Chapter 19.II, Problem 24RE

BUSINESS DECISION: BUSINESS INTERRUPTION INSURANCE

As the owner of a successful business, you have just purchased an additional type of properly insurance coverage known as business interruption insurance. This insurance protects the profits that a company would have earned had there been no problem. Business interruption insurance covers damages caused by all types of perils, such as fires, tornadoes, hurricanes, lightning, or any other disaster except floods and earthquakes.

This insurance pays for “economic" losses incurred when business operations suddenly cease. These include loss of income due to the interruption and additional expenses (e.g., leases; relocation to temporary facilities; overtime to keep up with production demands; recompiling of business, financial, and legal records; and even the salaries of key employees).

Your coverage provides insurance reimbursement for $80\%$ of any losses. Your company pays the other $20\%$. The annual premium is $2\%$ of the income and extra expenses that you insure.

a. If you have purchased coverage amounting to $20,000 per month, what is the amount of your annual premium?

b. If a tornado put your company out of business for $5\frac{1}{2}$ months, what would be the amount of the insurance reimbursement for your economic loss?