Insurance Journal Forums

Scenario:

You have a contractor who has an office with an attached storage facility for tools/equipment when brought back from the jobsite. You are writing a property policy with business income coverage. The business income applies only to the property coverage, not the inland marine. How do you calculate the proper business income coverage considering that in the event of a fire, the inland marine equipment would be a loss as well which would contribute to the lost income?

Easy. Just include b/i on the equipment. Many carriers will do this.

A contractor's expsoure is really Extra Expense. I write many contractors and have never had a BI loss. They will continue operations from another location if needed, but they never shut down or even slow down their operations.

We do write some Extra Expense on Equipment, too, when they are using highly specialized equipment that takes a while to replace. We also may include rental reimbursement coverage on equipment so they can rent substitue equipment while their equipment is being repaired or replaced.

crossins wrote:Easy. Just include b/i on the equipment. Many carriers will do this.

I haven't found any that will.

lauren wrote:A contractor's expsoure is really Extra Expense. I write many contractors and have never had a BI loss. They will continue operations from another location if needed, but they never shut down or even slow down their operations.

We do write some Extra Expense on Equipment, too, when they are using highly specialized equipment that takes a while to replace. We also may include rental reimbursement coverage on equipment so they can rent substitue equipment while their equipment is being repaired or replaced.

Great point. So how do you calculate the correct amount i.e. how much of a down factor to calculate in?

Rob, the same way you would for property.

1. How long will it take to obtain new owned equipment? (get the cash, order, and receive the equipment.)

2. How much will it cost to rent temporary replacement equipment for that amount of time?

Forum Reader wrote:Rob, the same way you would for property.

1. How long will it take to obtain new owned equipment? (get the cash, order, and receive the equipment.)

2. How much will it cost to rent temporary replacement equipment for that amount of time?

Well the amount for some of the costs will be dependent on the amount of time down, correct? That part of the equation is the unknown, isn't it?

Use combined bi and ee on one form. Just ask your inland marine underwriter. If they are not willing, fire them and find one who can. As for the exposure, it is agreed that specialized equipment will require careful analysis of the potential loss. Who knows if the equipment will take 18 months to manufacture, and 6 months to clear customs from Germany? If it is just generic equipment and redily available ie. '06 JD Excavator just add rental reimbursement to the Inland Marine form. Again, an underwriter not willing to accept a few additional premium dollars in this market should be replaced.

For example, when calculation extra expense If I was to say to the insured "what is the dollar amount for continued expenses such as payroll after a loss?" they usually say "well that depends on how long we're down for". So the bottom line is, how do you pin this number down when you don't know if it will be a 3 month shut down or a 6 month shut down or whatever?

This is the stuff that comes with experience or even better a good mentor...there is no exact formula for this. But here is what I would say in my interview with client:

Let's say you had a total knockdown fire at your main location:

1. What would be lost?
2. How long would it take to replace everything?
a. How long to replace the critical items?
b. Are these items readily available?
1. If not, what items and what kind of delay
2. Can you rent/borrow temporarily?
3. Once everything is replaced, how long to get back to 100% operation?

Then base your numbers on that. Take the number of months, combine with est lost income (if equip is not readily available) then add on at least 25-50% as a cushion. Also then look at extending the period of indemnity.

Then create a extra expense number by taking the costs to expedite the replacements, include the extra rent/lease payments for the premises...(by the way...if the owner of the biz owns the bldg and leases back to the company....you now have a diff exposure).

In each case the client should estimate on the liberal side of the coin and guess high.

The reason I'm asking this is because I'm taking the CRIS course offered by IRMI and in the module on contractor's property insurance they say

"To determine an appropriate limit of insurance for extra expense coverage, the contractor must project what expenses would continue unchanged despite the damage (e.g., payroll), what expenses would increase (e.g., payroll, if any employees will be putting in extra hours), whether any expenses would discontinue (e.g., utilities and perhaps rent at the original, damaged location), and what new expenses would be incurred to get the business back up and running"

If it is only extra expense coverage being examined, why must we project what expenses would continue despite the damage (e.g. payroll)?

Ah, perhaps because once the loss occurs that continuing payroll is now considered an extra expense?