Kimberly owns and operates a tennis shop in a resort area. The business is seaso
ID: 2765850 • Letter: K
Question
Kimberly owns and operates a tennis shop in a resort area. The business is seasonal. A large part of the annual revenues are due to sales in June, July, and August. Kimberly keeps the shop open during the remaining months of the year, but the inventory carried during those months is reduced. During the summer months, the amount of inventory on hand is substantially increased. Kimberly has the business insured under the special form businessowners policy (BOP) with no special endorsements attached.
1. Assume you are a risk management consultant. Identify the major loss exposures that Kimberly faces.
2. Assume that a covered loss occurs in July, which damages part of the inventory. Does the BOP provide any protection for the increase in inventory during the summer months? Explain your answer.
3. Kimberly plans to hire an additional employee during the summer months when sales are increasing. She is concerned about possible employee theft and dishonesty. Explain to Kimberly how this loss exposure can be handled under the BOP.
4. A fire damaged the building. As a result, Kimberly incurred a business income loss because the business was closed for three months.
5. Vandals broke the exterior glass window to the business, which caused substantial damage to the building.
Explanation / Answer
1. Kimberly owns and operates a business with limited revenue options in the year. Considering the demands are in the three months of the summer, it is a seasonal business.
Considering this as seasonal business, major risk exposures faced by Kimberly are: -
a. Loss due to fixed costs of rent, electricity, administrative expenses and other overhead expenses.
b. Loss due to pilferage of the inventory kept during the off season of the year.
c. Exposure of defaulting the interest payment and monthly instalments of the loan taken from the banks, if any.
d. Exposure of insolvency in event of non fulfilling the debt repayments.
2. Yes, BOP provide the protection for the increase in inventory during the summer months. BOP is a businessowners policy, therefore the owner has the right to choose the specific type of plan under this kind of insurance policy. This policy charges low premium as it covers only specific part of risks as per the owner.
3. As Kimberly has opted for the BOP insurance, which includes the loss to property and business assets which can include the personal assets as well but excludes professional liability, accidental losses, etc. Therefore, Kimberly can opt of coverage of theft of stock in the policy. This will provide the fidelity and burglary insurance.
4. Revenue loss is covered under the BOP insurance, due to the fire in the building leading to the closure of the business of three month will result in the loss of sale and hence loss of the margins or profit. Therefore the loss will be taken care by the BOP insurance.
5. Damages to buidling is covered under the BOP insurance, vandals breaking the exterior glass window to the business will covered and protected by the insurance cover taken by Kimberly.
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