What is Time Element coverage?
A property insurance term referring to coverage for loss resulting from the inability to put damaged property to its normal use. This type of coverage is called "time element" insurance because the amount of loss depends on how long it takes to repair or replace the damaged property. The best-known types of time element insurance are business interruption and extra expense coverage.
Time Element coverage is intended to reimburse the policyholder for the income lost or incremental increase of expenses experienced during the loss period. To trigger this coverage a policy must have suffered physical damage as a result of a covered peril or another trigger defined in the property policy such as Civil Authority, Ingress/Egress or Service Interruption.
Though the application of this coverage may appear simple on the surface, measuring a time element claim is far from black and white. There are various methods of calculating business interruption and other intervening factors such as property damage decisions that give these claims a shade of grey.
Calculating Time Element - Gross Earnings vs Gross Profits
At a high level, the two primary approaches to quantifying business interruption involve very different information. Gross Earnings offers two methods of measuring the loss, net sales value of lost production or total net lost sales, minus any saved expenses such as raw materials, material parts, supplies, utilities, and ordinary payroll during shutdown (with some exceptions). Gross Profit measures the loss simply by applying the business’ historical gross margin to the total loss of sales. Each option must be backed by supporting documentation and the rational behind it’s use.
It is common for forensic accountants to run calculations using two or three methods and evaluate the results. This technique avoids surprises from the audit process and reveals the best representation of the loss. Sophisticated Excel macros are used to build the schedules customized to the policy terms and the policyholders financial documentation.
Documenting Business Interruption
The following list will be necessary to document and support a time element loss.
- Estimated period of interruption for any site shut down due to the event, inaccessible due to ingress/egress blockage, civil authority orders, or service interruption.
- For any warehouses, distribution centers, store locations or other sites reporting potentially lost sales, provide:
- Twenty-four months of actual sales history by location (or as close as is available).
- Twenty-four months of income/P&L statement or profit contribution for each location (or as close as possible).
- Twelve months budgeted or forecasted sales prepared before the loss to depict anticipated sales and/or production (E.g., a plan projection prepared for the previous year and projecting sales for throughout that year and extending at least through 2Q of the next year if available).
- Track Actual Post-Event Sales from the start of the loss event through period of full recovery of operations and for a period of at least 6 months AFTER full recovery to look for any “make up” sales bump.
- Any affected Manufacturing Facility should provide similar documentation for production loss (i.e., 2-years historical production levels; most recent projected production estimates prepared prior to the loss event; and actual production from the start of the loss event until 6 months after full recovery).