Summary: What will be the insured's most pressing need if a fire or other disaster interrupts the normal operation of the enterprise? Specifically, if normal relations with customers are interrupted for a time, what will be the effect on the insured's operations over the long range? Alternatively, does the insured deal in services of a type that can be readily transferred to a new location so that the prospect of an interruption of significant duration need not even be contemplated? The answers to these questions provide the strongest possible guide to the insured in determining whether business income coverage or extra expense insurance is the primary need.
Need for Extra Expense Coverage
Most insureds are able to anticipate a temporary suspension of operations with the realization that the flow of customers will be, likewise, only temporarily suspended. It is even possible that, in the case of retailers, the interest generated by fire sales and by a gala reopening of remodeled premises can have a salutary effect on the business. Firms that are able to anticipate that the customer flow will resume in step with resumption of operations are those that, in general, market their goods or, less often, services broadly to a wide and general market. Such firms are most in need of a source of funds to replace the income that the business would have generated, funds that it will need to meet the unavoidable financial obligations that will continue during the time of business shutdown; they need business income coverage. See Business Income (and Extra Expense) Coverage Form.
Other firms, especially those dealing in services, may face a permanent loss of customers if the service is interrupted for any significant length of time. Banks, newspapers, and internet services are frequently cited as examples of businesses that cannot tell their customers to go elsewhere for a month or two and expect them to return with the reopening. Far more numerous are the firms that need never contemplate any except the briefest of interruptions because their operations are readily transportable to another, temporary location; firms, for example, that offer professional services and depend more on persons than on capital, equipment and places. Firms in this category—those that cannot contemplate a suspension of service and those that do not need to contemplate a suspension—have extra expense insurance as their primary need. As long as they have a source of funds to support the extraordinary expenses of staying in business, they should not experience a drop in income from the business.
Insured May Need Both
Having determined that the paramount need is for either business income coverage or extra expense insurance, the insured who chooses the latter should also give careful consideration to the extent of the business income exposure and, perhaps, arrange some coverage for that exposure also. The same process is not required of the insured who purchases business income coverage, because one version of that form (CP 00 30 10 12) provides extra expense insurance as well. By the same token, some of the extra expense of the insured's operations may be able to be temporarily curtailed without involving long-term harm. Since the loss of income from interruption of operations is not covered by the extra expense insurance, the insured may want business income coverage applying to those operations.
Since the CP 00 30 business income coverage form has extra expense insurance built in, some consideration might be given to using that form in lieu of the extra expense insurance form. In most cases, however, the insured who has a dominant need for extra expense insurance will find it both more economical and more convenient to choose the extra expense form. For example, an enterprise might have an exposure of $200,000 per month in terms of business income coverage but $50,000 per month in terms of extra expense. If by an emergency expenditure of $50,000 the insured can avoid the $200,000 loss of business income, then the purchase of extra expense insurance instead of business income coverage is the proper choice.
Extra Expense Coverage Form
A. Coverage
We will pay the actual and necessary Extra Expense you sustain due to direct physical loss of or damage to property at premises which are described in the Declarations and for which an Extra Expense Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss. With respect to loss of or damage to personal property in the open or personal property in a vehicle, the described premises include the area within 100 feet of such premises.
With respect to the requirements set forth in the preceding paragraph, if you occupy a building, your premises means:
a. The portion of the building which you rent, lease or occupy; and
b. The area within 100 feet of the building or within 100 feet of the premises described in the Declarations, whichever distance is greater (with respect to loss of or damage to personal property in the open or personal property in a vehicle); and
c. Any area within the building or at the described premises, if that area services, or is used to gain access to, the portion of the building which you rent, lease or occupy.
1. Extra Expense
Extra Expense means 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. Coverage pertains to expenses (other than the expense to repair or replace property) which are incurred to:
a. Avoid or minimize the "suspension" of business and to continue "operations" at the described premises or at replacement premises or temporary locations, including relocation expenses and costs to equip and operate the replacement location or temporary location.
b. Minimize the "suspension" of business if you cannot continue "operations".
