Form CP 15 20: Business Income Report/Work Sheet
The CP 15 20 Business Income Report/Work Sheet is not a coverage form or endorsement itself. Instead, it is a crucial tool used in conjunction with Business Income coverage forms, such as CP 00 30 (Business Income and Extra Expense) and CP 00 32 (Business Income Without Extra Expense). Its primary purpose is to help the insured and insurance professionals accurately calculate the appropriate amount of Business Income coverage needed. This is achieved by guiding the insured through a detailed estimation of their potential net income and continuing normal operating expenses that would be at risk during a "period of restoration" following a covered direct physical loss or damage. The worksheet facilitates a financial analysis by providing columns for both the most current 12-month period's income and expenses, and estimated figures for the upcoming 12-month period.
Classes of Business It Applies To
The CP 15 20 is applicable to a wide array of businesses seeking Business Income coverage. It is designed to be versatile enough for both non-manufacturing operations (businesses primarily involved in sales, storage of goods, or providing services) and manufacturing operations. Businesses with both types of operations can also utilize the form. Real-world examples where this form is essential include:
- Retail Stores: A local boutique would use this worksheet to project lost sales and ongoing expenses like rent, utilities, and employee salaries if a fire forced them to close temporarily.
- Restaurants: A restaurant owner would estimate lost revenue from diners and continuing costs such as loan payments, insurance, and key employee salaries during a shutdown caused by a covered peril.
- Manufacturing Plants: A factory producing goods would use the worksheet to calculate the net sales value of lost production and continuing expenses like equipment leases and property taxes.
- Service Providers: A dental office or a law firm would project lost billable hours and ongoing operational costs if their premises were unusable due to a covered event.
Essentially, any business that would suffer a loss of income and/or incur ongoing expenses if its operations were suspended due to property damage can benefit from using this worksheet. It is particularly important for businesses subject to coinsurance provisions, as it helps in determining the proper limit of insurance to avoid potential penalties.
Special Considerations
Several important points should be considered when using the CP 15 20:
- Mandatory vs. Optional Use: While highly recommended for any business with Business Income coverage on a coinsurance basis, the use of the worksheet (often referring to the CP 15 15, which the CP 15 20 often accompanies or acts as) is specifically required when the "Agreed Value" option is selected or when the "Premium Adjustment Form" (which is the CP 15 20 itself) is included with the Business Income coverage.
- Premium Adjustment (Reporting Form Functionality): When the CP 15 20 endorsement is attached, the worksheet serves a dual purpose. It's an initial worksheet to establish the basis for the initial premium calculation. Then, a final report, based on actual figures, is submitted by the insured (typically within 120 days after coverage expires or is cancelled) to calculate the final adjusted premium. This allows an insured to select a higher limit to cover potential maximum exposure but ultimately pay a premium based on their actual exposure during the policy period. If actual figures are lower than estimated, a refund may be due; if higher, no additional premium is charged as coverage was already capped at the selected limit.
- Accounting Method: The worksheet generally requires completion on an accrual basis, meaning income and expenses are recorded when incurred, not necessarily when cash changes hands. It should also align with generally accepted accounting principles (GAAP). Any accepted inventory valuation method (LIFO, FIFO) can be used, provided it's applied consistently.
- Coinsurance Implications: Accurately completing the worksheet is vital for establishing an adequate Business Income limit, which is crucial for satisfying coinsurance requirements. The coinsurance percentages for Business Income typically range from 50% to 125%, representing a proportion of a year (e.g., 50% = 6 months, 100% = 12 months). Failure to maintain adequate limits based on the worksheet's calculations can result in a coinsurance penalty at the time of loss. The CP 15 20, through its premium adjustment mechanism, helps mitigate this risk by allowing for a limit that reflects the highest possible loss exposure while adjusting the premium based on actuals.
- Exclusions from Eligibility for CP 15 20 Endorsement: The premium adjustment feature of the CP 15 20 is not available for risks written with the Business Income Agreed Value optional coverage, or those that include coverage for Business Income from Dependent Properties (CP 15 08 or CP 15 09).
Real-world example: A seasonal business, like a coastal resort, might experience significant fluctuations in income. Using the CP 15 20 allows them to set a Business Income limit based on their peak season's potential income, ensuring adequate coverage if a loss occurs then. However, their final premium will be adjusted based on their actual income over the entire 12-month policy period, potentially resulting in a lower premium than if they had a fixed premium based solely on the peak exposure.
Key Information for Agents and Underwriters
The CP 15 20 provides valuable insights for both agents and underwriters:
- Risk Assessment: The completed worksheet offers a detailed financial snapshot of the insured's operations, helping underwriters assess the potential severity of a Business Income loss. It highlights revenue streams, key expenses, and the overall financial health of the business.
- Pricing/Premium Adjustment: For underwriters, the CP 15 20 is integral to the premium adjustment process. The initial worksheet provides the basis for the deposit premium, and the final report allows for an accurate calculation of the earned premium. Agents should explain this reporting form nature to clients so they understand the potential for premium adjustments.
- Coverage Adequacy and Coinsurance: Agents should stress the importance of completing the worksheet accurately to ensure the insured selects an adequate Business Income limit, thereby avoiding coinsurance penalties. Underwriters will scrutinize the worksheet to ensure the limits requested are reasonable and supported by the financial data. The CP 15 20 encourages selecting a limit high enough for the maximum possible projected income and continuing expenses, with the premium adjustment feature making this more palatable.
- Identifying Coverage Gaps: Reviewing the worksheet can help agents identify potential coverage gaps. For instance, if "Extra Expense" is not adequately considered or if payroll expenses are a significant factor, the agent can discuss options like the CP 00 30 (which includes Extra Expense) or endorsements like the Payroll Limitation or Exclusion (CP 15 10).
- Underwriting Guidelines: The information on the worksheet helps underwriters determine if the risk meets their guidelines. For example, a business with highly volatile income or unusual expense structures might require more detailed underwriting scrutiny. The worksheet provides a standardized way to present this financial information.
- Client Education: Agents can use the worksheet as an educational tool to help clients understand their Business Income exposure and the importance of this coverage. Walking through the calculations can demystify the process and lead to more informed coverage decisions.
Practical Insight: An underwriter reviewing a CP 15 20 for a new restaurant might see high projected revenues but also very high initial operating expenses. The worksheet helps them understand the burn rate and the amount of continuing expenses (like rent, loan payments for new equipment) that would need to be covered even if the restaurant couldn't open or had to shut down shortly after opening due to a covered loss. This allows for a more accurate assessment of the necessary Business Income limit than a simple revenue projection alone. The agent, in turn, can use this detailed analysis to explain the recommended coverage limit to the client, emphasizing the protection it offers for those critical continuing expenses.