Our insured is covered under a businessowners policy form BP 00 02 01 97. He purchased property involved with subsidized housing and was granted tax credits for certain years pending construction being started and costs being incurred within a certain time frame. Now, because of a covered loss, he has missed the time frame and lost the tax credits.

My question relates to the policy language defining business income as "net income (net profit or loss before income taxes) that would have been earned or incurred had not physical loss or damage occurred…" Clearly, the insured will suffer a financial loss, but it appears the language will preclude coverage for that part of the claim. What are your thoughts?

Michigan Subscriber

First, we do not see the definition of "business income" creating a problem. The tax credit would be applied to the income tax owed, and the income taxes should fall within "continuing normal operating expenses incurred.'' The policy does not define "operating expenses," and most examples we found used "cost of raw materials" or "rent," but in fact taxes are listed in the expenses column for a standard profit/loss statement, upon which the amount of business income insurance to purchase is based.

So it should be feasible to think that in your situation the amount of operating expenses—the taxes—will increase, rather than remain a constant. What you will have to demonstrate, however, is that the business income loss has occurred during the "period of restoration." In other words, the tax credits should have been realized during the period. For example, the date of loss was March 1, and the construction, which should have begun April 1, must be delayed until September 1. Taxes due for the calendar year in which the loss occurred are therefore $5,000 rather than $4,500, because of not realizing the credit. So this additional $500 should be covered.

But once the period of restoration has ended, we do not see the policy language allowing further recovery.