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Business Continuity & Extra Expense

The 2020 Coronavirus pandemic has caused havoc with certain classes of businesses. Many businesses suffered tremendous loss of revenue due to shutdowns, whether they were mandated by government or resulting from customers ceasing to patronize their businesses due to fear of contracting the virus. The virus hit small business particularly hard. Many businesses ceased operations temporarily while some closed permanently.

The impact from Coronavirus was vast. Most financial loss resulting from the closures were uncovered by business income coverage due to either an exclusion for pandemic or disease or the requirement there be “direct physical damage” to the insured locations. Regardless of how vast the financial losses resulting from Coronavirus was, it is important to understand covered interruptions are still more likely to occur. A study from FEMA found that 40% of businesses do not reopen after a disaster and another 25% fail within a year. Furthermore, the Small Business Administration indicates over 90% of businesses fail within 2 years after being struck by disaster.


These statistics point out a need for commercial enterprises to plan for disaster and how essential it is for businesses to plan to stay in business. Business continuity planning should be a key component of any risk management plan. Planning to minimize a shutdown serves to increase the survivability of an event by eliminating or reducing the period the enterprise is shutdown.


Another benefit of a good business continuity plan is it can impact the need for business income limit, therefore reducing insurance costs. While it may reduce the length of time of an insured shutdown, it probably does not eliminate the need for Business Income Coverage at some level. However, it does point out that insurance is only one of several risk management tools.


As insurance professionals, we are prone to a biased toward insurance to solve or handle risk management problems. In the case of protecting commercial clients from closures, we focus on Business Income Coverage. Business Income Coverage is and will continue to be a critical portion of protecting commercial client from disaster. Business Income provides coverage for lost profits and continuing expenses a business incurs while they are recovering from a direct physical loss resulting from a covered peril.


I have often described Business Income Coverage as a bridge to another life. As stated earlier, many businesses never fully recover from a major incident. They lose customers and never get them back. Some businesses are more prone to what I call a fatal shut down than others.


When I think of identifying characteristics for those businesses two factors come to mind. The first is a business which relies on a single or few key customers. If they are shutdown, those critical customers will possibly move on to other suppliers who do similar work. If they are not able to recapture those clients after a shutdown, the business is doomed.

Furthermore, any business who has a limited universe of potential customers is exposed to a catastrophic shutdown. Businesses such as restaurants can rebuild and only need to advertise to get customers to patronize them again. Conversely, a business that only has a few customers interested in their services would have difficulty in recovering. Since the universe of customers is so small, no amount of advertising or marketing expenditures will help.


Benjamin Franklin is credited with saying “an ounce of prevention is worth a pound of cure.” While the statement is often applied to health, Ben was referring to fire safety. Ben was an incredibly wise man and points out some of the shortfalls of relying solely on insurance as the sole risk management tool.


The first shortfall of insurance is it does not cover anything. The last 12 months are proof. Almost all businesses which suffered a shutdown found the loss of income excluded by a Virus or bacteria exclusion (CP 01 40) or through the requirement for direct physical damage to the covered property.


Another shortfall of relying entirely on Business Income Coverage is that insurance does not bring your customers back. Once the restoration period is over and any extended business income period the insured has chosen, the insured is on their own to bring customers back.

Deductibles and waiting periods are a valuable tool to help commercial clients retain risk using more cost-effective risk management tools. However, for most commercial insurance programs the business income deductible is expressed in terms of a waiting periods with 72 hours being the standard waiting period. While 3 days does not seem like a substantial period, it can represent a significant financial impact if the timing is all wrong. For example, some brick-and-mortar retail establishments depend on the 3 days after Thanksgiving to turn their operations from loss into profit. Imagine the financial impact if that retail establishment was forced to close for those 3 days! All the more reason for a business to plan on staying in business.


The final shortfall of relying on insurance is that insurance costs money. In some cases, a lot of money. With exception of some life insurance products, insurance is a pure expense. Once premium is paid it is never coming back. Successful commercial enterprises seek to minimize expenses. That concept applies to insurance as well. To the effect a business can minimize insurance premiums, they are improving their bottom line. Ben Franklin said “an ounce of prevention is worth a pound of cure.” I like to think an ounce of prevention can save a lot of money.


