Business Income deductibles come in different shapes and sizes. A stated dollar deductible requires little thought. A Waiting Period deductible requires finesse. An Average Daily Value (ADV) deductible requires knowledge of the components and considerations to properly execute.
Know the following critical components when calculating the ADV:
- Relevant span of time
- Business Income
- Ordinary Payroll coverage
- Working days
- Proper multiple
Consider these excerpts from some ADV wording, but remember that wording may differ from policy to policy
- “The ADV (Average Daily Value) will be the “business income” that would have been earned during the period of interruption had no “accident” occurred, divided by the number of working days in that period.”
- “The ADV applies to the ‘business income’ value of the entire location, whether or not the loss affects the entire location.”
Span of Time
If the relevant time span for the ADV calculation is some period before the loss, the properly calculated value will be unchanging. If the relevant time span is during the period of restoration, the properly calculated value is only as well known as the “forecast” of sales. Be prepared for changing ADV as the loss (sales forecasts, material costs, and so on) are negotiated, affecting the Business Income value as if no loss had occurred.
ADV should be calculated for the “entire location” suffering the insured peril.
The “entire location” means all operations at the location, not just those operations that suffer a loss. Valuing only an independent, stand-alone department suffering a loss risks undervaluing the ADV.
Likewise, valuing one damaged machine of multiple similar machines making the same product risks undervaluing the ADV.
Some policies extend ADV to include related locations dependent upon the loss site. This is akin to contingent business interruption coverage. Included sister locations may provide intermediate product to, or receive intermediate product from, the loss location.
Business Income Value
The Business Income definition guides the valuation. The wording, “that would have been earned during the period of interruption had no ‘accident’ occurred,” means the Business Income value expected “but for the loss” is the proper value. The loss calculation, with its various savings of insured expenses, does not influence the ADV Business Income.
Ordinary Payroll Coverage
Ordinary Payroll limitations or exclusions modify the Business Income coverage. They also modify the ADV. Generally, if Ordinary Payroll coverage is limited, ADV will be the result of deducting all such payroll and adding the peak such payroll incurred in the limited coverage days.
If the ADV looks backward, working days should be known. If the ADV looks forward, the working days during a period of restoration should be consistent with the expected Business Income. Any loss’s effect on days worked should have no effect on the count of days for ADV.
Are all working days equal? Is three shifts a day, Monday through Friday and one shift on Saturday equal to six days? Or is it five and 1/3rd days?
ADV deductibles may be one day, but they may more. The Declarations Page should indicate the proper multiplier.
ADV deductibles require critical thinking and knowledge of the components in play. Meaden & Moore’s professionals offer knowledge and experience to work with clients to solve problems.