CAIB 2 Chapter 7 Study Guide Questions with
Answers
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 under insured because future trends were not considered
What type of employee salaries may not be considered a "necessary continuing expense" ? -
✔✔Ordinary payroll
Answers
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 under insured because future trends were not considered
What type of employee salaries may not be considered a "necessary continuing expense" ? -
✔✔Ordinary payroll
