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Do You Need Extra Expense Coverage?

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Do You Need Extra Expense Coverage?
Image courtesy of [Stuart Miles] / FreeDigitalPhotos.net

Brenda owns a computer repair shop that she operates out of a small building she owns. A tropical storm has just blown through town, tearing off the roof and damaging one wall of the building. The building damage is covered under Brenda’s commercial property policy. Yet, the building is now unusable and the repairs are expected to take six months.

Brenda can't afford to cease operations until the building is repaired. To get her business up and running again, she subleases space in a nearby office building to use as a temporary shop. She has to pay a moving company to transport her business personal property to her makeshift location. She also incurs costs to establish interim phone and computer connections, and to notify her customers of her temporary digs. As the expenses mount, Brenda wonders how she will pay them. If only she had purchased that extra expense coverage her insurance agent recommended last year!

Who Needs Extra Expense Coverage?

Extra expense coverage may be a good investment if your business has any of these characteristics:

  • It provides continuous services that your customers depend on seven days a week. Examples are data centers, security services, and airport shuttle services.
  • It cannot shut down because the services you provide are essential 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.

Extra expense coverage can be purchased alone or in conjunction with business income (also called business interruption) coverage. It is included automatically in some property policies, such as a businessowners policy. If your property policy does not already include extra expense coverage, you can add it to your policy via a separate form or endorsement.

What Does It Cover?

Extra expense coverage is designed to cover expenses that are over and above your normal operating expenses. To be covered, the expenses must be incurred because of physical damage to covered property by a cause (peril) insured under your policy.

The term extra expense is typically defined to mean 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 generally covered if they are incurred for any of the following reasons:

  1. To avoid or minimize a shutdown of your business so you can continue to operate. Coverage applies whether you continue operations at your existing location, move to a temporary location, or move to a new (replacement) location. Coverage includes moving expenses, and costs to set up and operate your business at the temporary or new location.
  2. To reduce the impact of the shutdown if you cannot continue to operate. For example, suppose you operate a grocery store and are forced to shut down because a fire has damaged the electrical system in the building. You purchase a generator so that you can reopen your store a week before your electrical system is repaired. You have reduced the shutdown by seven days. Thus, the cost of the generator should be covered.
  3. To repair or replace damaged property, but only if these costs reduce the total amount of extra expense loss. For example, suppose that you operate a cloth dying business. A piece of equipment you use in the dying process is destroyed by a fire. Your business cannot function without this equipment. You find a replacement machine and pay an extra 10% of the purchase price in order to have the machine arrive at your business in two days rather than the normal two weeks. Paying the extra freight has enabled you to reopen your business 12 days early. Assuming that the 10% charge you paid has enabled you to reduce your total extra expenses, the charges should be covered.

Period of Restoration

The term period of restoration typically means the time it takes to repair or replace your damaged property. The period of restoration begins on the date of physical loss. It ends when your damaged property has been repaired, rebuilt or replaced (assuming you haven’t caused any unreasonable delays). If you are moving to a new location, the restoration period ends when you start up your operations in that location.

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. Also, a building may take extra time to repair or replace if a local ordinance requires you to use certain materials or construction methods. This extra time is not normally 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 (depending on which coverages you have purchased).

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