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3. CP-00-30

Form CP 00 30: Business Income (And Extra Expense) Coverage Form

1. What the form is

The CP 00 30 Business Income (And Extra Expense) Coverage Form is a standard insurance policy provision used in Commercial Property insurance. Its primary purpose is to protect businesses against the financial losses incurred due to a temporary shutdown or slowdown of their operations ("suspension") resulting from direct physical loss or damage to their property by a covered peril (like fire, windstorm, etc.). This form covers two main types of financial loss:

• Business Income: This is defined as the net income (net profit or loss before income taxes) that the business would have earned or incurred, plus normal operating expenses that continue during the period of restoration, including payroll.
• Extra Expense: This covers necessary expenses an insured incurs during the "period of restoration" that they would not have incurred if there had been no physical loss. This could include costs to temporarily relocate, outsource operations, or expedite repairs to minimize the business interruption. The form will also cover extra expenses to repair or replace property if those expenses reduce the overall business income loss.

Essentially, this form helps a business survive a covered property loss by replacing lost income and covering additional costs needed to get back on its feet as quickly as possible. The coverage applies during the "period of restoration," which is the time reasonably required to repair or replace the damaged property. It's important to note that the CP 00 30 is used in conjunction with other forms to create a complete policy, such as a Causes of Loss form (e.g., CP 10 10, CP 10 20, or CP 10 30) which specifies the perils covered, and the Commercial Property Conditions.

2. Classes of business it applies to

The CP 00 30 is versatile and can apply to a wide range of businesses, both large and small, that could suffer a loss of income if their operations are disrupted due to property damage. Examples include:

• Retail Stores: A clothing boutique that has a fire would lose income from sales and still have to pay rent and other continuing expenses. Extra expenses might include setting up a temporary pop-up shop.
• Manufacturing Plants: If a key piece of machinery is damaged by a covered peril, production stops, leading to lost income. Extra expenses could involve paying for expedited shipping of a replacement part or outsourcing production temporarily.
• Restaurants: A restaurant forced to close due to a kitchen fire would lose daily revenue. Extra expenses could include renting a food truck to maintain some level of service or costs to deep clean and restock after repairs.
• Service Businesses (e.g., dry cleaners, repair shops): If their premises are damaged, they cannot serve customers, leading to lost revenue.
• Landlords (Rental Value): The form can cover the loss of rental income if a covered peril makes tenant spaces unusable. This is referred to as "Rental Value" within the form.

Essentially, any business that relies on a physical location and tangible property to generate income should consider this coverage. Businesses that can operate from anywhere with minimal physical assets might have less need for business income coverage but could still benefit from extra expense coverage.

3. Special considerations

• Period of Restoration: Coverage is limited to the loss sustained during the "period of restoration." This period begins with the direct physical loss and ends when the property should be repaired or operations restored with reasonable speed. It is not necessarily how long it actually takes. The expiration of the policy term does not cut short the period of restoration.
• Coinsurance: This form typically includes a coinsurance clause, which requires the insured to carry a certain percentage of their actual business income exposure (e.g., 50%, 80%, 100%) to avoid a penalty at the time of loss. Accurately calculating the required limit using a Business Income Report/Worksheet (like the CP 15 15) is crucial. Failure to carry adequate limits can result in the insured sharing a portion of the loss.
• Alternatives to Coinsurance: There are optional coverages that can modify or replace the standard coinsurance provision, such as:
  • Monthly Limit of Indemnity: This option removes the coinsurance clause and instead limits the amount of recovery during each 30-day period to a fraction (e.g., 1/3, 1/4, or 1/6) of the policy limit. It's important to understand this doesn't necessarily limit the number of months of coverage, but rather the payout per month. The fraction applies to business income, not extra expense, under the CP 00 30.
  • Maximum Period of Indemnity: This option limits business income and extra expense payments to a maximum of 120 days following the loss, or until the limit is exhausted, whichever comes first.
  • Agreed Value: This option suspends the coinsurance clause for 12 months, provided the insured submits a completed Business Income Report/Worksheet (CP 15 15) annually. The insurer and insured agree on the amount of insurable business income upfront.
• Extra Expense Limitations: While the CP 00 30 includes extra expense coverage, the amount available for extra expense is part of the overall business income limit purchased, unless a separate extra expense limit is specified. The form doesn't typically ration how the extra expense limit is distributed over time, unlike the standalone Extra Expense Coverage Form (CP 00 50).
• Interruption of Computer Operations: The form contains an additional limitation regarding the interruption of computer operations. While there's a small amount of coverage ($2,500) given back as an additional coverage for losses due to destruction or corruption of electronic data by specified causes of loss, broader coverage for cyber-related business income losses typically requires separate cyber insurance policies.
• Civil Authority: The form provides coverage for loss of business income and extra expense if a civil authority prohibits access to the insured's premises due to direct physical loss or damage to property other than at the described premises, caused by a covered peril. This coverage usually has a waiting period (e.g., 72 hours) and a limited duration (e.g., three or four weeks).
• Extended Business Income (EBI): This additional coverage provides some cushion for income loss that continues after the period of restoration and after operations have resumed, as it may take time for customers to return and revenue to reach pre-loss levels. The standard EBI period is typically 60 days.
• Resumption of Operations: The policy requires the insured to resume operations as quickly as possible. The business income loss payment will be reduced to the extent the insured can resume operations using damaged or undamaged property.

