Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

The Standard ISO Extra Expense provision reads as follows:

2. Extra Expense

a. Extra Expense Coverage is provided at the premises described in the Declarations only if the Declarations show that Business Income Coverage applies at that premises.

b. 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 caused by or resulting from a Covered Cause of Loss.

We will pay Extra Expense (other than the expense to repair or replace property) to:

(1) 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.

(2) 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.

Clearly, when an expense is incurred is just as important as the fact that it is incurred at all. The provision expressly states that extra expenses are limited to those actually incurred during a period of restoration. Most policies do not define the term “incur,” and parties often find themselves in court asking for favorable interpretations.

“Incur” is ordinarily defined as “to become liable or subject to through one's own action; [to] bring or take upon oneself.” Random House Webster's Unabridged Dictionary (1998).

This definition will typically exclude gratuitous or voluntary obligations (i.e., not otherwise helpful in reducing or minimizing the loss), which would not have been “necessary” and therefore not recoverable even though “incurred”

In Business Interruption-Coverage, Claims and Recovery, Daniel Torpey elaborates on the issue of paid vs. incurred expenses:

When a policyholder buys goods or services in connection with restoring its assets, it will likely do so under some type of financing arrangement. That expense is incurred at the time the goods or services are purchased, but it may be paid over a period of time. The expense is accrued for payment-as accounts payable-under accrual accounting at the time the obligation is incurred. When the actual payment is made, the payable balance is reduced, as is the company’s cash. Most disputes do not typically revolve around these concepts. Insurance companies generally recognize accounts payable and other accrued expenses as legitimate expenses in their loss calculations, although they often require proof of payment of those items before settling the loss.

The issue becomes significantly more complex and contentious when the dollar obligations are large and extend for a significant period beyond the time required for restoration or replacement of the damaged property.

Consider the situation of many major financial institutions after September 11, 2001. While most institutions had backup facilities for vital operations, thousands of employees were displaced by the damage or destruction of the buildings. Assuming that there would be a high demand for office space, some companies took unusual measures-from occupying entire hotels to entering in five or ten-year leases-to assure that they had sufficient temporary space to accommodate employees as quickly as possible and to minimize their business interruption losses during the reconstruction or relocation periods. As it turned out, more space was available than expected in the New York real estate market, and most institutions were able to relocate their work forces to permanent spaces fairly expeditiously. Unfortunately, these institutions then had unneeded space under long-term leases they were obligated to pay. And the soft, post 9/11 real estate market made subleasing virtually impossible.

The obligation for these leases was generally incurred during the period of indemnity for these companies, with the payment of these obligations set to occur over time. These specific issues still have no clear resolution, although most companies asserted claims for the present value of the tail on the residual lease obligations. Disagreements regarding the responsibility for paying these types of incurred, but not paid, obligations continue to be included in the ultimate negotiation of insurance and reinsurance claims. A very strong case can be made, based on insurance policies and simple logic, to support the validity of these claims. As a practical matter, the leases could be terminated – and the expense of doing so rightfully claimed-within the indemnity period.

I could not find a published court opinion that dealt specifically with long-term temporary losses incurred during the period of restoration, but the payment of which fell outside of the period. I believe that a policyholder’s efforts and money spent to resume operations swiftly and which reduce or eliminate a business income loss should be fully compensated, even if the time of actual payment for those efforts falls outside the period of restoration. Public policy should prevent an insurance company from denying coverage for legitimate and documented expenses incurred in accordance with a policyholder’s contractual obligation to mitigate its business income loss.

Many businesses were not directly affected by the storms, but if they have a dependent relationship with a business that was affected by the storms, there may be coverage for any economic losses as a result of the inability to continue the relationship with the affected entity.

Businesses develop and thrive on symbiotic relationships, in which the entities rely on the continued operational viability of each other (or even exclusively beneficial relationships). Few businesses, however, consider the risk and exposure of losing that relationship due to an unexpected calamity.

