Q. I insure a non-profit organization. They own their buildings which have tenants, but equally collect as much in donations annually as they do rental income. The insured inquired if Business Income & Extra Expense includes donations as they include donations in their financial profit and loss.  

Agent to underwriter: "What would be an example to qualify donations and what would be an example to disqualify donations? I'm assuming they are being used to pay the bills in my question. 

“They are not excluded in the form or the definition, but they do go into the P&L and impact profits. " 

Underwriting response:  

"...we will do the best we can to provide some general guidance; however, we have a policy not to do hypotheticals and the below is simply general items we would look at in this type of situation.  

While a Field Claims Specialist would evaluate each claim on its own merits, we would first review the coverage and damages being alleged. In this case it would likely be your normal business income if they had to shut down due to a covered loss, but the big question is what about donations? While I cannot answer that question directly, we would look at the policy coverage and language:  

b.   Business Income and Extra Expense 

SECTION C. DEDUCTIBLE does not apply to this Coverage Extension. 

(1)   Business Income 

We will pay for the actual loss of "Business Income" and "Rental Value" you sustain due to the necessary "suspension" of your "operations" during the "period of restoration". The "suspension" must be caused by direct physical "loss" to property at a "premises" caused by or resulting from any Covered Cause of Loss. With respect to "loss" to personal property in the open or personal property in a vehicle, the "premises" include the area within 1000 feet of the site at which the "premises" are located. 

SECTION G. DEFINITIONS 

2.    "Business Income" means the: 

a.        Net Income (net profit or loss before income taxes) that would have been earned or incurred; and 

b.        Continuing normal operating expenses incurred, including payroll. 

We would engage a forensic accountant to review the business income loss and make a coverage decision based on the merits of the claim. If a coverage decision is not clear, we sometimes may engage coverage counsel to provide their opinion.  

I apologize if this is not enough clarity, but we do not want to set a blanket answer for these types of claims as they are all reviewed based on the individual facts and we would have to interpret the policy within the context of that specific claim file."  

================================================================== 

The responses from our Ask an Expert team are provided below. 

Donations and grants are interesting components of Business Income. By definition, they are part of the definition. The difficulty lies with estimating/budgeting for them (especially grants).  

Businesses such as non-profits have a particular issue with coinsurance because of this uniqueness. In general, because donations and grants are part of business income (with no way to exclude them in the ISO world), an option for the operation is to use a very low coinsurance amount to avoid a coinsurance penalty (remembering that the coinsurance percentage does NOT limit how long the insured gets paid, the insured is paid until they run out of limits).  

Unfortunately, I can't say which would and would not be included. There are several types of grants in particular. A grant can be conditional, unconditional, and reimbursable grants. Given any particular situation, a conditional grant may be “clawed back" if the purpose is not yet fulfilled. If so, there needs to be coverage for the money being sought.  

There is no easy answer.  

================================================================== 

Would they actually have a loss of donations during a partial business shut down? The office will be running from somewhere with extra expense coverage to minimize the loss. My guess is they would probably increase donations from concerned donors in hard times? Only they and their accounting department could answer this one. Not everything needs insurance.  

================================================================== 

I would think that it would depend on whether physical loss to their building(s) prevented them from soliciting and/or receiving donations, and it's somewhat difficult for me to envision that result. But of course, as always, the exact circumstances of the physical and financial losses, if any, will be crucial. 

================================================================== 

A key phrase here is "Rental Value". Revenue received reflects the value of the operation.  

Business Interruption for a non-profit dependent on both revenue generation and donations has not been a problem in my 45 years’ experience. YMCA facilities, homes for unwed mothers, churches, colleges, etc., have been resolved to the satisfaction of the insured entity.  

However, larger facility nonprofit organizations often have more than 12-month BI exposures. You need to address the time requirements for major repair or rebuilding.  

================================================================== 

If donations are part of the business' income, then they would be considered in determining the extent of the business income loss. In some situations, donations actually increase as donors want to assist the organization in returning to full operation as quickly as possible. Whichever occurs, the donations would be considered after a loss as income for computing the business income loss. 

================================================================== 

I think the underwriter gave a good answer. It's something that would be determined at the time of loss. If the insured is using it for income, it may be considered that.  

Ultimately it will be the adjuster's call. 

================================================================== 

That's nice. An underwriter who says what they are selling! Yes, donations are income. 

================================================================== 

I don't know enough about the insured to answer the question. But my question is why would the donation stop if they have property damage? Is it possible that the donations increase when the public finds out they suffered a loss? Unless donations are only coming from tenants, I don't understand why donations would be affected by the property damage. Business Income coverage requires due diligence from the insured. Thus, the insured would be required to continue to seek donations, which I think they could do with or without a building. Was the insured thinking they could sit back and not try to seek donations if there was a property loss? These questions and more may mean the insured is not entitled to loss of donation, unless they can prove the loss was caused by the property damage and there were no steps the insured could take to keep them going.  

================================================================== 

Donations would not necessarily stop or be reduced due to your client's inability to operate for the period of restoration. In fact, they could launch a specific campaign for donations due to the loss. It would be difficult if not impossible to show that there was a physical loss. Even if caused by a covered peril, reduced the insured's donation receipts. Remember, this is an indemnification policy contract. 

================================================================== 

The answer may depend on what kind of donations are received and how, why, when your client receives these donations.  

In many cases, the amount received is not directly linked to the buildings and physical assets. Cash donations often continue even after a covered property loss since they were not generated by the covered property. If the donations do not decrease, they will not be included in a business income loss calculation. On the other hand, if they are operating a thrift shop, donations of items would likely stop if the store and donation center are closed. Donations of supplies or materials used at the location may also cease. Many of my non-profit clients have experienced wind/hurricane losses. Financial/cash donations continued and even increased following these large losses.  

Unlike a for-profit entity, these non-profits also intentionally operated facilities at a financial loss. On paper, they were in financially better shape when operations ceased. However, their goal was to continue providing the service to the community. The Extra Expense to continue operations even when it did not lower the BI loss was their real exposure. Make sure Extra Expense is included for your non-profit accounts.  

If the donation is reduced or free rent at the facility, you also want to address the value of their Leasehold Interest in below market rents.  

================================================================== 

Even though a non-profit's revenue includes donations, keep in mind that Business Income coverage doesn't simply replace the revenue that is no longer coming in. Business Income pays net income plus continuing normal operating expenses. While some portion of the donations may be net income, it won't all be.  ​