Most business interruption policy forms will include extra expense coverage to the degree it reduces the business interruption loss. One might think that with this built in coverage there is no need for additional extra expense coverage. Not so. Let's assume a retailer has a fire and incurs cost to temporarily lease another location and for additional advertising expenses. When it comes time to settle the business interruption loss with the insurance adjustor (read forensic accountant here), he will look at subsequent sales when the retailer is back in business. If sales increased by 10% due to an improved economy, the case will be made that the retailer made up the lost sales thereby disallowing the extra expense incurred because it did not reduce the loss of income.
Chip Merlin makes the point that the adjustment of these losses needs to be much more prompt. Many business interruption claims are not settled until well after the policyholder has returned to business. The accountants drag this out, often to be sure the lost income or sales was not made up in subsequent months. One measure to circumvent this delay is to purchase pure extra expense coverage that will apply whether or not the cost incurred reduces the business interruption loss. These expenses should be reimbursed by the insurer up front as they are incurred, because there is no need to validate that the costs help reduce the BI loss.
How much coverage to buy? Always a tough question. We have developed a user friendly worksheet to assist in determining the types of expenses that could be incurred after a loss. Since this is always a calculated estimate it is best to be conservative in establishing the limit. It is inexpensive insurance and it is always better to have too much rather than not enough. In recent years a new term, "demand surge" has evolved out of major catastrophes such as tornadoes, hurricanes and earthquakes. This relates to the increased cost of materials and supplies when a catastrophic event spikes the demand. Generators, temporary phone lines and computer equipment may cost well in excess of your estimate in these situations. I guess this is why it is best to buy a snow blower in July rather than January.
The moral of the story is be sure you have more than adequate Extra Expense coverage so you can get back in business in the most expeditious manner. The longer the delay the greater the chance that resumption will never occur.
Excellent article Robert! A group that MUST purchase extra expense insurance is anyone who provides professional services such as lawyers, accountants, doctors, dentists, etc. This is because it is VERY difficult to prove a loss of income rather than a delay of income. We, at Hutson Resource Group, recommend that all professional service firms have significant extra expense coverage and that, following a loss event, the insured move forward as quickly as possible while assuming that they will receive nothing under their business interruption/loss of income coverage. Thank you for this timely article!
Thanks Robert!
I often find that a lot of businesses are not even aware of the importance of business interruption insurance never mind the intricacies!