After non-catastrophic losses, most insureds are able to restore operations in a fairly short period of time. In those cases, the measure of recovery will be limited to any business income loss and incurred normal operating expenses during the period of restoration. However, in many cases, businesses are not able to return to their pre-loss income levels after they resume normal operations for weeks or months to follow.
Chris Boggs in his book Business Income Insurance Demystified: The Simplified Guide to Time Element Coverages, explains the dire scenario as follows:
During the period of restoration, the insured’s customers and clients may find alternate sources for the goods, services or products the insured provides. In so doing, those customers may have developed new buying habits or entered into a replacement contractual relationship with another entity. Regaining those customers and the revenue they represent takes time. Replacing the customers and clients with new buyers requires even more time.
Business Income Coverage Form (and Extra Expense) CP 00 30 06 07 and Business Income Coverage Form (without Extra Expense) CP 00 32 06 07 provide indemnification beyond the period of restoration for the difference in income for up to 30 consecutive days or when the business generates the same amount of income that would have been earned had no loss occurred, whichever occurs first.
An article in the FC&S Bulletin is illustrative:
Business Income Coverage—Restaurant Closed due to Robbery
Q. Our insured owns a small restaurant that was robbed at 9:30 on a Saturday night. Everyone was locked in a cooler by the robbers while they emptied the cash drawer and smashed the computer that operates the cash register and customer order system. Because the computer was down, the restaurant remained closed Saturday night and did not open again until its normal opening time of 11:00 Monday morning. The computer was fixed by this time. The insured carried an open perils business income coverage form (without extra expense) and the extended business income option. The insurance company paid the business income loss for the balance of Saturday night and Sunday, but refused to honor the extended business income option for the decrease in business the insured suffered during the week following the robbery. Business was down one third that week.
The insurance company argues that the decrease in business during the week following the robbery was due to fear of bodily injury in the minds of potential patrons and was not caused by the time required to repair the physical damage to the computer. They maintain that the short-term closing was not long enough to cause the loss of customer base intended to be covered by the extended business income option. We feel that the extended business income coverage should apply.
A. All of the elements required for a covered extended business income loss are present in your insured’s loss. Business was suspended because of direct physical loss or damage to the computer ordering system. The loss was covered by a covered cause of loss. The insurance company admitted this by paying the business income loss suffered from Saturday night until Monday morning. An additional loss of business income began on the date the property was repaired and operations were resumed and ended at the end of the week when the insured’s operations were restored to the condition that would have existed if no direct physical loss or damage occurred.
The insured does not have to establish the motives of the customers who stayed away from the restaurant because the policy does not require it. The insurance company’s presumption that customers stayed away out of fear of bodily harm is irrelevant, as is the presumption that the restaurant was not closed long enough to lose its customer base. All that is required is a covered loss and a decrease in business during the time period allowed by the policy. These conditions were met by your insured’s extended business income loss.
In non-catastrophic losses, Extended Business Coverage can mean the difference between shutting down or staying alive after a loss. However, this time element coverage warrants a caveat. Chris Boggs warns:
Extended Business Income protection will not allow and is not designed to help the insured recover income lost due to externally poor economic conditions present following the insured’s return to operations. If the insured’s ability to return to pre-loss income levels is stunted buy the surrounding community’s economic condition, the coverage extension does not apply