Many clients and claim professionals often have questions about their deductible responsibility toward their business income claim. Typically, if the property has sustained physical loss or damage, the insured will be required satisfy the applicable peril-deductible to receive benefits to repair or replace the damaged property and trigger the business income coverage. However, insureds should keep in mind that while there may not be an additional monetary deductible to trigger business income coverage, their business income claim will probably be subject to a waiting period of 24-72-hours, which often is the most crucial period of time after the loss. This waiting period is supposed to encourage the insured to take prompt and adequate repair measures to mitigate the business losses. However, any lost profits during this waiting period are not recoverable, and many consider this waiting period a “time deductible.”
3. Period of Restoration means the period of time that:
(1) 72 hours after the time of direct physical loss or damage for Business Income coverage; or
(2) Immediately after the time of direct physical loss or damage for Extra Expense coverage;
Caused by or resulting from any covered cause of loss at the described premises; and
b. Ends on the earlier of:
(1) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and quality.
The FC&S Bulletin offers an example which is illustrative of the practical application of the “time deductible” in business income claims.
Business Income—Time Deductible
An insured has had a partial business income loss and we are uncertain what to expect of the loss adjustment with the seventy-two hour time deductible now in our contract. The coverage is written with a monthly limit of $50,000 for the first month. As the loss is partial, is it the amount of actual loss for the first three days that is deducted, or is the deductible amount apportioned for the month? Furthermore, since the loss occurred on a Friday night and the insured does not operate on Saturday and Sunday, when does the seventy-two hour deductible begin? Is it seventy-two hours of normal operation that is deducted, or is our insured just lucky because the firm will really experience only the effect of a one-day deductible on this loss? Can you clarify this?
Dominican Republic Subscriber
According to the terms of the Insurance Services Office form for business income coverage (CP 00 30 06 95) recovery is keyed to a defined "period of restoration." For business income (not extra expense) that definition says the period does not begin until seventy-two hours "after the time of direct physical loss or damage." Thus, whether partial closure or complete shutdown occurs, there is no recovery of any business income loss during the first seventy-two hours. If there is no loss of business income during the period, or a reduced loss occurs because the business is normally closed during all or part of the time of the "period of restoration," the insured is lucky.
Extra expense is treated differently because the object is to do whatever is necessary to get the business up and running again. If by immediate action, such as hiring an emergency crew of workers and paying for express delivery of goods and materials, the period of interruption can be reduced, insured and insurer both benefit.
However, the term “time deductible” as referred to in this blog, is to be considered a waiting period and not a formal deductible that could conflict with certain policy language. Another FC&S Bulletin explains the formality:
Waiting Period Not the Same as a Deductible
Our insured had a business income loss that resulted in a twenty-eight hour closure. The property deductibles section of the policy states that no deductible applies to business income and extra expense coverage. However, the policy also states that the business income coverage is only available during the period of restoration, which does not begin until twenty-four hours following the time of direct physical loss. We think these two provisions are in conflict. What are your thoughts?
The deductibles section of the policy refers to the monetary deductible amount that the insured agrees to pay in the event of a covered loss. The twenty-four hours prior to the beginning of the period of restoration for the business income loss is a waiting period during which the coverage does not apply. Because the waiting period is not a deductible, the two provisions are not in conflict.