4. Key information for agents and underwriters

• Risk Assessment (COPE): Underwriting business income coverage involves a thorough assessment of the insured's Construction, Occupancy, Protection, and Exposure (COPE). Understanding the nature of the business, its dependencies, supply chains, and potential bottlenecks is crucial.
• Financial Data Accuracy: Accurate and up-to-date financial information is paramount for determining the correct limit of insurance. Agents should guide clients through the Business Income Report/Worksheet (CP 15 15) meticulously. Underwriters will scrutinize this information to assess the exposure and ensure adequate coverage.
• Setting the Right Limit & Coinsurance: Underinsurance due to an inadequate limit or miscalculation of the coinsurance requirement is a common pitfall. Agents must explain the coinsurance provision clearly and help clients select an appropriate limit and coinsurance percentage. For businesses with fluctuating or unpredictable income, options like the Monthly Limit of Indemnity or Agreed Value might be more suitable to avoid coinsurance penalties.
• Period of Restoration Estimation: Accurately estimating the potential period of restoration is key. This involves considering repair/rebuilding time, equipment replacement lead times, and any potential delays. For example, a manufacturer with specialized machinery might face a longer restoration period than a retail store with easily replaceable fixtures.
• Extra Expense Needs: Not all businesses have the same extra expense needs. Some businesses (e.g., service firms like accountants or law firms) might be able to operate remotely with minimal interruption if they incur extra expenses for temporary IT infrastructure. Others, like manufacturers, might have very high extra expenses to outsource production or expedite critical machinery. The amount of extra expense coverage should be tailored to the specific business's contingency plans.
• Dependent Properties (Contingent Business Income): The standard CP 00 30 covers direct loss at the insured's premises. If a business relies heavily on a key supplier (contributing location), a key customer (recipient location), or a leader location that attracts customers (manufacturing or magnet location), endorsements like the CP 15 08 or CP 15 09 are needed to cover income loss due to damage at those dependent properties.
• Ordinance or Law Considerations: If building codes require costly upgrades or a longer rebuilding time after a loss, the standard period of restoration might not be sufficient. The Ordinance or Law – Increased Period of Restoration endorsement (CP 15 31) can extend coverage.
• Payroll Coverage: The definition of Business Income includes continuing normal operating expenses, including payroll. However, businesses may want to limit or exclude coverage for "ordinary payroll" (payroll for employees other than key personnel) to reduce premiums, especially if they don't intend to retain all staff during a prolonged shutdown. The Payroll Limitation or Exclusion endorsement (CP 15 10) can be used for this.
• Understanding Exclusions: Agents and underwriters must be thoroughly familiar with the exclusions in the Causes of Loss form attached to the policy, as well as any specific exclusions or limitations within the CP 00 30 itself (e.g., the interruption of computer operations limitation).