Many agency staff (and, yes, even owners) inwardly cringe when the subject of business interruption arises. It seems to be a topic that confuses some, disheartens others and fills most CSRs with a sense of dread. The reason for this almost universal aversion is the worksheet that carriers demand be completed to measure the exposure to loss. I call this the "killer worksheet."
I refer, of course, to ISO's CP 15 15, the Business Income Report/Work Sheet. While not always required by carriers (some have their own version), many underwriters like to have it. It is almost universally demanded when the agreed-value coverage option is requested. And that's only fair. After all, we are perfectly comfortable providing a signed statement of values when we ask for agreed-amount coverage for property. Why rebel at the thought of providing it for BI?
As insurance professionals, we know the importance of measuring exposures and the necessity of insuring to value. So we don't have a problem with the concept; the problem is with the tool that's being used-especially since there's an equally effective yet painless alternative.
Look at the insuring agreement on the business income form (CP 00 30). It defines business income as net income (net profit or loss before taxes) + continuing normal operating expenses, including payroll. We can represent this as: BI = NP + CE. What could be simpler?
But the "killer worksheet" doesn't ask for this information. Instead, it requires us to make a much more complex calculation: annual gross sales minus the cost of goods sold (a sub-worksheet is provide so you can figure out how to come up with that figure) less certain non-continuing expenses (but not all of them), plus other earnings from business operations. Then, we have to apply a percentage to reflect the estimated portion of a full year that the insured would necessarily be shut down.
Not only do we get confused by the complex instructions that accompany this worksheet (allegedly to make it easier for us), but experience has shown that the worksheet confuses accountants as well.
Now here's the revolutionary idea: Why not have a worksheet that follows the insuring agreement? That is, why not merely ask the insured to provide a listing of those monthly expenses that would continue, even if their doors were closed, plus the net profit the business would have earned in its best month? Then we could multiply the sum of those two numbers by the insured's best estimate of the number of months they would be shut down by a covered loss, and we'd be done. In other words, ask for NP + CE–that's what the policy says we're supposed to be looking for!
Ah, but what about all that information on the "killer worksheet"? Aren't all those numbers important and necessary? Well, as I've demonstrated repeatedly in my continuing education classes on this subject, no matter which approach is used, the result is essentially the same! Net profit plus continuing expenses yields the same result as gross sales less cost of goods sold and non-continuing expenses. They are two sides of the same coin. So why torture ourselves?
What I'm suggesting is a worksheet that might look something like the one on the worksheet at the end of this article. We can then add an estimated extra expense figure and round up to get the total insurance required.
If you don't think this is simpler, compare it with the CP 15 15. And what insured (let alone an accountant) couldn't understand how to complete it? With a completed worksheet in hand, we agents could then confidently request agreed-value coverage for our clients–which, after all, is what they should have.
So why doesn't the industry abandon its old workhorse for something simpler and more understandable? I might cynically speculate that since the "killer worksheet" is harder to fudge, underwriters can have more faith in its veracity. I'd hate to think that's the case in an industry founded on trust and integrity.
An underwriter ought to trust a worksheet like the one below, signed and dated by the insured, as adequate verification that insurance to value had been achieved. It seems to work satisfactorily for property values. So let's all agree, once and for all, to kill the "killer worksheet."
| Loss of Income Worksheet
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(Readers can contact Philip Lieberman at liebermanconsult@yahoo.com.)
Philip Lieberman headed his own regional insurance agency for over 35 years. He now acts as an expert witness in insurance litigation, does traditional consulting for commercial insureds and works with insurance agencies on internal operational improvement. He has also taught self-created Continuing Education seminars for IIABNJ.
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