CAIB 2 Chapter 7 Practice Test 1 Exam Questions With Complete Solutions.

Provide four sources of Business Interruption losses and an example of each. - i) Physical damage to business example: Fire destroys business and customers cannot make purchases ii) Failure of public utilities example: Ice storm damages power lines and power cannot be restored for several weeks. This results in sales at the business to plummet iii) Transportation related accidents example: Railcar containing hazardous gas overturns causing evacuation of town. As a result, of this railcar accident, sales at business cease. iv) Physical damage to neighbouring premises example: Your client, who is a tenant in a shopping mall, experiences drop in sales when anchor store burns to the ground Identify three sources of funding available to businesses when their operations are interrupted. - i) Reduce capital reserves ii) Take out a bank loan iii) Purchase adequate amounts of business interruption insurance What are the two key coverages provided by business interruption policies? - i) Insure lost net profit of the business which it could have earned had there been no loss ii) Insure expense that must continue during period of business interruption What is the period of indemnity provided by Gross Earnings forms? - Coverage begins on the date of destruction or damage and continues for time necessary to repair or replace damaged propertyWhat is the period of indemnity provided by Profits forms? - Coverage begins on the date of destruction or damage and continues until the preloss sales have been re-established When would you recommend insureds purchase a Profits form? - When customers need to be won back after shut down of business, Profits form should be purchased Identify five characteristics common to all Business Interruption policies and briefly explain each. - i) Insure same perils covered by property insurance Explanation: Coverage on the property policy triggers coverage under business interruption policies ii) Contracts of indemnity Explanation: Claim payments based on amounts business could have earned had the loss not occurred iii) Indemnity period not limited by policy expiration Explanation: When losses occur during policy period, coverage will not end upon policy expiration. iv) Payment for expenses to reduce loss insured provided insurer saves more in business interruption loss than client spends in extra expenses Explanation: When clients can spend a little to re-establish business, even in part, insurer will pay for these expenses. Insured is required to show that this expenditure is less than amount of savings in business interruption loss v) Coverage provided when access prohibited by order of civil authority Explanation: Sales will plummet when no customers can get to client's business. When access is prevent by civil authority, coverage for subsequent business interruption is covered. What are three examples of expenses to reduce loss that would be insured byBusiness Interruption policies? - i) Over-time salaries to contractors repairing business ii) Promotional materials required to provide awareness of new business location of insured business iii) 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 businesses, coverage would be available for necessary continuing expenses and not just lost net profit What may happen if only the gross profit shown on insured's financial statements are insured? (hint - trending) - When only gross profit shown on financial statements is insured, clients would find themselves in a position of underinsurance. This is because future trends in business have not been considered. Why should businesses operating with a loss purchase business interruption insurance? - When operating with a loss, businesses are less able to withstand even short interruption of business