Contingent business coverage is a type of business interruption coverage which will protect the “dependent business” from an external business income exposure. There are four (4) types of dependent business ISO endorsements:

1. Contributing Premises, such as the businesses that deliver materials to the insured;
2. Recipient Premises, such as the businesses that receive the insured’s products;
3. Manufacturing Premises (businesses that make products for delivery to the insured, and
4. Leader Premises, such as businesses that bring the customers to the insured.

Extra Expense Coverage pays for necessary additional expenses a business incurs that it would not have incurred if there had been no direct physical loss or damage to property at the described premises (or contingent premises if adequately endorsed)

A good example of how distant businesses can be affected by catastrophes and yet recover under their own commercial policies is found in Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota, 356 F.3d 850 (8th Cir. 2004).

ADM processes and markets a variety of agricultural commodities such as corn, wheat, and soybeans. ADM uses corn to make such products as high-fructose corn syrup (“HFCS”) and ethanol. It relies heavily on corn producing operations and government transportation ways along the Mississippi and Illinois Rivers to conduct its operations. ADM insured its operations for $100 million under a difference-in-conditions program with several layers of insurance.

In 1993, severe floods devastated the Midwestern corn crops. The flood also obstructed the waterways and hampered the ability to navigate and move products by barge on the river. ADM claimed the flood caused it to incur extra expenses to procure sufficient quantities of corn for its processing and that the prolonged closures of parts of the Mississippi and Illinois Rivers caused it to incur additional expenses in alternative transportation. ADM ultimately submitted claims to its insurers for losses from the flood totaling more than $166 million in extra expenses and contingent business income losses.

ADM filed suit against all its insurers and settled with all, except for the hardiest $50 million layer with Hartford. The district court found that Hartford's policy insured only against direct physical damage to ADM's insured property, and that Hartford was not responsible for any contingent business or extra expense losses. ADM filed suit against its broker, Aon Risk Services, seeking $50 million in damages for Aon's failure to secure contingent business interruption and extra expense coverages in the Hartford policy. The broker alleged that ADM could not seek to recover Hartford’s excess layer because it had not exhausted the underlying layers. The court denied Aon’s motion and allowed ADM to proceed against its broker, holding that ADM had exhausted the lower layers by agreeing to settle with the underlying insurers for a partial sum and absorbing the balance.

Aon then argued that even if it had procured contingent business and extra expense coverage under Hartford’s policy, ADM could not have recovered because its operations were not interrupted. Aon also argued that ADM’s expert was not offsetting the amounts that the manufacturing giant was hedging in the commodities futures market or the increased costs that it passed down to its buyers.

The jury returned a verdict of $16.5 million against Aon and the court awarded $3.6 million in pre-judgment interest. Aon appealed.

In affirming the verdict and interest award, the court of appeals stated:

The phrase “interruption of business,” as used in section 13Q of the DIC policy, does not require ADM to show that its corn processing plants stopped or slowed production. An interruption of business means some harm to the insured's business, including the payment of extra expense, that would not have been incurred but for damage that an insured peril has caused to the property of any supplier.
***
Section 10B specifically excludes from the definition any “extra expense in excess of that necessary to continue as nearly as practicable the normal conduct of the insured's business.” Because the definition of extra expense contained in Section 10B applies wherever the term is used in the DIC policy, it applies to the extra expense coverage provided by Section 13Q.
***
As defined in Section 10B, extra expense clearly includes those expenses necessary to carry on business operations. Section 10B would not make any sense if the DIC policy were interpreted as covering only the extra expense incurred as a result of a complete cessation of business. Accordingly, Aon's argument that the policy only covers extra expense if business operations were stopped is inconsistent with the terms of the policy.
***
The cases cited by both parties demonstrate that parties to an insurance contract can require a slowdown or cessation of business before extra expense coverage applies. The DIC policy, however, does not include such a requirement with respect to the extra expense coverage and we are not at liberty to rewrite the policy to include one.

