FIN 461 CHP 3 BUSINESS INCOME

EXTRA EXPENSE TYPES

• CONTINUING EXPENSES

• NON-CONTINUING EXPENSES

• EXTRA EXPENSES

CONTINUING EXPENSES

NORMAL OPERATING EXPENSES HAT CONTINUE EVEN THOUGH THE BUSINESS IS INTERRUPTED/SHUTDOWN

• INCLUDED WHEN DETERMINING BUSINESS INCOME

  • KEY PERSONNEL SALARIES

  • RENT/LEASES

NON-CONTINUING EXPENSES

NORMAL EXPENSES THAT STOP/DECREASE DURING THE INTERRUPTION/SHUTDOWN

• HOURLY WAGES FOR LAID-OFF WORKERS

• REDUCED UTILITY COSTS

EXTRA EXPENSES

EXTRAORDINARY COSTS INCURRED ON TOP OF ORDINARY EXPENSES TO KEEP OPERATING AFTER PROPERTY DAMAGE FROM A COVERED PERIL

• RENTING A SIMILAR WAREHOUSE TO OPERATE FROM

CALCULATING BUSINESS EXPENSE

BUSINESS INCOME LOSS

= EXPECTED NET PROFIT/LOSS + ACTUAL NET PROFIT/LOSS

BUSINESS INTERRUPTION

PAYS FOR LOSS OF BUSINESS INCOME AND ONGOING EXPENSES WHEN OPERATIONS MUST BE SUSPENDED DUE TO DIRECT PHYSICAL DAMAGE TO PROPERTY CAUSED BY A COVERED PERIL

• ALSO CALLED TIME ELEMENT COVERAGE

FOR BUSINESS INTERRUPTION TO APPLY:

1. OPERATIONS MUST STOP

2. DUE TO DIRECT DAMAGE FROM A COVERED PERIL

3. AT A LOCATION LISTED ON THE POLICY

4. WICH LEADS TO LOST INCOME OR EXTRA COSTS

WHAT CAN CAUSE BUSINESS INTERRUPTION?

PROPERTY DAMAGE THAT RESULTS FROM:

• BUILDINGS

• PERSONAL PROPERTY

• KEY CUSTOMER/SUPPLIER

• MAGNET LOCATION

PERIOD OF RESTORATION

THE PERIOD DURING WHICH BUSINESS INCOME/EXTRA EXPENSE COVERAGE APPLIES FOLLOWING A COVERED PHYSICAL LOSS

WHEN DOES PERIOD OF RESTORATION BEGIN?

• BUSINESS INCOME COVERAGE BEGINS 72 HOURS AFTER THE PHYSICAL LOSS OCCURS

  • CAN BE SHORTENED OR ELIMINATED BY ENDORSEMENT

• EXTRA EXPENSE BEGINS IMMEDIATELY AFTER LOSS

WHEN DOES PERIOD OF RESTORATION END?

• PROPERTY IS RESTORED OR

• SHOULD HAVE BEEN RESTORED

WHAT IS NOT INCLUDED IN THE PERIOD OF RESTORATION?

• ADDITIONAL TIME NEEDED TO COMPLY WITH BUILDING CODES

NET INCOME EQUATION

NET INCOME = GROSS INCOME (REVENUE) - ALL DEDUCTIONS (EXPENSES)

BUSINESS INCOME EQUATION

BUSINESS = NET PROFIT + CONTINUING OPERATING EXPENSES

• DETERMINE WHAT THE BUSINESS WOULD HAVE FINANCIALLY EXPERIENCED IF THE INTERRUPTION HAD NEVER OCCURED

NET PROFIT

• WOULD HAVE BEEN EARNED OR INCURRED IF THE INTERRUPTION HAD NOT HAPPENED

• DETERMINED USING:

  • PAST PERFORMANCE

  • PROSPECTIVE PERFORMANCE

• IF REVENUE IS HIGHER THAN EXPENSES, YOU MADE MONEY

NET LOSS

IF EXPENSES ARE HIGHER THAN REVENUE, YOU LOST MONEY

CONTINUING NORMAL OPERATING EXPENSES

EXPENSES THAT CONTINUE DURING THE SUSPENSION

• SALARIES, TAXES, INTEREST EXPENSES