We will also pay Extra Expense to repair or replace property, but only to the extent it reduces the amount of loss that otherwise would have been payable under this Coverage Form.
Analysis
The Extra Expense form, CP 00 50 10 12, by using the wording "The portion of the building which you rent, lease or occupy; and Any area within the building or at the described premises, if that area services, or is used to gain access to, the portion of the building which you rent, lease, or occupy" recognizes the fact that an insured may own a building but not occupy the entire building. It also extends the definition of "premises" to include all routes within the building to gain access to the premises. The form also clarifies that the insured's personal property in the open or in a vehicle within 100 feet of the premises is also considered to be premises.
The form's definition of "extra expense" includes the term "period of restoration." In the business income form, the definition of "period of restoration" includes a seventy-two-hour waiting period before business income coverage begins. However, in the extra expense form, the period of restoration still begins with the date of direct physical loss or damage to property at the described premises caused by a covered cause of loss and it ends when the property should be repaired if reasonable speed is applied to getting the property back to its pre-loss condition. The term limit of the policy has no bearing on this period of time, i.e., the expiration of the policy will not end the period of restoration.
The operation of any building or zoning law or ordinance that interferes with repairs or reconstruction does not extend the time when extra expenses are payable. Likewise, any environmental protection ordinance that regulates the prevention or cleanup of pollution damage does not increase the period of restoration. The period of restoration remains based on that stretch of time during which repairs should be accomplished.
Insureds who have an exposure regarding building ordinances, with a careful investigation being required, are able to obtain an increased period of restoration by means of endorsement CP 15 31 10 12; see Business Income and Extra Expense Endorsements. The endorsement allows for the operation of laws affecting construction or repairs or requiring demolition as legitimate factors in the computation of restoration time. Note that this endorsement does not extend the period of restoration as regards the operation of environmental protection laws.
Interference by strikers or others at the site of repairs or reconstruction that causes a delay in the resumption of operations is also excluded from consideration in the period of restoration. This is a stipulation of the causes of loss form and is one of several special exclusions therein applicable to extra expense and business income insurance. See Business Income (and Extra Expense) Coverage Form.
In addition to covering the extra expenses needed to avoid suspension of the enterprise, the coverage agreement also applies to expenses undertaken to minimize the suspension if it cannot be avoided and to expenses undertaken to facilitate the repair or restoration of property to the extent that the latter reduces the amount that would otherwise have been necessary to spend. For example, the cost of air shipment of a vital part is covered as a legitimate extra expense if air shipment will reduce the period of restoration and save payment of other expenses that would otherwise be at least equal to the cost of air shipment.
The major extra expenses that the policy coverage undertakes to insure are those having to do with keeping the enterprise of the insured in operation at the described premises or getting it moved and operating at a new permanent or temporary location.
2.Covered Causes Of Loss
See applicable Causes Of Loss Form as shown in the Declarations.
Analysis:
Whether damage to property at the insured premises triggers extra expense coverage depends upon whether the peril causing the damage is covered. That is a function of the causes of loss form that is a necessary part of the policy. These forms are categorized into basic, broad, and special coverage forms. See Causes of Loss Forms for an in-depth discussion of each of the causes of loss forms.
In addition to setting up the perils and the exclusions specifically applying to those perils, the causes of loss forms all contain one set of exclusions specifically applying to extra expense insurance. One such exclusion relating to interference by strikers or others at the repair site is previously noted.
Another exclusion eliminates coverage for extra expense associated with the damage or destruction of radio or television antennas and their accoutrements. A buy-back endorsement— CP 15 50 10 12—is available for insureds who need to cover the exposure.
The matter of cancellation of business deals is the subject of another exclusion directly addressed by extra expense insurance. There is no coverage for extra expense associated with the termination of any license, lease, or contract beyond the period of restoration. It is also stipulated that there is no coverage for any other consequential loss. If, for example, an advertising agency insured is prevented from soliciting a new account because a fire destroys the layout on the day before a scheduled presentation, the consequential loss exclusion rules out coverage under the extra expense form.
