Welcome to the ABCs of Insurance Claims. Over the next few months, Sherri Walker, Sentinel’s Director of Claims will address an aspect of claims handling for every letter of the alphabet to help provide a better understanding of the claims process.
X is for X-tra X-pense
As a business, the worst thing that can happen after a loss is absolutely nothing. And by that, I mean nothing getting made, nothing getting sold, nothing bringing in revenue. We’ve talked about Business Interruption coverage, and that is one way to try to mitigate the financial impacts that a business suffers after a covered loss, but there’s also an additional piece to that coverage – so let’s talk about EXtra EXpense.
Extra Expense coverage goes beyond what you are financially losing; it addresses the additional expenses that you incur to try to lessen the impacts of an interruption to your business. Consider these scenarios:
Scenario 1: A manufacturing business has a fire loss that impacts one production line. Extra Expense may cover the costs incurred to rent a temporary facility with similar equipment so that production can continue. Perhaps extra workers need to be hired when the line is back up and running to catch up on production. The additional cost of these workers could be an Extra Expense.
Scenario 2: An apartment complex building is struck by lightning that damages the electrical systems. There is a 3-month anticipated delay in getting the needed parts to repair the system. In order to maintain power and retain tenants, a generator is rented. The cost of the generator and incurred fuel costs to keep power may be an Extra Expense.
Conditions and Coverages
There are some conditions to using Extra Expense, just like every other insurance coverage. In order to trigger coverage, there must be a suspension of your operations due to a covered cause of loss. That means there likely needs to be direct physical damage, and it cannot be a loss that’s excluded elsewhere under the policy verbiage. Additionally, it’s not a free for all – there is usually a dollar limit listed in the policy – either shared with Business Interruption or set aside expressly for Extra Expense. Furthermore, the expenses must be incurred in such a way as to reduce the overall loss.
While some carriers will include this as part of the Business Interruption policy, there are often additional forms or endorsements to add it at more than just a trivial amount. It can be added in by endorsement or form choice on to the Business Interruption, but there are also stand-alone forms for Extra Expense only. Depending upon how this coverage is added to the policy, there may be some additional coverages included for alterations and new buildings, as well as Civil Authority and Computer Operations.
Often in an Extra Expense policy, there are percentage limits on what is payable, based on the length of the period of restoration, beginning on the date of loss and ending on the date that life should return to normal. Often these limits are indicated by a series of three percentages – such as 40%-80%-100% or 100%-100%-100%. Which percentage that applies is based on how long there should be a reasonable expectation of down time.
The first percentage is the limit available the first 30 days or less, the second is the amount of the limit available from 31 to 60 days, and the last is the limit available for loss payment over 60 days. These percentages are simply multiplied by the limit to indicate how much coverage is available for that time frame. Basically, if you carry $100,000 of Extra Expense, and are expected to be down for 45 days and your policy includes 40%-80%-10%, you would be entitled to a maximum of 80% of $100,000, or $80,000.
So what happens if you have a loss that’s more than 90 days, and your Extra Expense limit has run out? There could potentially be some additional coverage under the Business Interruption limit – but only if the use of any Extra Expense dollars will continue to lessen the amount of Business Interruption that the carrier will have to pay.
As much as lawyers on TV want to tell you that the big bad Insurance Company is out to get you, the truth of the matter is that if something makes sense, your carrier is likely to take that common sense into consideration and work with you to extend those limits further when the big picture is better for both sides.
Safeguarding Your Success
We know that Insurance coverages can be confusing, but much like the guacamole at Moe’s, Sentinel is “X-tra” when it comes to ensuring that you are getting all the advantages your policy has to offer. Your dedicated Account Service and Claims teams are here to navigate any rough waters. Contact us today to learn more!