Filed Under:Agent Broker, Commercial Business

Expenses incurred to minimize loss should be covered

Coverage Q&A

Additional insurance coverage for extra expenses can be used to replace business personal property, but only to the extent the amount spent reduces the amount that would otherwise be payable as business income. (Photo: iStock)
Additional insurance coverage for extra expenses can be used to replace business personal property, but only to the extent the amount spent reduces the amount that would otherwise be payable as business income. (Photo: iStock)

Analysis brought to you by the experts at FC&S Online, the unquestioned authority on insurance coverage interpretation and analysis for the P&C industry. To find out more — or to have YOUR coverage question answered — visit the National Underwriter website, or contact the editors via Twitter: @FCSbulletins.

Question: When an insured hires a builder to make repairs (and) signs a contract with the builder, have they in fact "incurred" the cost and should therefore be entitled to the portion of the holdback amount above the ACV?  

— Ohio Subscriber

Answer: The policy doesn't define "incurred," and courts generally refer to a standard dictionary since that is what insured's have access to. Merriam Webster online defines incurred as: to become liable or subject to; to bring down upon oneself.

Therefore, the signing of a contract, even though no money has changed hands, can be seen as incurred expenses, and thus the holdback should be paid.          

Luxury hotel tries to cut losses after a fire

Question: The insured, an all-inclusive beachfront five-star hotel, experienced a loss due to a fire during its high season. This loss directly affected the lodging of an important part of their workforce, 250 employees who live at a great distance from the hotel.

The insured discussed three alternative scenarios with the insurance adjuster:

1. Termination of all the 250 employees who lived at the affected building, which would result in a significant reduction in the insured’s customer service capabilities and thus force lower occupation rates. This occupation rate reduction would directly impact the insured’s income and profit margins.

2. External lodging of all 250 employees in smaller, lower cost hotels or venues in the area. This would entail the cost of the lodging plus additional out-of-pocket transportation expenses for these employees to and from the hotel due to the distance from the insured’s property, as well as overtime pay and the administrative cost of organizing this new lodging and transportation scheme.

3. Provide lodging for all 250 employees in guest rooms of the insured’s property, with the corresponding implications of reducing the availability of rooms for guests and additional security measures to ensure guest comfort and safety.

Related: Today's hospitality guests want new experiences and technology

During these discussions, the insurance adjuster reminded and instructed the insured to take any and all measures at their disposal to minimize the loss.

In subsequent discussions between the insured and insurance adjuster, and after scenario 2 was discarded due to the lack of room availability in the area (considering it was high season), the insured opted for scenario 3. The insured charged 12 percent of the corresponding rate per person/per room, with the hypothesis that the employees would not use all of the hotel’s services and that this should not represent a profit for the hotel. This rate was equivalent to the average rate quoted for small hotels/motels that were considered in scenario 2.

In spite of this unusual strategy to minimize the loss, since most hotels do not lodge their employees in guest quarters, the insurer claimed they cannot cover this part of the loss because the insured’s balance sheets do not reflect a reduction in the insured’s profit.

We believe that the 12 percent charge per employee/room should be recognized and covered, as the intent of this scenario was to avoid a profit reduction for the hotel and a larger claim.

— Dominican Republic Subscriber

Answer: The amount calculated for employees taking the place of paying guests in guest rooms should be covered. If the insured figured the rate on what it would have paid for the employees to stay in external lodging, that is reasonable and would stand up to the definition of an extra expense — "necessary expenses you incur during the ‘period of restoration’ that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss." The extra expense must avoid or minimize the suspension, which is what housing the employees in guest quarters appears to have done.

Related: Covering additional living expenses: luxury or necessity

Extra expenses due to changing locations after a loss

Question: We have a loss involving a beauty salon that purchased only $15,000 in coverage on a businessowners form, BP 00 02 01 97. The policy covers personal property as well as improvements and betterments. Therefore, they were very short of coverage for the personal property. We have established the cut off date for the necessary time to get back into business, and the insured and her attorney have submitted approximately $60,000 of repairs at the permanent location. Possibly, some of them are at a temporary location. Could you please comment as to whether or not this $60,000 would be covered under the extra expense portion of this policy?

— Kentucky Subscriber

Answer: The ISO businessowners form promises, in g.(1)(b)(ii), to pay for extra expenses incurred to avoid or minimize suspension and continue operations, including the cost to equip and operate the replacement or temporary location. The costs must have been incurred to avoid or minimize the suspension and continue operating. To repair or replace property at the permanent location, the form will pay extra expense “to the extent it reduces the amount of loss that otherwise would have been payable under” extra expense or business income (see g. (3) (a)). So, the portion of the $60,000 that was used to repair or replace property at the permanent location may be covered, but only to the extent that the amount of the loss that otherwise would have been payable is reduced. Also covered is the portion of the $60,000 in extra expense that was spent in order to avoid or minimize the period of suspension and continue operations at the temporary location.