3. Additional Limitation – Interruption Of Computer Operations
- Coverage for Extra Expense does not apply when action is taken to avoid or minimize a "suspension" of "operations" caused by destruction or corruption of electronic data, or any loss or damage to electronic data, except as provided under the Additional Coverage – Interruption Of Computer Operations.
- Electronic data means information, facts or computer programs stored as or on, created or used on, or transmitted to or from computer software (including systems and applications software), on hard or floppy disks, CD-ROMs, tapes, drives, cells, data processing devices or any other repositories of computer software which are used with electronically controlled equipment. The term computer programs, referred to in the foregoing description of electronic data, means a set of related electronic instructions which direct the operations and functions of a computer or device connected to it, which enable the computer or device to receive, process, store, retrieve or send data.
- This Additional Limitation does not apply when loss or damage to electronic data involves only electronic data which is integrated in and operates or controls a building's elevator, lighting, heating, ventilation, air conditioning or security system.
Analysis:
This limitation shows that coverage for extra expense related to electronic data is addressed in an additional coverage. The limited coverage provides coverage in certain events of corruption of electronic data, a type of loss that was not explicitly addressed in the past. The definition of "electronic data" is standard and in order with other forms in the commercial property program.
4.Additional Coverages
a.Alterations and New Buildings.
We will pay for the actual and necessary Extra Expense you incur due to direct physical loss or damage at the described premises caused by or resulting from any Covered Cause of Loss to:
(1)New buildings or structures, whether complete or under construction;
(2)Alterations or additions to existing buildings or structures; and
(3)Machinery, equipment, supplies or building materials located on or within 100 feet of the described premises and:
(a)Used in the construction, alterations or additions; or
(b)Incidental to the occupancy of new buildings.
b.Civil Authority
In this Additional Coverage – Civil Authority, the described premises are premises to which this Coverage Form applies, as shown in the Declarations. When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual and necessary Extra Expense you incur caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:
(1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and
(2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
Civil Authority Coverage will begin immediately after the time of the first action of civil authority that prohibits access to the described premises and will end four consecutive weeks after the date of that action.
c. Interruption Of Computer Operations
(1) Under this Additional Coverage, electronic data has the meaning described under Additional Limitation – Interruption Of Computer Operations.
(2) Subject to all provisions of this Additional Coverage, you may extend the insurance that applies to Extra Expense to apply to a "suspension" of "operations" caused by an interruption in computer operations due to destruction or corruption of electronic data due to a Covered Cause of Loss. However, we will not provide coverage under this Additional Coverage when the Additional Limitation, Interruption Of Computer Operations does not apply based on Paragraph A.3.c. therein.
(3) With respect to the coverage provided under this Additional Coverage, the Covered Causes of Loss are subject to the following:
(a) If the Causes Of Loss – Special Form applies, coverage under this Additional Coverage – Interruption Of Computer Operations is limited to the "specified causes of loss" as defined in that form, and Collapse as set forth in that form.
(b) If the Causes Of Loss – Broad Form applies, coverage under this Additional Coverage – Interruption Of Computer Operations includes Collapse as set forth in that form.
(c) If the Causes Of Loss Form is endorsed to add a Covered Cause of Loss, the additional Covered Cause of Loss does not apply to the coverage provided under this Additional Coverage – Interruption Of Computer Operations.
(d) The Covered Causes of Loss include a virus, harmful code or similar instruction introduced into or enacted on a computer system (including electronic data) or a network to which it is connected, designed to damage or destroy any part of the system or disrupt its normal operation. But there is no coverage for an interruption related to manipulation of a computer system (including electronic data) by any employee, including a temporary or leased employee, or by an entity retained by you or for you to inspect, design, install, maintain, repair or replace that system.
