Do You Need Extra Expense Coverage?
Extra Expense and Business Income Coverages Are Often Written Together
Extra expense insurance covers expenses you incur to avoid or minimize a shutdown of your business after your property has sustained a physical loss. It can enable your business to continue operating after your property has been damaged by a fire or other peril.
Extra Expense coverage may be added to a standard commercial property policy via a separate form or endorsement. It may be written alone or combined with business income coverage. Some package policies, including the ISO business owners policy, automatically include some extra expense coverage.
Who Needs It?
While extra expense insurance can benefit many businesses, it is especially valuable if your business has any of these characteristics:
- It provides continuous services customers depend on seven days a week. Examples are data centers, security services, and airport shuttle services.
- It cannot shut down because it provides essential services to the community. Examples are hospitals, medical clinics, nursing homes, homeless shelters, and banks.
- It can continue to operate from a temporary location to avoid or minimize a shutdown.
The following example demonstrates the importance of extra expense coverage.
Sarah owns Snappy Snacks, a restaurant she operates out of leased space in a busy office complex. Snappy Snacks is open from 7 A.M. to 3 P.M. Monday through Friday. Most of its food is sold as take-out since the restaurant does not offer table service.
Late one night, a tornado tears off the roof and one wall of the building that houses Snappy Snacks. It also damages the interior of Sarah's restaurant. The physical damage to the building is covered under a commercial property policy purchased by the landlord. The damage to the restaurant's personal property is covered by Sarah's commercial property insurance. Repairs will take four months.
A four-month shutdown could harm Sarah's business by causing it to lose customers. To keep her restaurant running, Sarah obtains a short-term lease on empty space in a nearby office building. She pays a moving company to transport her undamaged property to her makeshift restaurant. She also incurs costs to rent equipment, establish interim phone and computer connections, and to notify her customers and suppliers of her temporary digs. Fortunately, Sarah has purchased extra expense coverage, which is designed to cover the types of expenses she has incurred.
What It Covers
Extra expense insurance covers expenses that are over and above your normal operating expenses. To be covered, the expenses must be incurred due to physical damage to covered property by a peril insured under your policy.
The term extra expense is typically defined as expenses you incur during the period of restoration that you would not have incurred if the physical damage had not taken place. In other words, it means the extra money you spent that is directly tied to the physical loss. These expenses are covered if they are incurred for any of the reasons outlined below.
To avoid or minimize a shutdown of your business so you can continue to operate
These are costs you incur to get (or keep) your business operating at your existing location, at a temporary location, or at a new (replacement) location. Coverage includes moving expenses and costs to set up and operate your business at a temporary or new location.
To reduce the impact of the shutdown if you cannot continue to operate
Extra expense insurance covers costs you incur to lessen the effect of a shutdown if you must temporarily cease operations. For example, you are forced to shut down your grocery store because a fire has damaged the building's electrical system. You purchase a generator so you can reopen your store a week before your electrical system is repaired. As you have reduced the shutdown by seven days, the cost of the generator should be covered.
To repair or replace damaged property, but only if these costs reduce the total amount of loss that would have been payable.
Most of the costs associated with repairing or replacing damaged property are covered by direct damage insurance. However, such costs are covered by your extra expense coverage if they reduce your overall extra expense or business income loss.
For example, you operate a retail store in a building you own. Your store is insured under a commercial property policy that includes business income and extra expense coverages. A windstorm destroys one wall of your building. Repairs will take three months. You pay the contractor an extra $2,000 over normal construction costs to have repairs completed in one month. The extra money is used to rush building materials to your location and to pay the workers overtime. If your $2,000 expenditure enables you to reopen your store two months early and avoid a $25,000 income loss, the expenses should be covered.
Period of Restoration
Extra expense coverage applies to expenses you incur during the period of restoration. This term means the time required to repair or replace your damaged property.
The period of restoration begins on the date of physical loss and ends when your damaged property has been repaired, rebuilt or replaced. If you are moving to a new location, the restoration period ends when you begin operations there. The period of restoration does not include any extra time you spend testing for or cleaning up pollutants if the testing or cleanup is required by law.
Local ordinances may dictate the types of building materials or construction methods you can use when repairing or replacing damaged buildings. This can slow down the repair process. Any extra time you need to comply with a local ordinance isn't included in the period of restoration unless you have purchased an endorsement called Ordinance or Law Coverage—Increased Period of Restoration. This endorsement is similar to the standard Ordinance or Law endorsement except that it applies to business income and/or extra expense (whichever you have purchased).