Business Continuity & Disaster Planning


There is no better organization at successfully implementing continuity or disaster planning is the United States Navy. There is no better example of planning and executing on continuity plans than that of the USS Yorktown during the Battle of Midway on June 4, 1942.

The Yorktown was in drydock being repaired from damage incurred in the Battle of the Coral Sea. She was needed for the Battle of Midway. They were able to complete repairs estimated to take 2 weeks within 24 hours, allowing the Yorktown to join her sister ships Enterprise and Hornet. That alone would be an impressive story of minimizing a shutdown. But what happened just a few days later was nothing short of amazing.


On June 4, 1942, the Yorktown was attacked by Japanese aircraft. After picking up the attackers on radar, her crew swiftly prepared for the attack. Her crew discontinued fueling planes on her deck. An auxiliary 800-US-gallon gasoline tank was pushed over her fantail, eliminating a major fire hazard. Her crew drained fuel lines and closed and secured all compartments. The Japanese aircraft scored 3 hits on the Yorktown. She was left a dead in the water and a burning hulk with a large hole in her flight deck.

Having drilled endlessly, the Yorktown’s crew acted swiftly. Fires were quickly extinguished. Their powerplant back online and were steaming at 21 knots. They had even patcheds the large hole in her flight deck. Within an hour, the USS Yorktown was back in business and launching aircraft to counterattack the Japanese fleet.


Imagine a business being able to do something similar after a disastrous event!

This story highlights three important issues. The first is that the plan needs to be developed before disaster strikes. Secondly, the plan needs to be tested and practiced regularly. The United States Navy is renowned for their constant damage control drilling.


The last is we need to understand our profession is helping our clients to prepare for disasters and help them manage risk. We are not experts in managing their businesses. We are not qualified to tell how a manufacturer can prevent or manage around unexpected shutdown any more than I am qualified to go aboard a navy ship and tell them how they should prepare for being hit by a bomb.

But what we can do is help them by providing a framework to help them use their expertise and experience to plan and prepare. In other words, help them get their own creative juices flowing to develop a plan that works for them.


One method I have used and recommended to clients has been to follow a “what if” analysis to identify possible solutions to commence planning to stay in business. It is simple to perform. A business should ask themselves a series of “what if” questions.

What if my location or equipment is not usable?

It may be possible to transfer operations to a secondary location which is not being used to full capacity. Furthermore, in today’s global economy it may even be possible to utilize subcontractors to temporarily perform the function need to maintain customers. Some manufacturers have may consider maintain excess inventory stored at locations not subject to the same event which can be used to satisfy customer requirements seamlessly for a certain amount of time. One former client maintained older equipment when it was replaced with the idea to press it into use if the frontline equipment must be taken offline for some reason.


Wholesale operations may consider if it is possible to arrange to drop ship their products directly from their suppliers to customers.


However, it is also important not to forget issues of loss prevention and loss mitigation. Sprinklers are proven to be able to reduce property losses by over 80% shrinking the loss potential by fire to a level that is easier to continue to maintain services to customers.

What if my employees cannot come to work?


In today’s high-tech world, many employees have been enabled to work remotely. This has been proven to be a highly effective solution to dealing with Covid. It is also a potential solution which is easily pretested by asking employees to work remotely on occasion. In doing so management can ascertain if there are any technology issues which need to be resolved.


My sister worked for a major investment firm in the upper Midwest. The firm needed to staff customer call centers which meant most employees had to be onsite. If there was a major storm on the way, they would reserve local hotel capacity to house enough staff close to the site to assure they could be adequately staffed. They even so far as to know which employees had 4-wheel drive vehicles to help ferry employees to and from the hotels and work.


What if customers cannot visit my business?


During Covid, many businesses have not only taken the pandemic in stride but have also thrived. Others like restaurants and health clubs have taken it on the chin. Some failed to make adaptations quick enough and were forced to close their doors. Even for those businesses who predominantly rely on visitation can make adaptations.

Retail risks with a well-developed online strategy found less disruption in revenue as customers transitioned to mail order or curb-side pickup options. In some cases, they found revenues increased.


