CAIB 2 - Chapter 7 Questions and Answers 100% Pass

CAIB 2 - Chapter 7 Questions and Answers 100% Pass 4 sources of business interruption & provide an example of each 1) physical damage to business; fire destroys business 2) failure of public utilities; ice storm damages power lines 3) transportation related accidents; rail car derailment 4) physical damage to neighbouring premises; anchor store burns down 3 sources of funding available to businesses when their operations are interrupted 1) reduce their capital reserves 2) take out a bank loan 3) purchase adequate amounts of business interruption insurance 2 key coverages provided by Business Interruption Policies 1) insure lost net profit of the business which it could have earned had there been no loss 2) insure expenses that must continue during period of business interruption What is the period of indemnity provided by the Gross Earnings Form? Coverage begins on the date of destruction or damage and continues for time necessary to repair or replace the damaged property What is the period of indemnity provided by the Profits Form? Coverage begins on the date of destruction or damage and continues until the pre-loss sales have been re-established When would you recommend a Profits Form to a client? when customers need to be won back after shut down of business 5 characteristics common to all Business Interruption policies and briefly explain each 1) Insure same perils covered by property insurance; coverage on the property policy triggers coverage under business interruption policies 2) Contracts of Indemnity; claim payments based on amounts business could have earned had the loss not occurred 3) Indemnity period not limited by policy expiration; when losses occur during policy period coverage will not end upon policy expiry 4) payment for expenses to reduce loss; when clients spend a little more to re-establish the business such as paying overtime wages 5) coverage provided when access prohibited by order of civil authority; sales will plummet when no customers can get to the business 3 examples of expenses to reduce loss that would be insured by Business Interruption Policies 1) over time salaries 2) promotional materials required to provide awareness of new business location 3) extra charges to bring in needed equipment by air instead of truck Why should insureds cover their gross profit and not just their net profit? by insuring gross profit of business coverage would be available for necessary continuing expenses and not jut lost net profit What may happen if only the gross profit shown on insureds financial statements are insured? when only gross profit shown on financial statements is insured clients would find themselves in a position of under insurance, this is because future trends in business have not been considered Why should businesses operating with a loss purchase Business Interruption Policies? when operating with a loss business are less able to withstand even short interruption of business 2 factors to consider when deciding which form of Business Interruption insurance to purchase 1) Nature of business 2) Types of perils most likely to cause a loss When using old financial statements to establish amount of insurance, what problems could be encountered? clients may be