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3. CP-15-15

Form CP 15 15: Business Income Report/Worksheet - Coinsurance

The CP 15 15 Business Income Report/Worksheet - Coinsurance is a crucial document in commercial property insurance. Its primary purpose is to assist insureds in accurately calculating their business income exposure. This calculation helps determine the appropriate limit of insurance needed to satisfy the coinsurance requirements stipulated in their Business Income coverage forms (like CP 00 30 or CP 00 32). Essentially, it's a tool to figure out the potential financial loss a business could suffer due to an interruption caused by a covered peril and to ensure adequate coverage is in place to avoid a coinsurance penalty.

Classes of Business It Applies To

The CP 15 15 is versatile and can be used by a wide array of businesses, as business income coverage is vital for most commercial enterprises. It is specifically designed to accommodate both:

• Non-manufacturing operations: These are businesses primarily involved in the sale or storage of goods/merchandise or those that mainly provide services. Examples include retail stores, wholesalers, professional service firms (e.g., law firms, accounting practices), and healthcare facilities. Even businesses that perform minor incidental machine work, like packing or minor repairs, fall under this category if their primary operation is non-manufacturing.
• Manufacturing operations: These businesses are primarily engaged in producing goods. The worksheet has distinct sections or columns to cater to the specific financial calculations relevant to manufacturers, such as the valuation of raw materials, work-in-process, and finished stock.
• Dual-purpose operations: Businesses that have both manufacturing and non-manufacturing income streams can utilize all applicable sections of the worksheet to accurately report their total business income exposure.

For instance, a bakery that manufactures bread and pastries on-site (manufacturing) and also operates a retail storefront to sell these goods directly to consumers (non-manufacturing) would use the relevant columns for each aspect of its operation when completing the CP 15 15.

Special Considerations

There are several important points to keep in mind when dealing with the CP 15 15:

• Mandatory vs. Optional Use: Completion of the CP 15 15 is required if the insured selects the "Agreed Value" option for their Business Income coverage or if the "Premium Adjustment Form" (CP 15 20) is attached to the policy. When Agreed Value is chosen, the worksheet helps establish the "agreed value," and the insured (or their representative) must certify its accuracy. For policies with the Premium Adjustment Form, the CP 15 15 serves as both the initial worksheet for premium calculation and the final report for premium adjustment after the policy period. For other business income policies written on a coinsurance basis, using the CP 15 15 is optional but highly recommended to accurately determine the necessary insurance limit and avoid potential coinsurance penalties.
• Accounting Method: The worksheet must be completed on an accrual basis of accounting. This means income and expenses are recorded when they are earned or incurred, not necessarily when cash changes hands. Any inventory valuation method (LIFO, FIFO, etc.) can be used, as long as it's applied consistently for both beginning and ending inventories.
• Financial Analysis Period: The form typically requires a two-part financial analysis: one for the most recent 12-month period (ending at policy inception or the last anniversary date) and another for the estimated income and expenses for the upcoming 12-month policy period. This forward-looking estimate is crucial for setting appropriate coverage limits.
• Not a Guarantee Against Coinsurance Penalty: While the worksheet is a tool to help meet coinsurance, accurately completing it doesn't automatically waive the coinsurance clause unless the Agreed Value option is in effect. If the actual sustained loss or the values at the time of loss differ significantly from the worksheet projections, a coinsurance penalty could still apply if the limit of insurance is inadequate.
• Complexity: The form can appear daunting to clients due to its detailed financial nature. Agents play a key role in guiding insureds through the process or recommending they work with their accounting professionals.

Real-world example: A restaurant owner planning to renew their business income coverage. If they opt for "Agreed Value" to avoid coinsurance penalties, they must complete the CP 15 15. The figures from this worksheet will form the basis of the agreed insurance amount. If they choose standard coinsurance, their agent should still strongly advise completing the CP 15 15 to project income and expenses accurately, thereby minimizing the risk of being underinsured.

Key Information for Agents and Underwriters

The CP 15 15 is more than just a client document; it's a vital tool for both agents and underwriters:

• For Agents:
  • Client Education: Agents should be prepared to explain the purpose and importance of the worksheet, especially the implications of coinsurance and the benefits of options like Agreed Value. Many clients may need assistance understanding the accounting terms and how they relate to their insurance coverage.
  • Needs Analysis: The worksheet is the foundation for determining the correct amount of Business Income coverage. It helps identify all sources of revenue and continuing expenses that need protection. Agents can use it to discuss how long a business might realistically take to recover from a major loss (the "period of restoration").
  • Coverage Gaps: By going through the worksheet, agents can identify potential coverage gaps, such as the need for Extra Expense coverage (covered under CP 00 30 but not CP 00 32 unless expenses reduce the business income loss) or coverage for dependent properties (which requires separate endorsements like CP 15 08 or CP 15 09).
  • Managing Expectations: It helps set realistic expectations about the coverage amount and the information required by underwriters.
• For Underwriters:
  • Risk Assessment: The CP 15 15 provides a detailed financial snapshot of the business's income-generating capability, which is essential for assessing the business income exposure. It's the time element equivalent of a property schedule.
  • Underwriting Data: It offers crucial data points for underwriting, such as gross sales, cost of goods sold, operating expenses, and projected net income. This information helps in understanding the stability and nature of the insured's revenue streams.
  • Basis for Coinsurance/Agreed Value: It provides the figures upon which the coinsurance percentage will be applied or the Agreed Value will be based. Underwriters rely on the accuracy of this information.
  • Identifying Fluctuations: Comparing the historical data with the projected figures can help underwriters identify significant anticipated changes in the business that might affect its income exposure (e.g., planned expansion or contraction).

Real-world example for underwriters: An underwriter receives a CP 15 15 for a manufacturing business. They will scrutinize the breakdown of revenues, the cost of goods sold (including raw materials and factory supplies), and the continuing expenses (like payroll, utilities, and rent). If the projected income for the next 12 months shows a significant, unexplained increase compared to the historical data, the underwriter might request further clarification or justification before binding coverage or agreeing to an "Agreed Value." This helps ensure the premium accurately reflects the risk and that the coverage limit is appropriate.