Notwithstanding these general principles, every policy must be read carefully to determine if this general rule applies to a particular claim. Feel free to call if you have questions.

In considering Extra Expense provisions, however, courts will not require a total cessation of the operations to trigger coverage for necessary expenses incurred in reducing the amount of the loss.

A good explanation of the general requirements to trigger extra expense coverage can be found in Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota, 356 F.3d 850 (8th Cir. 2004).

ADM processes and markets a variety of agricultural commodities such as corn, wheat, and soybeans. ADM uses corn to make such products as high-fructose corn syrup (“HFCS”) and ethanol. It relies heavily on corn producing operations and government transportation ways along the Mississippi and Illinois Rivers to conduct its operations. ADM insured its operations for $100 million under a difference-in-conditions program with several layers of insurance.

In 1993, severe floods devastated the Midwestern corn crops. The flood also obstructed the waterways and hampered the ability to navigate and move products by barge on the river. ADM claimed the flood caused it to incur extra expenses to procure sufficient quantities of corn for its processing and that the prolonged closures of parts of the Mississippi and Illinois Rivers caused it to incur additional expenses in alternative transportation. ADM ultimately submitted claims to its insurers for losses from the flood totaling more than $166 million, in extra expenses and contingent business income losses.

ADM filed suit against all its insurers and settled with all, except for the hardiest $50 million layer with Hartford. The district court found that Hartford's policy insured only against direct physical damage to ADM's insured property, and that Hartford was not responsible for any contingent business or extra expense losses. ADM filed suit against its broker, Aon Risk Services, seeking $50 million in damages for Aon's failure to secure contingent business interruption and extra expense coverages in the Hartford policy. The broker alleged that ADM could not seek to recover Hartford’s excess layer because it had not exhausted the underlying layers. The court denied Aon’s motion and allowed ADM to proceed against its broker, holding that ADM had exhausted the lower layers by agreeing to settle with the underlying insurers for a partial sum and absorbing the balance.

Aon then argued that even if it had procured contingent business and extra expense coverage under Hartford’s policy, ADM could not have recovered because its operations were not interrupted. Aon also argued that ADM’s expert was not offsetting the amounts that the manufacturing giant was hedging in the commodities futures market or the increased costs that it passed down to its buyers.

The jury returned a verdict of $16.5 million against Aon and the court awarded $3.6 million in pre-judgment interest. Aon appealed.

In affirming the verdict and interest award, the court of appeals stated:

The phrase “interruption of business,” as used in section 13Q of the DIC policy, does not require ADM to show that its corn processing plants stopped or slowed production. An interruption of business means some harm to the insured's business, including the payment of extra expense, that would not have been incurred but for damage that an insured peril has caused to the property of any supplier.

Section 10B specifically excludes from the definition any “extra expense in excess of that necessary to continue as nearly as practicable the normal conduct of the insured's business.” Because the definition of extra expense contained in Section 10B applies wherever the term is used in the DIC policy, it applies to the extra expense coverage provided by Section 13Q.

As defined in Section 10B, extra expense clearly includes those expenses necessary to carry on business operations. Section 10B would not make any sense if the DIC policy were interpreted as covering only the extra expense incurred as a result of a complete cessation of business. Accordingly, Aon's argument that the policy only covers extra expense if business operations were stopped is inconsistent with the terms of the policy.

The cases cited by both parties demonstrate that parties to an insurance contract can require a slowdown or cessation of business before extra expense coverage applies. The DIC policy, however, does not include such a requirement with respect to the extra expense coverage and we are not at liberty to rewrite the policy to include one.

Notwithstanding this general principle, every policy must be read carefully to determine if this general rule applies to a particular claim. Feel free to call if you have questions.

Notwithstanding the standard practice of calculating property manager’s fees as a continuing expense of the business operation, I came across an interesting article in the FC&S Bulletin regarding the recoverability of these fees that is worth sharing so that everyone can avoid similar coverage disputes:

Business Income—Status of
Management Fees?

