The loss of income and the additional expenses that occur after a direct loss to property can be devastating to a business. All aspects of the insured’s property and operations must be considered when addressing such potential loss exposures because properly structured consequential loss insurance will be needed to ensure that the business survives. Theoretically, business income, if properly purchased, will do exactly what the business would have done had no loss occurred—no more, no less. But what happens after the property is restored? Can the business regain its customers and survive? In addition to surveying the insured’s property and operations, key suppliers, customers, and inter-related companies should also be considered in the evaluation. In doing so, the insured should try to determine the extent of the most severe damage possible to the most critical items at the worst time of year.
Consequential Loss Checklist – General Information –
Named Insured is a(n): _____Individual _____Partnership _____Corporation ____Limited Liability Corporation _____Joint Venture _____Other
General business operations:
States/territories in which insured has operations:
States/territories in which insured might begin operations within next twelve months:
Loss control contact name/phone:
Insurance Company Information
Carrier name ___________________________________________________
Financial (A.M. Best) rating ____________________________________
Number of days for notice of cancellation and nonrenewal _____________
Standard or nonadmitted market? _________________________________
Coverage territory ____________________________________________
Business income, including extra expense:_________________________________
Business income, excluding extra expense: __________________________
Extra expense limit: _____________________________
Other consequential loss limit: _______________________________
____1. Review flow chart to determine critical path of operations?
____2. Use critical path analysis?
____3. Review asset schedule to determine time to replace each item that would seriously affect operations?
____4. Identify possible bottlenecks in production or operating processes?
____5. Would the shut down of any key locations affect operations? For how long?
____6. Would the loss of key equipment affect operations? For how long?
____7. Should parent and all subsidiaries/affiliates be commonly or separately insured?
____8. Are there inter-dependent operations that would be compromised if one portion were not able to operate?
____9. Are spare parts for critical equipment readily available? On premises? Off premises?
____10. How long would it take to repair the most time-consuming production processes or the most involved operational facilities?
____11. Are there any pieces of obsolete equipment or obsolete facilities?
____12. Are plans in place to replace obsolete equipment or re-build obsolete facilities?
____13. What operations could and would be suspended until repair or replacement?
____14. What operations could and would be shifted to another location or quickly restored regardless of the expense involved?
____15. Do seasonal fluctuations in business patterns affect income?
____16. Any loss of rents?
____17. Any favorable leases that would not be able to be mimicked?
____18. Would widespread damage geographically, such as that caused by tornadoes or floods, affect the length of time required to recover from a direct loss because of the scarcity of building materials?
____19. How long will it take to regain customers after an extended shutdown?
____20. Will extra expenses be incurred to regain customers after an extended shutdown?
____21. Are there any attributes that need special evaluation or coverage consideration, such as:
– Aerial structures
– Buildings under construction or renovation
– Selling agents that rely on commission income
– Electronic data processing operations
– Contingent liability for an additional period of restoration due to operation of building laws
– Extending coverage to underground property in a mining operation
– Molten metals exposure
– Continuing expense exposure for not-for-profit or educational organizations
– Radioactive contamination exposures
– Other pollution contamination exposures
– Special research and development issues, such as reliance on current research for future profits
– Possibility of newly acquired locations
Contingent Business Income/Extra Expense/Consequential Loss Issues
____1. Consider potential effect of off premises utility interruptions, including water, communications, and power supplies?
____2. Consider potential effect of excessive application of utilities, such as heat, light, steam, air conditioning, coolant, etc.?
____3. Are there any on premises utility generators that should be considered?
____4. Are alternative sources of key supplies readily available?
____5. Has extra expense needed to use alternative suppliers been calculated?
____6. Is the insured dependent on any contributing properties (suppliers, etc.)?
____7. Is the insured dependent on any recipient properties (consumers, etc.)?
____8. Is the insured dependent on any leader locations to draw customers?
____1. Business income excluding extra expense?
____2. Business income including extra expense?
____3. Extra expense only?
____4. Perils insured?
____5. Should perils such as earthquake and flood be included in coverage?
____6. Blanket or scheduled coverage?
____7. Is extended period of recovery provision in place?
____8. Should length of extended period of recovery be extended?
____9. Consider premium adjustment endorsement?
____10. Consider maximum period of indemnity endorsement if restoration period is less than a year?
____11. Consider monthly limitation of recovery?
____12. Delete coinsurance and add agreed value endorsement?
____13. Would valued form of coverage be appropriate?
____14. Consider adding coverage for off premises utility failure, including overhead transmission lines?
____15. Extend coverage for action of civil authority beyond the time provided in form?
____16. Consider using valued business income/extra expense or special R&D coverage for research and development facilities that may depend on current research for future profits?
____17. Consider coverage for other specialized or contingent exposures, such as:
– Food spoilage,
– Other perishable items, such as pharmaceuticals, blood products, etc.
– Boiler and machinery exposures
– EDP exposures
– Builders risk exposures
– Tuition fees
– Transportation equipment
– Planned alterations to existing physical plant and new building exposures
____18. Consider coverage provisions of the following endorsements See Business Income and Extra Expense Endorsements for a description of each endorsement:
– Business income from dependent properties – broad coverage
– Business income from dependent properties – limited coverage
– Expanded limits on loss payment
– Ordinary payroll limitation or exclusion
– Power, heat, and refrigeration deduction
– Seasonal leases – monthly limits on loss payments
– Business income report/work sheet
– Business income premium adjustment
– Mining properties – business income
– Business income changes – educational institutions
– Electronic media and records
– Ordinance or law – increased period of restoration
– Extra expense from dependent properties
– Utility services – time element
– Radio or television antennas – business income or extra expense
– Business income changes – beginning of the period of restoration
Establishing Limit(s) of Coverage
____1. Has worksheet been completed?
____2. Should ordinary payroll be insured?
____3. How much coverage should be included for extra expenses to recover from the loss and regain customers?
____4. Consider buy-back of off-premises transmission lines coverage?
____5. Consider impact of peak season fluctuations in business?
____6. Consider the following expenses to determine what amount should be included in the business income limit for continuing expenses:
– Payroll (ordinary and extraordinary)
– Services performed by others
– Lease or rental expense (check written leases to determine whether rental payments must be continued if building is damaged)
– Interest expense
– Franchise and license fees/royalties
– Postage and telephone
– Collection expense
– Professional fees
– Travel/entertainment expense
– Shipping and packing expenses
– Cost of on-going contracts
– Contractual penalties that may be imposed if a contract cannot be completed as required
____1. Has a company-wide disaster recovery plan been developed?
____2. Are key records (including paper and electronic) duplicated?
____3. Are duplicate records kept off premises?
____4. Are critical spare parts available but kept off premises but in an easily accessible location?
____5. Is there any reserve inventory kept off premises?
____6. Are reciprocal operations arrangements in place with friendly competitors or disaster recovery centers in place?
____7. For service operations, are plans in place to continue operations in temporary facilities with temporary equipment?
____8. How quickly can temporary facilities be established?