(4) The most we will pay under this Additional Coverage – Interruption Of Computer Operations is $2,500 (unless a higher limit is shown in the Declarations) for all loss sustained in any one policy year, regardless of the number of interruptions or the number of premises, locations or computer systems involved. If loss payment relating to the first interruption does not exhaust this amount, then the balance is available for loss sustained as a result of subsequent interruptions in that policy year. A balance remaining at the end of a policy year does not increase the amount of insurance in the next policy year. With respect to any interruption which begins in one policy year and continues or results in additional loss in a subsequent policy year(s), all loss is deemed to be sustained in the policy year in which the interruption began.
(5) This Additional Coverage – Interruption Of Computer Operations does not apply to loss sustained after the end of the "period of restoration", even if the amount of insurance stated in (4) above has not been exhausted.
Analysis:
The form addresses three other areas of exposure under what it refers to as additional coverages. These additional coverages do not serve to increase the limit for extra expense insurance set out in the declarations except the interruption of computer operations additional coverage.
Coverage of alterations and new buildings on the described premises might be inferred from the basic insuring agreement—which covers extra expense losses caused by insured physical damage to property at described locations (including personal property in the open or in vehicles within 100 feet of the described locations). Additions and new construction are distinguished in terms of additional coverage because the time frame for the extra expense loss is different. If an already existing structure is damaged, extra expense insurance runs from the date of damage through the time the damage should be repaired. If a new structure or an alteration is damaged, extra expense insurance begins to run on the date that the new property would have been operational if no covered loss had occurred.
To illustrate, suppose that an insured is expanding its suite of offices in order to house two additional practitioners and the new offices are scheduled to be operational on January 1. On December 15, there is a small fire and the offices now will not be able to be occupied until February 1. Any extra expense the insured must undertake in order to speed up the repairs is covered under the basic insuring agreement. The extra expense loss associated with the additional coverage starts on January 1, the date when the offices would have been available, and it applies to such expenses as the cost of acquiring temporary office space for the two new persons during the delay.
When damage by an insured peril occurs away from the insured's premises and civil authorities seal off the area or otherwise prohibit the insured's access to the described premises, the civil authority coverage could apply. The 2012 form specifies that the described premises are those that are described in the declarations and are within one mile of the area closed by civil authority. Fire fighters cordoning off a city block during and after a fire on neighboring property is an example of an interruption by civil authority during which extra expense insurance applies. There is coverage for up to four consecutive weeks of such blocked access.
This additional coverage responds only to blockades imposed by civil authority. Extra expense insurance does not provide for coverage if access to the insured's premises is reduced or cut off by some other means—as when, for example, a hubbub of construction activity surrounding the insured's premises discourages clients. Also, blockage by civil authorities in the face of an uninsured cause of loss, such as flood, does not activate this additional coverage.
The interruption of computer operations additional coverage gives back up to $2,500 for suspension of operations caused by an interruption in computer operations, a peril that is otherwise not covered via the interruptions of computer operations limitation. The covered cause of loss that will apply depends upon the causes of loss form chosen by the insured. Additional perils that are added to the form by endorsement do apply to this coverage. If losses are incurred after the period of restoration, the coverage no longer applies even if the limit has not been exhausted.
5. Coverage Extension
You may extend the insurance provided by this Coverage Part as follows:
Newly Acquired Locations.
a. You may extend your Extra Expense Coverage to apply to property at any location you acquire other than fairs or exhibitions.
b. The most we will pay for loss under this Extension is $100,000 at each location, (unless a higher limit is shown in the Declarations)
c. Insurance under this Extension for each newly acquired location will end when any of the following first occurs:
(1)This policy expires.
(2)30 days expire after you acquire the property; or
(3)You notify us of how you want this coverage to apply to that location.
We will charge you additional premium from the date you acquire the property.
Analysis:
If the insured acquires a new location during the term of the policy, the extra expense form provides limited coverage at the new location automatically. The added coverage's limit—$100,000—is separate from the policy limit shown in the declarations.
The automatic insurance expires after thirty days from the date of acquisition of the property or, if sooner, on the date the acquisition is reported to the insurance company. Expiration of the policy terminates the coverage also.