Q
Many of our clients have property management firms who manage their apartment buildings and commercial properties for a percentage fee based on rental income. Frequently, the management agreements call for the firms to be paid an additional fee for any construction management services performed following a property loss.

In our opinion, both these fees should be covered as part of the property owner's business income loss following a covered property loss. However, following a recent covered loss to a large commercial complex containing many leased offices, the adjuster refused to allow either the continuing management fee or the additional fee, stating that both of these were "agreements outside the policy" and therefore not covered.

Specifically, the adjuster pointed to exclusion 4.c.(2) of the CP 10 30 06 95, which eliminates coverage for certain contractual liability assumed by the insured. Not only did he disallow coverage for the additional fee, but for the on-going management fee as well.

Our insured has the [sic.] with business income and extra expense CP 00 30 06 95 attached.

What do you think?

Texas Subscriber

A

The covered direct physical loss to the insured property is the trigger for business income coverage. In the CP 00 30 business income and extra expense form, the insurer promises to pay the net income that would have been earned and continuing normal operating expenses, including payroll.

There is no descriptive or restrictive language in the form detailing what "normal operating expenses" are comprised of. And, although the adjuster may think that this "operating expense" does not continue because there is nothing to manage, this is not necessarily the case. For example, when property is completely destroyed, then maintenance expense—money paid to an outside firm—for building and machinery might discontinue. However, these expenses might well continue if the property is only partially destroyed and if the insured is obligated by contract to continue payment.

The ongoing management fees may be viewed in the same light. If the management fee does not discontinue in event of a covered loss, it therefore is a part of the normal operating expense covered by business income.

The second part of the business income coverage is for extra expense. The CP 00 30 defines extra expense as "necessary expenses [the insured] incur[s] during the 'period of restoration' that [the insured] would not have incurred if there had been no direct physical loss or damage." Further, the extra expense must be for the purpose of avoiding or minimizing the suspension of business and allowing the insured to continue "operations" at the described premises.

The management company's function in this instance is to supervise the leased space construction; since the management company is presumably in a better position to expedite the restoration of the damaged building, the adjuster cannot arbitrarily disallow the fee. If the management company's intervention minimizes the suspension of business by making sure the premises are restored quickly to the preloss condition, then the fee is covered.

The adjuster's citing of exclusion 4.c.(2) is inappropriate, since this exclusion is prefaced by the language (under 4. special exclusions) that "the following provisions apply only to the specified coverage forms." Exclusion 4.c.(2) relates to the legal liability coverage form; specifically the insured's assumption of liability in a contract or agreement. The exclusion precludes coverage, for example, for a hold harmless agreement in which the insured assumes liability rightfully belonging to another. It is not applicable in this situation.

As stated in the FC&S Bulletin, property manager’s fees incurred after a loss to assist in the mitigation of damages above may also be recovered as an extra expense under the policy. A standard extra expense coverage form states "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." These extra expenses include those "to avoid or minimize the suspension of business and to continue 'operations' at the described premises, or at replacement premises or at temporary locations."

It is also likely that courts will allow recovery of the property manager’s fees. For example, in  Cotton Bros. Banking v. Industrial Risk Insurers, 951 F.2d 54 (5th Cir. 1992), the court granted coverage for security expenses to avoid theft of a damaged business property. Also, in Northwestern States Portland Cement Co. v. Hartford Fire Ins. Co., 360 F.2d 531 (8th Cir. 1996), under a business interruption endorsement containing an "extra expense" clause, the insured was able to avoid a loss of earnings by using available raw materials to continue production; the extra cost involved in producing replacement raw materials was recoverable, although the total cost of such materials was not.

