The definition of an extended period of indemnity relates to a business' income insurance policy, which covers loss of income during a suspension of operations. An extension of the indemnity period can be used in order to give a business more time to recover from the suspension.

Sometimes when a business suffers a loss, it will need to suspend operations during the subsequent period of restoration. In these circumstances, business income insurance will cover the loss of business income. Business income is the net profit that would have been earned if the suspension had not occurred, plus any regular operating expenses that are incurred during the actual suspension.

For business income insurance to cover the loss, the suspension must be a result of direct physical loss or damage to personal or real property. This kind of coverage is active against the same causes of loss that are covered by the insured business's property policy. In some circumstances, the policy may also offer an extension of coverage for newly acquired property.

The period of restoration starts on the date of the direct loss and ends when the destroyed or damaged property is restored. Unfortunately, during this period, the insured business' customers may seek alternative sources for the products, services, or goods they had been receiving from the insured business. Customers might have changed their buying habits or entered into replacement contracts with other businesses. It takes time to regain these customers and the revenue they provided. It takes even more time to replace these customers with new ones.

Once the full operational capability of the business is restored, both income levels and operational expenses increase. Expenses that were lowered or discontinued altogether during the suspension become reestablished once regular operations are underway.

Extended Period of Indemnity

The business insurance policy must list the business location and business operations. In addition, the insurance income and extra expense form most likely includes many options for additional coverage, including the following clauses related to indemnity:

  • Maximum Period of Indemnity.
    This option restricts the policy's period of restoration. If this option is chosen, the insured business' loss payment will be limited to either the amount of loss suffered within the 120 days after the loss or the policy limit, whichever is less. If you choose this option, the coinsurance requirement will not apply.
  • Monthly Limit of Indemnity
    This option enables the insured business to recover a predetermined percentage amount of the policy limit during every month of interrupted business operations. If a loss happens, payment will be made for the lesser actual amount of the loss, or the maximum recoverable amount under this option. If you choose this option, the coinsurance requirement will not apply.
  • Extended Period of Indemnity
    This option extends the business income coverage over the regular 30-day timeframe. The insured business may extend coverage for 60 days, for up to 360 days maximum. The chosen timeframe depends on the amount of time the business estimates it will take for revenues to return to their normal numbers following a suspension.
  • Agreed Value
    This option requires the insured business to file a business income report or worksheet that reports the actual financial information for the past 12 months and estimated financial information for the next 12 months. From the submitted data, an agreed value amount is determined. If a loss happens, the insured business' policy limit must equal the agreed value, in order for losses to be paid in full. If you choose this option, the coinsurance requirement will not apply.

Extended Business Income Protection

The protection offered by extended business income policies is not intended to help the insured business recover income loss due to external circumstances, such as unfavorable economic conditions that exist once the insured business returns to normal operations. If the business' ability to restore its income to pre-loss levels is harmed by external economic circumstances, the coverage extension will not apply.

The limits set by extended business income policies are not factored in addition to the limit set by the business income coverage that was purchased. Rather, the lost income during this period is paid out of the regular business income limit.

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