Some fitness companies were successful in converting from clientele visiting the club to following online fitness training. A friend who runs a private yoga was able to restructure from in-person group classes to virtual classes. She was able to replace a substantial portion of her revenue. Since restrictions have lightened up video yoga lessons remains a large portion of her revenue stream.


Restaurants who were able to reach out to reach out to their loyal customers to market takeout or food delivery options fared better than those who could not. A critical component was to have already access to customer contact information to make their customers aware the same delicious food was available. Free birthday desert clubs can be a valuable method to capture email or cell phone numbers to enable the restaurant to reach out to their customers for continued patronage.


Extra Expense Coverage


Businesses need to pre-plan to stay in business because of event but implementing and executing the plan may require resources. That is where Extra Expense Coverage comes into play. Earlier I called Business Income Coverage a bridge to another life. I think of Extra Expense Coverage as the “Help” button. It is there to make sure the business can make good on the plans.


Extra Expense Coverage can be provided in one of two manners. The first and the most common is as part of a combined limit with Business Income Coverage Form (CP 00 30). The second is as a separate limit using the Extra Expense Coverage Form (CP 00 50).

What is covered is identical under each of these forms. Extra expense means necessary expenses you incur during the “period of restoration” that you would not have incurred if there had been no direct physical loss or damage to property. Coverage pertains to expenses (other than the expense to repair or replace property) which are incurred to avoid or minimize the “suspension” of business and to continue “operations” at the described premises or at replacement premises or temporary locations, including relocation expenses and costs to equip and operate the replacement location or temporary location.

Furthermore, Extra Expense will pay to repair or replace property, but only to the extent it reduces the amount of loss that otherwise would have been payable under the selected coverage form. For example, paying an additional amount to get equipment repaired on an expedited basis.


While the insuring agreement is basically identical with either approach, there are some variations potentially affecting how the claim dollars will get paid out. When the extra expense coverage of within a combined limit with business income under form CP 00 30, any or all of the policy limit may be used for extra expenses incurred to stay in business or reduce the time or the level of disruptions in their business resulting from a covered loss.

Since extra expense is part of the business income limit, extra expense is subject to the same coinsurance conditions. Therefore, the coinsurance percentage and the overall limit requires the appropriate consideration. Similarly, the coinsurance condition may be waived by selecting the agreed amount, maximum period of indemnity or any of the monthly limit of indemnity options. If the carrier permits writing coverage without a specified limit, would effectively negate the coinsurance clause.


If coverage is elected to be a separate limit under form CP 00 50 the ultimate payout is restricted to the amount selected for extra expense. Unlike coverage under CP 00 30, the Extra Expense Coverage Form (CP 00 50), there is no coinsurance clause. However, how the claim dollars are paid out is limited to a specific percentage for the first 30 days, first 60 days and in the ensuing period. The is one option permit 35% to be paid within the first 30 days, 70% the first 60 days and 100% after that. Another option permits 40%, 80% and 100% respectively. The final option permits 1005 of the extra expense limit to be paid without time restrictions. The last option is the most expensive with the 35%/70%/100% %being the least expensive. Likely, the insured will need the money early. Hence, a 100%/100%/100% option is likely the best option as businesses seek to use extra expense coverage to stay in business or minimize the disruption in operations.


Probably the most often question I have been asked regarding Extra Expense Coverage is how much extra expense should the insured buy? There is an easy answer. If it covers all the extra expense the insured incurs to stay in business, then it was enough.


Yes! That is a flippant answer but there is no set formula to apply to extra expense. However, there are some factors that businesses can consider when trying to reach a good representation of how much limit the insured should purchase. It may seem like I am beating a dead horse but unless the business has developed a good continuity plan, it will be difficult to make an effective assessment of these factors.


1. Cost of Customer Outreach Programs

2. Increased advertising & Social media costs

3. Email outreach services

4. Extra employees

5. Extra shipping costs

6. Additional Technology needs

7. Higher contract Manufacturing costs

8. Rent for temporary premises.


The lesson we learned from recent events is there is no replacement preparing for disasters whether there are covered or uncovered events. Reliance upon insurance as the sole risk management instrument is fraught with peril. While loss of profits helps support any business, staying in business is always a preferred outcome. In fact, many of the businesses that were positioned and not only survive Covid-19 but actually thrived.

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