Business owner policies, traditionally referred to simply as BOPs, were introduced in 1976 and significantly revised in 1987. The BOP evolved gradually since the 1987 revisions to include risk classification and sizes not contemplated in the original or revised editions of the form. Additionally, many insurance carriers have built upon the Insurance Services Office’s (ISO) version to develop proprietary forms.
BOP policies have long been viewed as the easy way to protect the client with the greatest amount of coverage, and to a great extent they are. BOP policies were designed to simplify the risk management process by packaging property and liability coverages into one form while including several coverage extensions that traditionally necessitated endorsements. However, reliance on the breadth of coverage automatically provided by the BOP may have blinded some to the form’s coverage gaps.
BOP Business Income Limitations
Business income protection provided by the BOP is relationally broad — there is no coinsurance with which the agent or insured need be concerned and the loss of income is “fully” covered for 12 months. But even in its breadth three weaknesses exist:
- Ordinary payroll is limited to 60 days;
- Coverage is limited to 12 months of protection; and
- Extended business income is limited to 30 days.
Ordinary payroll is not limited in the standard business income policies unless done so by endorsement. The BOP is exactly opposite — unless endorsed otherwise, coverage for ordinary payroll is limited to just 60 days. Should the insured desire to extend payroll to “ordinary” employees beyond these 60 days, the policy must be endorsed by notation on the declaration page, indicating the number of days of coverage desired, and payment of an additional premium must be made.
“Ordinary” employees are all employees other than officers, executives, department managers, employees under contract or any other employees specifically listed as being necessary, non-ordinary employees (done by name or job classification). Payroll for these non-ordinary employees is covered for the entire period of restoration or 12 months, whichever comes first.
The insured has no remedy should the “period of restoration” extend beyond the 12 months of coverage provided by the BOP’s business income protection. Business income lost after the 12-month period of indemnity is paid out of the insured’s pocket.
Many factors directly affect the “period of restoration” and the time it takes a particular entity to return to its pre-loss “operational capability.” Among the relevant factors: time for the adjustment process; time for building plans to be drawn and approved; finding and hiring a contractor; obtaining building permits; time to rebuild; and any building code-related issues. The insured may require more than 12 months to return to “operational capability” depending on the loss severity and problems in accomplishing all the necessary “period of restoration” factors. The BOP offers no way for the insured to increase the protection beyond 12 months.
“Operational capability” as it relates to business income is an entity’s ability to operate at or near pre-loss production or sales capacity. This is a non-policy-defined business income term describing the point at which an insured can operate with the same level of inventory, equipment and efficiency as before the operational-closing loss.
To clarify, “operational capability” is not synonymous with a return to pre-loss income levels, which may take much longer to accomplish. “Operational capability” is merely the entity’s ability to produce goods and provide service at the same level, efficiency and speed as before the loss (i.e., the ability to conduct “operations” at pre-loss levels). This highlights the third limitation of the BOP’s business income coverage — the 30-day limit on the extended period of indemnity.
Once the business has reopened and returned to full operational capability, returning to pre-loss cash flows and income levels may take a while. The unendorsed/unaltered BOP provides only 30 days of additional protection following the period of restoration to return to pre-loss profit levels. If the insured feels this is inadequate coverage (which it probably is), the period of extended business income coverage can be extended by a notation on the declaration page and the payment of an additional premium.
Business Personal Property – Seasonal Increase Limitation
One often touted benefit of the BOP is the automatic 25 percent seasonal increase for business personal property. This is appropriate for those insureds subject to periods of foreseeable or even unforeseen increases in business personal property.
However, this extension of coverage comes with a caveat — the business personal property limit must equal 100 percent of the average monthly values on hand for the 12 months (or the length the insured has been in business, whichever is less) immediately preceding the loss. This means that the value used for the current year has to include the seasonally increased values of the year prior.
If the insured averaged $100,000 for nine of the previous 12 months and $120,000 for the remaining three (within the 25 percent), what limit must they carry to assure the availability of the seasonal increase protection? The insured’s average monthly value is $105,000 [(($120,000 x 3) + ($100,000 x 9))/12]. To qualify for the seasonal increase, the insured must carry $105,000 — not the $100,000 that is the most common amount on hand.
Many agents fail to account for this policy provision, which potentially leaves their client without the proper protection should a loss occur during the time of a seasonal increase.
Breakdown, Boiler and Artificial Electrical Damage Limitations
Limitation may not be the correct term for System Breakdown, Boiler and Artificial Electrical Damage losses — exclusion is more appropriate. Loss caused by a systems breakdown, steam boiler or artificial electrical damage is specifically excluded in ISO’s BOP coverage form.
To pick up coverage for these exposures requires an endorsement be attached. The BP 04 59 “Equipment Breakdown Protection Coverage,” adds back the necessary protection.
BOP policies accomplish much of their intended goal, providing a wide scope of coverage without the need of much agent/policy interaction. However, relying too heavily on the BOP without knowledge of its finer details can leave the client lacking at the time of a loss.
This article discusses five limitations or exclusions that may adversely affect clients, but there are others. And the BOP program offers additional endorsements to personalize the policy to fit each client’s need. Even though the BOP looks like a full package of protection, proper time must be devoted to assure the insured is protected.
Writer’s Note: This article has focused solely on ISO’s BOP form. Many carriers have developed their own forms. Non-ISO forms must also be carefully analyzed to find their own weaknesses and gaps. A BOP is not a “once-and-done” form — it must be monitored like any other.
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