What it means
After a fire, flood or major breakdown, the damage bill is only the start. Trading from temporary premises, renting equipment and paying overtime to catch up all cost money that the business was not spending before.
Without cover, those costs come straight out of cash at the worst possible time. Standard property insurance replaces the building and the machines.
Additional expense coverage pays for the improvisation in between: the rented warehouse, the emergency IT set-up, the overnight freight that keeps customers supplied. The distinction from business interruption insurance matters.
Interruption cover replaces lost profit and continuing fixed costs, while extra expense cover funds the spending that prevents the profit from being lost in the first place. The two are often sold together and work as a pair.
The test is necessity and economy. Insurers pay for expenses incurred to reduce the interruption, and they will ask whether the spending was reasonable given what it protected.
Cover also runs only for a defined restoration period, and some policies have waiting periods or sublimits (smaller caps on particular types of cost), so the plan should assume the money stops before recovery is finished. Document every emergency spend.
Invoices, a short rationale and the link to the loss form the claim file, and reconstruction from memory pays poorly. It helps to run a tabletop exercise with the broker in advance, so you know which documents the insurer will demand while they are still easy to produce.
The cover shapes disaster planning. Knowing the policy will fund a temporary site or emergency supplier changes what the continuity plan can promise, and the plan should be written to match the limit.
Review that limit at each renewal, because emergency space and freight costs rise over time and an old limit may fund only half the plan it once did.
In practice
Real-world examples.
Example
A bakery rents a temporary kitchen for $9,000 a month for 3 months after an oven fire. The policy reimburses the $27,000 of rent, because the cost is reasonable, necessary and above its normal spending.
Example
A manufacturer pays an extra $6,000 a week in air freight for 5 weeks to keep its largest customer supplied while its factory line is repaired. The $30,000 is recoverable under extra expense cover, and the customer never notices the disruption.
Example
A consultancy moves into a serviced office at $4,500 a month for 2 months when its leased space floods. The $9,000 keeps staff working and client deadlines intact.
Formula
Calculation
Required cover = monthly extra cost of operating x expected months of disruption. Shortfall = required cover - policy limit, if positive.
Worked example. A bakery loses its kitchen to a fire. It expects to pay $9,000 a month for a temporary kitchen, $3,000 a month for extra delivery vans and $2,000 a month in overtime, which is $9,000 + $3,000 + $2,000 = $14,000 a month. If repairs are expected to take 4 months, the required cover is $14,000 x 4 = $56,000. With a policy limit of $50,000, the shortfall is $56,000 - $50,000 = $6,000, which the owner must fund from reserves or by raising the limit.Case study
Seen in the real world.
Vestmar Print is an invented commercial printer used here for illustration. A press-room fire strikes in its busiest month. Its extra expense coverage funds subcontracted print capacity at 140% of normal cost, along with overnight freight, which together hold 95% of customer deliveries on time.
In this fictional story the total claim is $310,000, far less than the lost contracts would have cost. The managers also found that their record keeping paid off, because every invoice was logged with a note on why it was necessary. The lesson is that the expensive week spent keeping customers is usually the best money an insurer ever pays out.
Watch out
Common mistakes.
- Assuming property insurance covers emergency operating costs, when it usually pays only to repair or replace the damaged property.
- Letting the continuity plan promise spending that the policy limits cannot fund, which leaves a shortfall in the middle of a crisis.
- Keeping poor records of emergency spending, which makes it hard to show the insurer that each cost was necessary and linked to the loss.
Questions
People also ask.
How does extra expense cover differ from business interruption insurance?
Interruption cover replaces lost profit and continuing costs, while extra expense cover pays the costs incurred to avoid losing that profit.
What expenses qualify?
Reasonable, necessary costs above normal spending, incurred to continue operating during restoration, such as temporary premises, rented equipment, rush freight and overtime.
Is there a time limit?
Yes. Cover runs for the policy's restoration period and may have waiting periods or sublimits, so plan spending to fit them.
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