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Enhance BI coverage: 3 modifications can elevate coverage from mundane to magnificent.

Ah, November. Football is in high gear and Thanksgiving is in the wings. I can almost smell those sweet potatoes cooking.

Although turkey may take center stage, my family's one non-negotiable tradition is to dive into that sweet potato casserole, awash in brown sugar, butter, maple syrup and melted marshmallows.

My sister Therese is our ultimate empress of the edibles. Here is the salient passage from her 'Thanksgiving Sweet Potatoes" recipe: 'There is nothing special about this recipe, except that all the kids like it and this is for them. Mary Gabrielle, for you, double the marshmallows. If Uncle Chris is invited to dinner, triple them."

I rest my case. For the record, Mary Gabrielle is her daughter, my niece. Uncle Chris, of course, would be yours truly. A marshmallow melee may ensure if whichever of us is first in the food line dares to take more than his or her fair share of the tasty topping.

Which brings us to the parallels between the sweet potato casserole and Business Income (BI) coverage.

First, while there is a multitude of great food served at our family get-togethers, without the sweet potatoes something would be lacking. Similarly, it continues to amaze me how many otherwise solid commercial lines coverage packages lack even the most rudimentary business income protection.

How fortunate for many insureds that at least some BI coverage is automatically included in popular packages such as the BOP (although even that may fall far short of actual needs, as discussed in my June 2013 article, "Walk the Line"). For others, it seems the coverage falls far down the totem pole of recommendations. Perhaps this is because BI is not normally required coverage, unlike property, liability, auto and workers' compensation. But just because no one has a gun to the insured's head doesn't mean that other coverages are not key to proper protection.

BI fits squarely in that latter camp. It is a simple truth of accounting and book-keeping principles that a business with no income will soon cease to be a business at all. So if there were a method to insure a least a portion of current cash flow, if interrupted due to a covered peril, why would such a solution not be presented as not just a side dish, but as a key ingredient of a successful feast?

The second parallel: Once the basic sweet potatoes are added to the menu, the proper additives must be included to elevate sweet potatoes from mere side dish to a bullseye. In the case of BI, this alludes to the proper use of available options to make the basic coverage better fit the client.

The basic BI coverage forms, similar to other standard commercial property forms, have a coinsurance requirement. Proper evaluation of tangible property is difficult enough to meet coinsurance provisions. Make those provisions contingent on accurately estimating items as potentially slippery as future earnings and expenses, and coming up with an amount of coverage with any degree of confidence it will avoid any penalty can give you more indigestion than undercooked stuffing.

But the good news is BI has its own coverage form equivalents of brown sugar, butter, maple syrup and marshmallows, provided via the coverage options to avoid coinsurance that can be activated simply by indicating the choice in the declarations page. There is one major difference: Whereas my sister's sweet potato recipe includes them all, effective modification of the basic BI form only requires just one: maximum periods of indemnity, monthly limit of indemnity and agreed value. Let's consider each.


The main effect of this option is to substitute a limited coverage period of 120 days for the annualized coinsurance requirement. The good news? No complicated accounting of estimated annual revenues and expenses, hoping to calculate a valid coverage amount to avoid any coinsurance penalty. The bad news? For good or ill, all coverage terminates at the end of the 120-day period, so the insured's business better be back in swing in that period.

While traditionally this option was suggested as adequate for smaller retail and office exposures, catastrophes such as Superstorm Sandy exposed the potentially glaring shortcoming of assuming such insureds getting back in business in a few short months is a slam dunk.


Often espoused as an effective choice for smaller risks, the argument for this option was that such risks could avoid calculations of annual revenues and cash flows by choosing a simple monthly amount that should prove sufficient. As many smaller businesses are more aware of their monthly sales, expenses, etc., as opposed to annualized financial accounting, this approach has much merit. A choice of three monthly limits is provided in the form: 1/3, 1/4 and 1/6.

An annualized coverage amount needed still must be calculated, but coinsurance is then waived in favor of the monthly limit on payouts. The potential downside? That limit may prove insufficient, either by month or in total, when facing catastrophic losses. This option is also a bad idea for any business whose monthly income protection needs may fluctuate widely over a policy year.


Last month's article went into some detail on the concept of Agreed Value, with the attendant potential benefits and pitfalls. Although the language of the BI option is not exactly the same as that in the Commercial Property Form, it is very similar in operation. Here are the three key steps:

(1) The insured must complete an approved work sheet, providing all the necessary accounting numbers to make a proper calculation of the coverage estimated to be needed for the coverage period.

(2) The insured must agree to carry at least the amount of coverage determined by multiplying the total amount on the work sheet by the applicable coinsurance percentage chosen.

(3) Assuming the insured complies with Step 2, any coinsurance penalty is waived. However, if the insured is found at time of loss to have carried less that 100 percent of the amount mandated by Step 2, then the insured loss will be "coinsured" to the extent the amount actually carried falls short of the requirement. Depending upon the amount of noncompliance, the insured might actually have been better to ignore choosing this option and simply rely on the coinsurance clause in the basic form.

So when it comes to providing a coverage feast for your clients, follow the long-proven advice of a turkey tribe veteran:

* Although the main dishes are a given, it's the side offerings that separate a mere meal from a truly sumptuous repast.

* Every bit as much pride and expertise should go into the proper choice and preparation of the sides as is expended on the main course.

* To elevate an otherwise adequate side dish to true bliss, always sweeten the offering by modifying to the unique tastes and preferences of your guests.

Follow these simple steps and you'll transform your clients from grudging swallowers of a "commodity" to eager participants in your flavorful feast (i.e., they'll renew).

Or as we say in our clan. "Triple the marshmallows, I'm coming home!"

More on the Web:

> 4 Reasons Why Agreed Value is a Possible Trap

> ISO Program Revisions

> Living Vicariously

Read these related articles at

Chris Amrhein, AAI, is an insurance educator and speaker with more than 30 years in the industry. He also is the chief fun officer at, and author of "Yes, Virginia, There is Insurance." Contact him at
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Copyright 2013 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Policy Issues
Author:Amrhein, Chris
Publication:American Agent & Broker
Date:Nov 1, 2013
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