Limits of Insurance
B. Limits Of Insurance
The most we will pay for loss in any one occurrence is the applicable Limit of Insurance shown in the Declarations.
Payments under the following Additional Coverages will not increase the applicable Limit of Insurance:
- Alterations And New Buildings; or
- Civil Authority.
The amounts of insurance stated in the Interruption Of Computer Operations Additional Coverage and the Newly Acquired Locations Coverage Extension apply in accordance with the terms of those coverages and are separate from the Limit(s) of Insurance shown in the Declarations for any other coverage.
Analysis:
The limits of insurance section re-emphasizes that the $2,500 available under the interruption of computer operations additional coverage and the $100,000 available for the newly acquired locations coverage extension are separate from the limit of liability for extra expense coverage shown on the declarations page. It also restates that payment under the additional coverages for alterations and new buildings and civil authority does not increase the extra expense limit shown on the declarations page.
Loss Conditions
C. Loss Conditions
The following conditions apply in addition to the Common Policy Conditions and the Commercial Property Conditions.
1. Appraisal
If we and you disagree on the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. Each party will:
a. Pay its chosen appraiser; and
b. Bear the other expenses of the appraisal and umpire equally.
If there is an appraisal, we will still retain our right to deny the claim.
2.Duties If You Incur Extra Expense
a. You must see that the following are done if you incur Extra Expense:
(1) Notify the police if a law may have been broken.
(2) Give us prompt notice of the direct physical loss or damage. Include a description of the property involved.
(3) As soon as possible, give us a description of how, when, and where the direct physical loss or damage occurred.
(4) Take all reasonable steps to protect the Covered Property from further damage, and keep a record of your expenses necessary to protect the Covered Property, for consideration in the settlement of the claim. This will not increase the Limit of Insurance. However, we will not pay for any subsequent loss or damage resulting from a cause of loss that is not a Covered Cause of Loss. Also, if feasible, set the damaged property aside and in the best possible order for examination.
(5) As often as may be reasonably required, permit us to inspect the property proving the loss or damage and examine your books and records. Also permit us to take samples of damaged and undamaged property for inspection, testing and analysis, and permit us to make copies from your books and records.
(6) Send us a signed, sworn proof of loss containing the information we request to investigate the claim. You must do this within 60 days after our request. We will supply you with the necessary forms.
(7) Cooperate with us in the investigation or settlement of the claim.
(8) If you intend to continue your business, you must resume all or part of your "operations" as quickly as possible.
b. We may examine any insured under oath, while not in the presence of any other insured and at such times as may be reasonably required, about any matter relating to this insurance or the claim, including an insured's books and records. In the event of an examination, an insured's answers must be signed.
3.Limits On Loss Payment
We will not pay more for Extra Expense than the percentages shown in the Declarations times the Limit of Insurance.
When the "period of restoration" is:
- 30 days or less, the first percentage applies.
- 60 days or less, but more than 30 days, the second percentage applies.
- More than 60 days, the third percentage applies.
Example: The Limit of Insurance is $100,000
The percentages shown in the Declarations are 40%-80%-100%
The "period of restoration" is 45 days
The amount of Extra Expenses incurred is $90,000
We will not pay more than $100,000 times 80% (the percentage applicable for a "period of restoration" of 31-60 days), or $80,000. The remaining $10,000 is not covered.
4.Loss Determination
a. The amount of Extra Expense will be determined based on:
(1) All expenses that exceed the normal operating expenses that would have been incurred by "operations" during the "period of restoration" if no direct physical loss or damage had occurred. We will deduct from the total of such expenses:
(a) The salvage value that remains of any property bought for temporary use during the "period of restoration," once "operations" are resumed; and
(b )Any Extra Expense that is paid for by other insurance, except for insurance that is written subject to the same plan, terms, conditions and provisions as this insurance; and
(2) Necessary expenses that reduce the Extra Expense otherwise incurred.
b. We will reduce the amount of your Extra Expense loss to the extent you can return "operations" to normal and discontinue such Extra Expense.
c. If you do not resume "operations," or do not resume "operations" as quickly as possible, we will pay based on the length of time it would have taken to resume "operations" as quickly as possible.
