Extra expense coverage form

Limits of insurance

Loss conditions

Definitions

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Need for Extra Expense Coverage

Most insureds are able to anticipate a temporary suspension of operations with the realization that the flow of customers will be, likewise, only temporarily suspended. It is even possible that, in the case of retailers, the interest generated by fire sales and by a gala reopening of remodeled premises can have a salutary effect on the business. Firms that are able to anticipate that the customer flow will resume in step with resumption of operations are those that, in general, market their goods or, less often, services broadly to a wide and general market. Such firms are most in need of a source of funds to replace the income that the business would have generated, funds that it will need to meet the unavoidable financial obligations that will continue during the time of business shutdown; they need business income coverage. See Business Income (and Extra Expense) Coverage Form.

Other firms, especially those dealing in services, may face a permanent loss of customers if the service is interrupted for any significant length of time. Banks, newspapers, and internet services are frequently cited as examples of businesses that cannot tell their customers to go elsewhere for a month or two and expect them to return with the reopening. Far more numerous are the firms that need never contemplate any except the briefest of interruptions because their operations are readily transportable to another, temporary location; firms, for example, that offer professional services and depend more on persons than on capital, equipment and places. Firms in this category—those that cannot contemplate a suspension of service and those that do not need to contemplate a suspension—have extra expense insurance as their primary need. As long as they have a source of funds to support the extraordinary expenses of staying in business, they should not experience a drop in income from the business.

Insured May Need Both

Having determined that the paramount need is for either business income coverage or extra expense insurance, the insured who chooses the latter should also give careful consideration to the extent of the business income exposure and, perhaps, arrange some coverage for that exposure also. The same process is not required of the insured who purchases business income coverage, because one version of that form (CP 00 30 10 12) provides extra expense insurance as well. By the same token, some of the extra expense of the insured's operations may be able to be temporarily curtailed without involving long-term harm. Since the loss of income from interruption of operations is not covered by the extra expense insurance, the insured may want business income coverage applying to those operations.

Since the CP 00 30 business income coverage form has extra expense insurance built in, some consideration might be given to using that form in lieu of the extra expense insurance form. In most cases, however, the insured who has a dominant need for extra expense insurance will find it both more economical and more convenient to choose the extra expense form. For example, an enterprise might have an exposure of $200,000 per month in terms of business income coverage but $50,000 per month in terms of extra expense. If by an emergency expenditure of $50,000 the insured can avoid the $200,000 loss of business income, then the purchase of extra expense insurance instead of business income coverage is the proper choice.

 Extra Expense Coverage Form

 A. Coverage

We will pay the actual and necessary Extra Expense you sustain due to direct physical loss of or damage to property at premises which are described in the Declarations and for which an Extra Expense Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss. With respect to loss of or damage to personal property in the open or personal property in a vehicle, the described premises include the area within 100 feet of such premises.

With respect to the requirements set forth in the preceding paragraph, if you occupy a building, your premises means:

a. The portion of the building which you rent, lease or occupy; and

b. The area within 100 feet of the building or within 100 feet of the premises described in the Declarations, whichever distance is greater (with respect to loss of or damage to personal property in the open or personal property in a vehicle); and

c. Any area within the building or at the described premises, if that area services, or is used to gain access to, the portion of the building which you rent, lease or occupy.

1. Extra Expense

Extra Expense means necessary expenses you incur during the "period of restoration" that you would not have incurred if there had been no direct physical loss or damage to property. Coverage pertains to expenses (other than the expense to repair or replace property) which are incurred to:

a. Avoid or minimize the "suspension" of business and to continue "operations" at the described premises or at replacement premises or temporary locations, including relocation expenses and costs to equip and operate the replacement location or temporary location.

b. Minimize the "suspension" of business if you cannot continue "operations".

We will also pay Extra Expense to repair or replace property, but only to the extent it reduces the amount of loss that otherwise would have been payable under this Coverage Form.

Analysis

The Extra Expense form, CP 00 50 10 12, by using the wording "The portion of the building which you rent, lease or occupy; and Any area within the building or at the described premises, if that area services, or is used to gain access to, the portion of the building which you rent, lease, or occupy" recognizes the fact that an insured may own a building but not occupy the entire building. It also extends the definition of "premises" to include all routes within the building to gain access to the premises. The form also clarifies that the insured's personal property in the open or in a vehicle within 100 feet of the premises is also considered to be premises.

The form's definition of "extra expense" includes the term "period of restoration." In the business income form, the definition of "period of restoration" includes a seventy-two-hour waiting period before business income coverage begins. However, in the extra expense form, the period of restoration still begins with the date of direct physical loss or damage to property at the described premises caused by a covered cause of loss and it ends when the property should be repaired if reasonable speed is applied to getting the property back to its pre-loss condition. The term limit of the policy has no bearing on this period of time, i.e., the expiration of the policy will not end the period of restoration.

The operation of any building or zoning law or ordinance that interferes with repairs or reconstruction does not extend the time when extra expenses are payable. Likewise, any environmental protection ordinance that regulates the prevention or cleanup of pollution damage does not increase the period of restoration. The period of restoration remains based on that stretch of time during which repairs should be accomplished.

Insureds who have an exposure regarding building ordinances, with a careful investigation being required, are able to obtain an increased period of restoration by means of endorsement CP 15 31 10 12; see Business Income and Extra Expense Endorsements. The endorsement allows for the operation of laws affecting construction or repairs or requiring demolition as legitimate factors in the computation of restoration time. Note that this endorsement does not extend the period of restoration as regards the operation of environmental protection laws.

Interference by strikers or others at the site of repairs or reconstruction that causes a delay in the resumption of operations is also excluded from consideration in the period of restoration. This is a stipulation of the causes of loss form and is one of several special exclusions therein applicable to extra expense and business income insurance. See Business Income (and Extra Expense) Coverage Form.

In addition to covering the extra expenses needed to avoid suspension of the enterprise, the coverage agreement also applies to expenses undertaken to minimize the suspension if it cannot be avoided and to expenses undertaken to facilitate the repair or restoration of property to the extent that the latter reduces the amount that would otherwise have been necessary to spend. For example, the cost of air shipment of a vital part is covered as a legitimate extra expense if air shipment will reduce the period of restoration and save payment of other expenses that would otherwise be at least equal to the cost of air shipment.

The major extra expenses that the policy coverage undertakes to insure are those having to do with keeping the enterprise of the insured in operation at the described premises or getting it moved and operating at a new permanent or temporary location.