Related: Managing claims legal expenses

Cancellation of debt and medical expense coverage

Our insured has a homeowners policy (HO 3 10 00) with med pay coverage. The policy states, "We will pay the necessary medical expenses that are incurred or medically ascertained within three year." The claimant lost control of a chainsaw while helping our insured. The claimant had about $2,500 in emergency room expenses. The claimant was given a charity write off of the expenses and does not have to pay them. Should these expenses be considered incurred? The policy does not define "incurred," and Black's Law Dictionary does not seem helpful. Your thoughts on the carrier’s obligation would be appreciated. (The charity write off is from a private hospital and to our knowledge has nothing to do with any government payments. It was simply a need-based forgiveness of the debt.

— Virginia Subscriber

Answer: If the hospital wrote off the debt, then the claimant incurred no expense. If funds were due to the hospital then a claim could be made and paid; since the claimant does not owe the hospital any money, he has not incurred any expense. The claimant cannot collect $2,500 and keep it, which is what it sounds like he is trying to do.

Business accounting fees after a loss are sometimes deemed an extra expense. (Photo: iStock)

Business accounting fees after a loss are sometimes deemed an extra expense. (Photo: iStock)

Who pays for accounting documentation?

Our insured sustained a covered loss and made a business income loss claim under form CP 00 30 07 88. The company requested the insured provide accounting documentation to support the claim.

To comply with the request from the insurance company, the insured requested his accountant to accumulate the data and provide a report to the company. The accountant charged the insured for his time and we submitted the invoice to the insurance company. They have disclaimed responsibility stating that the insured did not have the right under the policy to hire an accountant to prepare the records. If such assistance was required, according to the insurer, the company would hire its own accountants.

It is our contention that our insured, who does not customarily deal with income accounting records would not be familiar with the type of documentation required. When the company requested the insured to submit reports, etc., they became obligated to assume the costs of the accounting fees.

We consider the accounting bill covered as claim investigation expense. Are we right?

— New York Subscriber

Answer: There is nothing in the wording of the business income portion of the policy that obligates the insurance company to pay the insured's accounting cost to determine the extent of the business income loss. The policy promises to pay for "the actual loss of Business Income you sustain due to the necessary suspension of your 'operations' during the 'period of restoration.'" Business income is defined in the policy to mean "a. Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and b. Continuing normal operating expenses incurred, including payroll." The accountant's fee is neither net income nor continuing normal operating expenses.

However, the form also provides extra expense coverage. Extra expense is defined to mean "necessary expenses you incur during the 'period of restoration' that you would not have incurred if there had been no direct physical loss." The accounting fees in question would not have been incurred had there been no loss.

The policy also requires that the extra expense be incurred to "avoid or minimize the suspension of business and to continue 'operations.'" It is fair to assume that the insurance company would not have paid the business income loss if the insured had not submitted the requested accounting information, and also that the insured's business would have continued to be suspended or operated at reduced income if the insured had not been paid for the business income loss.

It therefore seems reasonable to conclude that the accounting fees were an insured extra expense as intended under the policy.

Suppose the insured had been covered by ISO's Business Income Coverage Form (Without Extra Expense) (CP 00 32 10 91). That form covers expediting expenses that are necessary to reduce a loss "to the extent they do not exceed the amount of loss that otherwise would have been payable under this Coverage Form." There is no question that incurring the accounting fees reduces the loss to the insured, because the insurance company would not cover the loss without a proof of loss being submitted. However, the insurer could argue that the accounting fees exceed the amount that would otherwise be covered under the form, since the insurer would pay nothing without a proof of loss.

This is such an anti-consumer conclusion that many insurance companies cover such accounting fees as a matter of good will, and some go so far as to specifically include the costs of proving a loss in their policy's coverage.

Related: Can you obtain additional living expense coverage for family pets

Are moving expenses covered?

We are hoping you can help us in interpreting some policy language. Our insured is a small manufacturer who leased premises that were destroyed in a fire. He is insured on a CP 00 10 04 02 with broad form coverage, with the CP 00 30 04 02 business income and extra expense coverage form attached. 

He established a temporary office in his own home until he was able to find a suitable space elsewhere, which took about two months. Unfortunately, he did not have adequate business personal property coverage.

Our questions are these: Is the expense incurred to move to and set up the temporary office covered? Also, can extra expense coverage be used to replace any of the business personal property; and, if so, is the coinsurance penalty applied to this?

— Michigan Subscriber

Answer: Any extra expense incurred "to avoid or minimize the suspension of business and to continue 'operations' at a temporary location, including "costs to equip and operate the ... temporary location" is covered.

The additional coverage for extra expense can indeed be used to replace business personal property, but only to the extent the amount spent reduces the amount that would otherwise be payable as business income. For example, if the insured spends $50,000 extra expense dollars to purchase office furniture because of a property insurance shortage, and is able to resume operations quickly, thereby reducing his business income loss by $25,000, he is entitled to $25,000, the amount of the reduced loss. (He cannot claim the entire $50,000. To receive full payment would encourage underinsurance.)

Coinsurance does not apply to additional coverages, which are extra expense, civil authority, alterations and new buildings, and extended business income.

See also:

How to calculate deductibles for multiple related losses

The trouble with estimating additional living expenses (ALE)

Commercial parking lots and valet: Who pays for auto damage?


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