On the issue of tanning beds and extra expense coverage, the FC&S Bulletin published the following:

Extra Expense for a Tanning Salon

Q

The insured owns a tanning salon. He is insured on a standard commercial property form, with the CP 00 50 04 02, Extra Expense, endorsement. There is no business income endorsement. Many of his customers pre-pay for a number of sessions, or have monthly fees directly taken from their credit cards.

He suffered a covered loss in which four out of the seven beds were rendered unfit for use. In order to keep his business alive (particularly in the light of many customers having pre-paid), he contracted with another tanning salon for his customers to use the other salon's tanning beds. He paid the other salon $8 per person/per session, which is what his customers paid.

When he submitted this expense to the insurance carrier, however, the claim was denied. The adjuster stated this was a business income loss and not covered. May we have your opinion?

Pennsylvania Subscriber

A

The extra expense coverage form states "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." These extra expenses include those "to avoid or minimize the suspension of business and to continue 'operations' at the described premises, or at replacement premises or at temporary locations."

Since the insured has, through contracting with another tanning salon to serve his customers, incurred expenses he would not otherwise have had, there is coverage. He has minimized the suspension of business through this arrangement. Further, the endorsement does not state the insured must own, rent, or lease the "replacement premises," so the use of the other tanning salon becomes the insured's business's "temporary location."

Other popular “extra expenses” could be temporary office space, temporary computer systems or furniture for the temporary space, overtime for workers who need to spend additional time outside of their normal workday due to the covered event. If employees were not able to bring their lunch to work because the employee’s lounge/kitchenette was burned in a fire, an extra expense claim could be made for feeding them during this time period.

For example, in Cotton Bros. Banking v. Industrial Risk Insurers, 951 F.2d 54 (5th Cir. 1992), the court granted coverage for security expenses to avoid theft of a damaged business property. Also, in Northwestern States Portland Cement Co. v. Hartford Fire Ins. Co., 360 F.2d 531 (8th Cir. 1996), under a business interruption endorsement containing an "extra expense" clause, the insured was able to avoid a loss of earnings by using available raw materials to continue production; the extra cost involved in producing replacement raw materials was recoverable, although the total cost of such materials was not.

It is also important to note that, as with most insurance policies, the insured has a duty to mitigate its damages after the loss and that Extra Expense Coverage allows the insured to recover a measure of the incidental costs expended in trying to mitigate damages pursuant to the terms and provisions of most insurance policies.

In yesterday's post, I quoted Barry Zalma’s opinion, "without Insurance the economy of the world would collapse. No entrepreneur would dare invest money in a business if he could not spread the risk of loss." Scott Johnson and his fellow insurance agents would make a much greater impact upon their business clients if they could convince more to purchase complete coverage in the various forms of business loss insurance. Money is the lifeblood of any business organization.

In an upgrade to our website and to make all of Michelle's work more easily available, we have placed them together into an e-book for study. Just click below.

[Insurer] will pay necessary Extra Expense 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 at the described premises ... caused by or resulting from a Covered Cause of Loss.

Extra Expense means expense incurred:

(1) To avoid or minimize the suspension of business and to continue ‘operations':

(a) At the described premises ...

(2) To minimize the suspension of business if you cannot continue ‘operations.’

(3) (a) To repair or replace any property ...

to the extent it reduces the amount of loss that otherwise would have been payable under this Additional Coverage or Additional Coverage f., Business Income ...

After reading the extra expense provision, it is ascertainable that the timing of when an expense is incurred is just as important as the fact that it is incurred at all. The provision expressly states that extra expense is limited to those costs actually incurred by the insured itself during a period of restoration. However, most policies do not define the term “incur”. As such, courts are often required to interpret the plain meaning of this provision and a set of facts.

