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26 Cards in this Set
- Front
- Back
BUSINESS INTERRUPTION
State 3 reason why clients don't want to purchase Business Interruption |
1. Perceived as being too technical 2. Reluctance to reveal their earnings 3. lack of costumer knowledge |
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Identify possible sources of Business Interruption losses |
1. Physical breakdown to property 2. Failure or Breakdown of public utilities 3. Transportation related accidents 4. Physical damage to neighboring premises 5. loss caused to property of major supplier or customer 6. Action of regulatory authorities 7. Ancillary causes - strikes/ockouts |
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When no Businses Interruption is purchsed what sources would a business owner use to fund or pay continued expenses |
1. Take money out of capital reserves to pay expenses 2. Bank loan 3. Increase product prices to cover the loss 4. purchase adequate limits of business interruption insurance |
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The key difference between the Gross Profits Form vs the the Gross Earnings Form is the Period of indemnity |
GROSS EARNINGS FORM: Ends immediately upon reinstatement of the lost or damaged property
PROFITS FORM: Continues until the income is restores to the level that would have been at the time of the loss had the loss not occurred, the indemnity under both forms is usually 12 months but can be extended for an additional premium
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Gross Earnings Form/Profits Form |
Gross Earnings - Represents the American approach to Business Interruption
Profits Form - Represents the British approach to Business Interruption |
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Characteristics Common to Business Interruption Forms
Identify 5 Characteristics common to ALL Business Interruption Forms |
1. Insure against the same perils as are insured by the property policy 2. Are contract of Indemnity 3. Period of Indemnity is NOT limited by the policy period 4. Provide for payment of expenses necessarily incurred to reduce the amount of the loss 5. Provide for payment when access to the insureds premises is prohibited by order of civil authority
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DISPELLING THE MYTHS ASSOCIATED WITH BUSINESS INTERRUPTION INSURANCE
Identify 2 Expenses insured by Business Interruption Policies & provide 2 examples each |
Expenses FIXED & SEMI VARIABLE
FIXED -Mortgage interest -Interest on accounts payable -Property taxes -Management salaries & salaries under contract -Professional fees -Insurance fees -Trade association dues
SEMI VARIABLE -Advertising -Short term salary continuation -Warehousing costs -Other business expenses - (Heat/power/water)
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The meaning given to certain financial terms in business interruption policies will often vary from that used in ACCOUNTING circles. Discuss the potential differences using the term Gross Profit |
Gross Profit- shown on a financial statement is not an accurate value to use when insuring Gross Profits of a business.
This is because the calculation of gross profit on the financial statement allows for MORE deductions than does the Gross Profit calculated for Insurance purposes. If the amount were to be used as the basis of insurance the insured would be UNDER insured in the event of a loss |
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DETERMINING THE NEED, TYPE & AMOUNT
Business Interruption coverage required by the business should be based on a consideration of 2 important factors.
Identify 2 factors & a brief statement as to how they could affect a decision as to the type of coverage to be purchased. |
1. Nature of the Business The nature of the business will be important in determining the length or duration of a possible interruption
2. Types of Perils that will most likely cause an interruption.
The period of business interruption will vary depending on the type of peril which caused the loss therefore, if a peril such as fire is the highest exposure for business the interruption will be longer than for a brief power outage |
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Gross Earnings:
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Covers the reduction in Gross Earnings less the charges & expenses which do not necessarily continue during the interruption of the business |
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Gross Profits: |
Covers the sum produced by adding to the net profit the amount of the insureds standing charges(expenses which the insured will continue during an interruption to the business) |
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Gross Earnings Endorsement Form (Mercantile & Non-Manufacturing)
Gross Earnings are defined as the sum of: |
1. Total net sales 2. Other earnings derived from the operation of the business
LESS THE COST OF:
1. Merchandise sold, including packing materials 2. Materials and supplies consumed directly in supplying the services sold by the insured 3. Services purchased from outsiders, for resale which do not continue under contract
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Actual Loss Sustained, when referring to loss of income what is the major consideration in determining this amount
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The insured is entitled ONLY to the amount of Business would have actually have earned had the loss not occurred. *To determine that amount will involve a review of the insureds PRE-LOSS sales and other income. *Next an assessment must be undertaken to determine if sales and other income trends would have continued had the loss not occurred |
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Identify 2 Factors that might affect the determination of Actual Loss Sustained. |
1. Competition increase or decrease 2. Economic Conditions getting worse or better |
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Earnings Form - requires that the insured act with due diligence & dispatch after a loss or ? |
requires that the property be reinstated with due diligence & dispatch if the insured does not act with due diligence payment will be reduce accordingly
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Ordinary Payroll |
Is the entire payroll expense for ALL employees of the insured EXCEPT *Managers *Officers *Employees under contract
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Besides the savings in premium likely to be realized by the insured for deleting ordinary payroll what reasons can be made for deleting it |
The insurer may not recognize the continuation of these salaries as being NECESSARY continuing expenses. As a result the insured may decide to reduce premium payable by deleting ordinary payroll coverage |
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Insuring Ordinary payroll on a limited basis |
If the estimated interruption will only be for a short period 1-2 months it would be wise for the insured to insure this payroll as the cost to recruit & retrain new employees with in weeks of opening up again is costly |
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List 4 provisions contained in the premium adjustment clause |
Provisions - premium adjustment clause
1. Application for the premium must be made with in 12 months 2. When the insurer has made payment for ANY loss the premium is deemed fully earned 3. When coverage is on a 50% co clause insured is entitled to 25% max refund 4. When coverage is on 80% Co Ins Clause refund is 50% |
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3 KEY features to the PROFITS FORM |
1.Indemnity period is longer 2. Bylaws coverage included 3. Due / Diligence & dispatch provisions requires only that the insureds do whatever they can do to prevent delays in reinstating the property |
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How does Profits Form deal with continued expenses? |
No coverage for:
Ordinary Payroll, depreciation of stock or bad debts. However PROVISIONS can be made to insure ordinary payroll |
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What purpose is served by the contributing properties Business Interruption Form |
This form would be to insure contingent business exposures(manufacturer or supplier for goods or materials) |
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What kinds of businesses would purchase Extra Expense? |
1. Dry cleaners 2. Insurance Brokers 3. Medical Office's/ Dental
Business that would need to resume business as soon as possible after a loss or face loss of customers |
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Describe how extra expense payment is made in the event of a loss? |
The amount of insurance is available is based on the time needed to resume normal operations referred to as a PERIOD of restoration |
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Identify 3 factors which will be considered when determining the amount of a loss which is insured by the rent or rental value endorsement |
1. Actual annual rents 2. estimated annual rental value of unoccupied portions 3. fair rental value of the portions of the building occupied by the insured |
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Extra Expense |
Rental of temporary location telephone installation moving expenses necessary renovations or alterations
claims are paid -40% when restoration is not in excess of 1 month -70% when restoration is in excess of 1 month but not in excess of 2 months -90% when restoration is in excess of 2 months but not in excess of 3 -100% when restoration is in excess of 3 months but not in excess of 4 (if it exceeds 4 mths then the policy limits would have been FULLY exhausted) |