Period Of Indemnity

The period of indemnity is the length of time for which benefits are payable under an insurance policy. It is also used to denote the time period for which indemnity or compensation is payable under a business interruption policy. The period of indemnity is usually the most critical component of quantifying the business interruption loss.

One of the most important and helpful endorsements to a business interruption policy is the extended period of indemnity endorsement. If the business interruption coverage is being written under more recently issued forms, an automatic 30-day extended period of indemnity is built into the coverage. But absent one of these forms, this endorsement must be added to the policy to extend the indemnity period.

As its name suggests, extended period of indemnity coverage extends the covered loss period beyond the time required to restore the property. In most types of businesses, sales and/or production immediately following a restoration period is often not as high it would have been if the loss never happened.

The period after restoration is critical because the full costs of operation are being absorbed without corresponding income. The effect of the revenue shortfall, therefore, directly hits the bottom line. With extended period of indemnity coverage, however, the insured can be indemnified for the shortfall that occurs during this extended period.

An extended period of indemnity endorsement also enables a policyholder to recoup significant pre-opening expenses, incurred during the extended period, to restore revenues to their pre-loss levels. They might include extraordinary advertising and public relations activities or hiring new personnel. These expenses are not normally covered under basic business interruption insurance because they're not normal operating expenses, nor would they be considered “expediting” expenses because they do not reduce the loss within the traditional loss period. These expenses do, however, reduce the carrier’s liability when the post-restoration period is covered by an extended period of indemnity endorsement.

Consider ABC corporation, which manufactures oil drilling equipment to order. After a fire causes extensive damage to its factory, a six-month shutdown ensues. When ABC reopens, company executives discover their business is only 50 percent of what it would have been before the loss. In the second month after reopening, the firm is only at 75 percent of anticipated volume. Ultimately, it takes four months after reopening to return to pre-loss levels.

One month before reopening, and for a considerable period thereafter, the company incurs significant additional expense advertising that it will be back in business shortly. These ads are placed in trade journals and representatives are sent around the world to assure customers that the company will be able to fill their orders. Under the right extended period of indemnity endorsement, these extra costs will be covered.