Chatham v. Dann Insurance, 812 N.E. 2d 483 (Ill. App. Ct. 2004) provides a detailed analysis on this issue. Chatham ran a medical equipment sterilization facility. After an explosion, the facility was shut for seven months. During that time, Chatham could not sterilize equipment for one of its main customers. Pursuant to Chatham’s contract with its main customer, Chatham was obligated to arrange for alternate sterilization and pay the cost of shipping the customer’s unsterilized goods to the alternate facilities. The contract, however, did not require Chatham to pay for shipping the sterilized equipment back to its customers and Chatham never did pay for such “outbound freight” costs. Chatham submitted a claim that included those return shipping costs that its main customer incurred and sought coverage under their policy extra expense provisions.

The carrier paid for the reconstruction of the facility and for $1MM of “inbound freight” costs as extra expenses claimed by the insured as a result of the explosion, but it refused to pay an additional $1MM in return shipping costs incurred by Chatham’s biggest customer. Chatham filed suit.

Although the carrier had made a partial payment for extra expenses, the court found that the carrier had not waived its coverage defense and held that the costs of shipping products from an insured's alternate facilities to the insured's customers were not covered, reasoning that Chatham had not itself incurred those expenses:

We are unable to find any ambiguity in the contract language regarding extra expenses.[…] This commonly understood meaning encompasses expenses that the named and additional insureds to the policy, Chatham and SSV, were required to incur during the reconstruction of the sterilization facilities. It does not encompass expenses that the insureds may have wanted to incur on a gratuitous or voluntary basis, which would have been the opposite of “necessary.” It also does not encompass expenses that other, nonparties to the contract were required to incur during the facility reconstruction period. The only party required to pay for the cost of shipping [the customer’s] sterilized products away from the alternate sterilization facilities was [the customer’s] itself, not Chatham or SSV.

The court further defined the meaning of incurred:

“Incur” is another term that was not defined in the contract, but it has a plain, ordinary, and popular meaning of “to become liable or subject to through one's own action; [to] bring or take upon oneself.” Random House Webster's Unabridged Dictionary 969 (1998). Chatham never became liable or subject to the expense of [the customer’s] outbound freight. [Its customer] did.

In conclusion, under the standard extra expense provision, although certain extra expenses may be a direct consequence of a loss, they will not necessarily be covered unless the named insured incurs it on its own -- not through a third party.

The period of restoration in a business interruption claim is a concept of time. The period, as defined in most ISO forms, begins at the time of “direct physical loss or damage” and ends on the earlier of “the date when the property should be repaired, rebuilt, or replaced with reasonable speed and similar quality.” […] or “the date when the business is resumed at a new permanent location”

While there is normally little debate as to when the period of restoration begins, there is often much debate as to when the period ends, since most policies limit the time period to the time that it would take to repair or replace the damage “with reasonable speed or similar quality” and return the business to its pre-loss operational capability. This means that if an operation is suspended for four months but the premises could have been restored to operating conditions in eight weeks “with reasonable speed and similar quality,” the recovery period will probably be limited to eight weeks.

Insureds should keep in mind that returning the business to “operational capability” does not necessarily mean to return the business to pre-loss income levels, a feat which may take much longer to accomplish. Operational capability is merely the entity’s ability to produce goods and provide service at the same level, efficiency and speed as before the loss.

As a general rule, the end date of the period of restoration cuts off the loss of income and extra expense claim.

For example, in Millville Quarry v. Liberty Mutual, 31 F. App’x. 116 (4th Cir. 2002), a quarry operator maintained a system of four water pumps to remove naturally occurring excess water. The pumps were affixed to a platform and the policy only covered the pumps and the platform, but not the entire quarry. One day the quarry flooded and the pumps were lost. In order to save the quarry, the insured rented four additional pumps that were identical to the previous ones, but could not install them due to unrelated electrical problems. The quarry operator then rented additional pumps stabilized the quarry and resumed operations six months after the flood. The quarry operator filed a $9 million extra expense claim with Liberty Mutual. Liberty Mutual advanced $450,000 to the quarry operator to pay for the cost of pumping activities, but it denied the balance of the claim.

