Does Business Income for Property require coinsurance? There are three alternatives to using coinsurance:

• Monthly Limit of Indemnity
• Maximum Period of Indemnity
• Agreed Value

All three are built into ISO form CP 0030, Business Income (and Extra Expense). This post will discuss Monthly Limit of Indemnity. The coverage uses only 63 words in the form – including that Coinsurance does not apply – and yet it is an often misunderstood type of BI.

Monthly Limit is available in fractions of 1/3, 1/4, 1/6 and 1/12. To dispense with the most common myth, despite the title and despite the fractions, this type of BI does not limit coverage to a certain number of months.

The insured must choose a limit for the BI, and any EE thought necessary. This is entirely up to the insured’s discretion, as no coinsurance applies. This total limit of BI and EE combined is the most that will be paid. The fraction caps the amount of BI that can be paid in a single 30-day period. Extra Expense is not affected by the fraction.

As usual with BI coverage, examples can be illuminating. The insured has a limit of $350,000. $300,000 is for BI, and $50,000 is for EE. The fraction chosen is 1/4.

Example 1
In the first 30-day period, the insured sustains a loss of $50,000. The amount available is $75,000 ($300,000 x 1/4 monthly limit). The entire loss of $50,000 is covered. $250,000 of BI remains, no matter how many months the loss continues. The entire limit of $50,000 EE remains.

In the second 30-day period, the insured sustains a loss of $70,000, and uses $25,000 of EE. The entire loss is covered. $180,000 of BI and $25,000 of EE remains.

In the third 30-day period, the insured sustains a loss of $75,000 and uses $25,000 of EE. The entire loss is covered. $105,000 of BI remains and no EE remains.

Additional months, if needed, can be covered by this $105,000, with coverage limited to $75,000 per month.

If the 1/3 fraction is used, $100,000 is available per month. For 1/6 fraction, $50,000 is available per month. For 1/12, $25,000 is available.

Example 2
In the first 30-day period, the insured sustains a loss of $150,000. The amount available is $100,000. The carrier will pay $100,000, the max amount available. $300,000 of BI remains, and $50,000 of EE.

In the second 30-day period, the insured sustains a loss of $125,000 and uses $40,000 of EE. The insurer will pay $100,000 for BI, and $40,000 for EE. $200,000 of BI remains, and $10,000 of EE.

In the third 30-day period, the insured sustains a loss of $75,000 and spends $20,000 on EE. The insurer will pay $75,000 for BI, and $10,000 for EE (the remainder of the limit). $125,000 of BI remains, and no EE remains.

It is apparent that the insured must carefully choose both the limit and the fraction. The insured is most familiar with its own revenue and expense patterns. As with any other limit, allow the insured to choose.