A landlord-insured had a disastrous building fire and the leases of four tenants became broken. Two of the tenants were ready to move on, but two agreed to return if the landlord would obtain for them suitable quarters to occupy while the building was being restored. The sums they would have paid in rent were used by the landlord to obtain the temporary quarters. The landlord also paid their expenses in moving to the temporary location.

The business income-rents insurer is agreeable to paying the lost rental income for all four tenants during the period of unoccupancy, but balks at paying the extra expenses involved in moving the two tenants to temporary quarters. The insurer's position is that the extra expense in no way mitigated the rental income loss. Coverage is by way of ISO form CP 00 30 04 02.

New York Subscriber

The promise of the form with respect to this situation is to "pay any extra expense" meeting two conditions. The extra expenses that will be paid are those that both "avoid or minimize the suspension of business and (serve) to continue 'operations': (b) At…temporary locations, including: (i) relocation expenses and (ii) costs to equip and operate the…temporary locations."

Obviously, the extra expenses undertaken by the landlord did not avoid the suspension of rental income during the time the building is being restored.  Did they, nevertheless, serve to "minimize the suspension"? It would seem that the only way to minimize suspension of a rental income loss is to get the building repaired as quickly as possible and have the building reoccupied as soon as possible thereafter. That is what keeping the tenants in tow does. Yes, arranging temporary quarters under such circumstances does serve to minimize the suspension.

The second test for extra expenses is: do they also serve to continue operations? The word "operations" is a defined term; with respect to rental income it means "the tenantability of the described premises." How can any extra expense at a temporary location continue the tenantability of a burned out building? That is a literal impossibility, of course, yet that is the way the form reads. Is the tenantability of the premises "continued" by keeping a tenant on hand and ready to reoccupy the building once it is restored? It would certainly seem so.

Extra expense coverage is not measured in terms of offset for business income or rent losses. The only instance in which the contract calls for extra expenses to have a dollar-for-dollar payback in loss reduction is in conjunction with expenses undertaken to speed up repair or replacement of property or to restore records. If, for example, labor overtime expenses in building repair restore the building to rent condition early then extra expense coverage will apply to the overtime cost — to the extent that the rental income loss is reduced.