(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the part of a series she is writing on business interruption claims).
In these tough economic times, many businesses are looking to cut expenses and trim their budgets. While it is tempting to reduce insurance coverage to minimize operating costs, business owners should not skimp on insurance protection to trim budgets, particularly when it comes to additional coverages like Extra Expense Coverage.
Business interruption insurance policies frequently provide indemnity not only for lost profits and fixed charges and necessarily continuing expenses, but for expenses, or "extra expenses," which the insured incurred to reduce the loss and resume business operations. Extra expense coverage is an additional coverage afforded to a business, and it goes beyond the typical coverage for direct physical losses contemplated by the general insuring agreement of a building and personal property coverage form in an insurance policy. Extra expense should allow a business to continue in the event of an emergency, by indemnifying the insured for additional expenses that would not normally have been incurred, but which are not covered under their traditional business interruption provision.
However, if the business policy does not contain Extra Expense protection, these costs may never be recovered, despite the due diligence of a business enterprise to resume operations. Under an Extra Expense Coverage provision, expenses incurred for the purpose of resuming business operations are recoverable only to the extent that they, in fact, reduce the loss, and recovery is limited to variable costs directly attributable to the loss mitigation efforts, rather than fixed costs which would have been incurred even in the absence of the loss.
Examples of covered expenses could be temporary office space, temporary computer systems or furniture for the temporary space, overtime for workers who need to spend additional time outside of their normal work day due to the covered event. If employees were not able to bring their lunch to work because the employee’s lounge/kitchenette was burned in a fire, an extra expense claim could be made for feeding them during this time period.
For example, in Cotton Bros. Banking v. Industrial Risk Insurers, 951 F.2d 54 (5th Cir. 1992), the court granted expenses, such as incremental utility costs and other overhead, to the damaged business property to enable the insured to repair the property and resume operations earlier than anticipated, as well as extra expenses for security to avoid theft of business property. Also, in Northwestern States Portland Cement Co. v. Hartford Fire Ins. Co., 360 F.2d 531 (8th Cir. 1996), under a business interruption endorsement containing an "extra expense" clause, the insured was able to avoid a loss of earnings by using available raw materials to continue production; the extra cost involved in producing replacement raw materials was recoverable, although the total cost of such materials is not.
It is important to note that, as with most insurance policies, the insured has a duty to mitigate its damages after the loss. Extra Expense Coverage allows the insured to recover a measure of the incidental costs expended in trying to mitigate damages pursuant to the terms and provisions of most insurance policies. Therefore, even in tough times, it still makes business sense to keep additional insurance protections (ie. Extra Expense Coverage) to avoid wasting the same or more money the business is trying to save by downgrading coverage.