5.Loss Payment
We will pay for any loss within 30 days after we receive the proof of loss, if you have complied with all of the terms of this Coverage Part and:
- We reach agreement with you on the amount of loss; or
- An appraisal award has been made.
Analysis:
As in the business income form, the insured is required to take all reasonable steps to protect covered property from further damage.
The system of recovery under extra expense insurance requires careful attention and explanation. A limit appears in the declarations that specifies the most that the insurance company will pay on an extra expense loss. However, the declarations also specify percentages of the policy limit that are recoverable in thirty day intervals. A 40-80-100 arrangement is the most common. With this, the insured may not recover more than 40 percent of the policy limit when the recovery period is thirty days or less, 80 percent when the recovery period is over thirty but less than sixty days, and 100 percent of the limit only when the recovery period exceeds sixty days.
The extra expense form itself—in the provision entitled "limits on loss payment"—shows what happens when proven expenses do not line up favorably with the selected limits. (The insured in the form's example recovers $80,000 under a $100,000 policy and goes uninsured for $10,000 of proven expenses. The time for recovery, the period of restoration, turned out to be forty-five days and the insured had a 40-80-100 arrangement. Thus, the most the insured could recover for a restoration period of sixty days or less was 80 percent of the $100,000 limit even though extra expenses had amounted to $90,000.)
The insured has the option—and the challenge—of selecting the number of thirty day intervals and the percentages of the overall limit that will become available at each limit. Endorsement CP 15 07 11 85 is used when four or more recovery intervals are contemplated. The 40-80-100 arrangement commonly shown on the declarations page can often be altered on the page itself.
The most foolproof arrangement is to have 100 percent of the coverage available during the first thirty days. (The time of recovery could extend beyond thirty days but the full amount of the policy is available, even so. Even a one day period of restoration is sufficient to bring the total policy limit into play, if necessary.) However, this arrangement is also significantly more expensive. The cost of the coverage goes down as the limit is spread through longer intervals into the policy term. An insured who could realistically expect a very slow recovery and a very gradual pay out of extra expenses might choose a 300 day recovery with 10 percent of the policy limit becoming available every thirty days. The premium would be relatively inexpensive, but few insureds are in a position to take advantage of that extended arrangement. Only a careful examination of maximum expenses during the first thirty day interval, maximum expenses during the second thirty day interval, and maximum time of restoration can guide the insured in determining the firm's individual and particular requirements.
The matter of other insurance is discussed in the form under Loss Determination. Extra expense insurance holds itself as excess to recovery of the same expenses that the insured receives from another source unless the other source "is written subject to the same plan, terms, conditions and provisions as this insurance." Many insureds may need both business income coverage and extra expense insurance, and business income coverage has some extra expense insurance built in.
Definitions
D. Definitions
1."Operations" means your business activities occurring at the described premises.
2."Period of restoration" means the period of time that:
a. Begins with the date of direct physical loss or damage caused by or resulting from any Covered Cause of Loss at the described premises; and
b. Ends on the earlier of:
(1) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality.
(2) The date when business is resumed at a new permanent location. "Period of restoration" does not include any increased period required due to the enforcement of or compliance with any ordinance or law that:
(1) Regulates the construction, use or repair, or requires the tearing down of any property; or
(2) Requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants." The expiration date of this policy will not cut short the "period of restoration."
3."Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
4."Suspension" means the slowdown or cessation of your business activities.
Analysis:
While the business income form requires a seventy-two-hour waiting period after the loss before the period of restoration begins, the extra expense form does not contain the same limitation. Thus, its period of restoration and its coverage begin at the time the damage occurs.
A definition of "suspension" was added with the 2000 edition to indicate that either a slowdown or a cessation of business activities constitutes a suspension and that total cessation is not necessary.
Includes copyrighted material of Insurance Services Office, Inc., with its permission.