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Key Terms in Standard Business Interruption Policies

•  Co-insurance

The purpose of the co-insurance clause in standard policies is to encourage the insured to insure to full value. For example in the profits policy, the insurer shall not be liable, in the event of a loss, for a greater proportion than the amount the insured bears to 100% of the projected annual defined gross profit . Thus, if the amount insured is $80,000 and the projected annual defined gross profit is $100,000, the company would only be covered for 80% of any loss.

This problem however, can be avoided. It is important when purchasing insurance that a company purchases coverage based on the anticipated future income two years into the future. This is even more critical for a rapidly growing company that may need to review its coverage on an annual basis.

This is discussed in more detail in the article Factors to consider in choosing an amount of Business Interruption Insurance.

•  Ordinary Payroll

Ordinary payroll refers to the wages paid to non-key staff who would not normally continue to be employed if a major incident occurred.

In a gross earnings policy, if no option under the Payroll Options clause is exercised then the amount of insurance includes ordinary payroll. Under the Payroll Options clause, companies may choose coverage for 90 days following the loss or exclude ordinary payroll entirely.

In a standard profits policy, ordinary payroll is not covered. Accordingly, a company needs should to consider whether it needs requires additional coverage if, for example, it employs skilled workers who would be hard to rehire after a temporary interruption.

•  Indemnity Period

This is the period during which business interruption losses are covered by an insurance policy.

In a profits policy, the indemnity period extends until sales return to the level they would have been at, if the incident had not occurred. However the period is normally limited to 12 months.

In a gross earnings policy the period is not limited but the insurer's liability ends when the rebuilding, repairs or replacement is completed.

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