies concerned that their policy might not be adequate to cover a serious loss. In the course of such a review, the immediate priorities are usually to determine the values at risk; to ensure that the limits of liability are adequate; and to make sure that any existing coinsurance requirements are met. However, it's just as essential to remember less obvious but equally important areas of coverage whose existence, or lack thereof, can make significant differences in the insured's ultimate claim recovery.
One of the most important and helpful endorsements to a business interruption policy is the Extended Period of Indemnity Endorsement. If the business interruption coverage is being written under more recently issued forms, an automatic 30-day extended period of indemnity is built into the coverage. But absent one of these forms, this endorsement must be added to the policy to extend the indemnity period.
As its name suggests, the benefit of this coverage is that it extends the covered loss period beyond the time required to restore the property. In both mercantile and manufacturing businesses, the level of sales or production during the time following the restoration period is often not as high as the level would have been had no loss taken place.
Additional time may be needed to restore revenues to preloss levels. Making the situation more critical is the fact that because the business is up and running, the full costs of operation are being absorbed without corresponding income. The effect of the revenue shortfall, therefore, goes right to the bottom line. With the proper coverage, however, the insured can be indemnified for the shortfall that occurs during the extended period.
This endorsement also opens up another avenue of indemnification for the insured—for expenses that otherwise would not be covered by the basic business interruption policy. The Extended Period of Indemnity Endorsement can enable the policyholder to recoup significant preopening expenses, incurred during the extended period, to restore revenues to their preloss levels. They might include extraordinary advertising
and public relations activities, or be related to locating and hiring new personnel.
These expenses are not ordinarily reimbursed under basic BI coverage because they do not qualify as normal operating expenses, nor would they be considered “expediting” expenses because they do not reduce the loss within the traditional loss period. On the other hand, these expenses do reduce the carrier's liability when the post-restoration period is covered by the Extended Period of Indemnity Endorsement.
Consider the following illustration: The REM corporation manufactures widgets to order. A fire causes extensive damage to the manufacturing facility, resulting in a shutdown and period of restoration of six months. When REM reopens, company officials find that their level of business is only 50 percent of what it would have been had the loss not occurred. The second month after reopening, the firm is realizing only 75 percent of anticipated volume. Ultimately, it takes four months after reopening to return to preloss levels.
One month before reopening, and for a considerable period thereafter, the company incurs significant additional expense contacting the trade to advise that it will be back in business shortly. Advertisements are placed in trade journals and representatives are sent around the world to assure customers that the company will be able to fill their orders.