In affirming the lower court's grant of summary judgment in favor of Liberty Mutual, the court reasoned that the period of restoration imposed a “temporal rather than substantive limitation on the” policy's extra expense coverage. The court specifically noted that the period of restoration ended when the quarry operator obtained pumps that were identical in number and pumping capacity to the four that had been destroyed by the flood. Although the pumps were not operational on the date they were delivered due to the electrical problem, the court held that the pumps should have been replaced with reasonable speed and similar quality by the date of delivery and that any delay in making the replacement pumps operational did not arise out of the flood or any damage to the lost pumps. Extra expense costs incurred beyond the period of restoration, including costs for additional pumping activities, the construction of a second barge, hydrology investigations, and limestone grout work to stabilize the quarry, were denied as they were incurred outside of the period of restoration.

On the other hand, in Zurich American Insurance Co. v. ABM Industries, Inc., 2006 WL 1293360 (S.D.N.Y. 2006), a janitorial company that held a contract to clean the World Trade Center (“WTC”) submitted a claim to its carrier as a result of the September 11 attacks. ABM was a facility services contractor that provided janitorial, lighting, and engineering services in the common areas of the WTC; provided janitorial services for virtually all of the tenants in the WTC; and operated a call desk through which it provided engineering and lighting services to the WTC tenants.

Among the claimed extra expenses were (1) increased salary costs that resulted because the janitorial company was required to bump junior employees at other locations with more senior employees displaced from the World Trade Center, (2) increased unemployment insurance assessments levied by the State of New York after dozens of the company's workers filed for benefits, and (3) costs associated with the termination of engineers whose services were no longer necessary following the destruction of the buildings. The policy had a standard period of restoration provision, stating that the length of time will not exceed what “would be required with the exercise of due diligence and dispatch to rebuild, repair, or replace the property that had been destroyed or damaged.”

Following remand from the U.S. Court of Appeals for the Second Circuit, and contrary to some other WTC decisions, the district court held that “restoration of the World Trade Center itself [was] necessary for ABM to resume its operations.” In that case the court did not set a specific date for the end of the period of restoration and held that the “appropriate period of recovery is the hypothetical length of time required to rebuild the WTC”, which left the closure of the period of restoration to be determined by a jury and placed the policy's entire $50 million extra expense limit in the hands of a jury.

Clients involved in these types of claims often ask if the cost of accounting is recoverable after the claim is resolved.

While the typical answer to this question is “It depends,” The FC&S Bulletin addresses and clarifies the question as follows:

There is nothing in the wording of the business income portion of the policy [CP 0030] 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.

Now, CP 00 30 also provides extra expense coverage and some may argue that this coverage would apply to the accounting documentation charges. The argument goes that extra expense is defined to mean necessary expenses that the insured incurs during the period of restoration that would not have been incurred if there had been no direct physical loss; and, the accounting fees in question would not have been incurred had there been no loss. Furthermore, the policy also requires that the extra expense be incurred to avoid or minimize the suspension of business and to continue operations. Since 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 since 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, the accounting documentation was a necessary expense to continue the insured's operations.

We do not agree with such an interpretation of the extra expense coverage. However, one of the duties of the insured in the event of loss is to cooperate with the insurer in the investigation or settlement of the claim. If the insurer requests that the insured provide accounting documentation to support a claim, this can be seen by the insured as a duty required of him by the insurer. And, it is reasonable for the insured to assume that the insurer would pay for the insured's costs in performing this duty. The policy's terms do not require such a payment, but the costs the insured incurs while cooperating with the insurer should be taken into consideration in the final settlement of the claim.

Business interruption insurance policies frequently provide indemnity not only for lost profits and fixed charges and necessarily continuing expenses, but for expenses, or "extra expenses," which the insured incurred to reduce the loss and resume business operations. Extra expense coverage is an additional coverage afforded to a business, and it goes beyond the typical coverage for direct physical losses contemplated by the general insuring agreement of a building and personal property coverage form in an insurance policy. Extra expense should allow a business to continue in the event of an emergency, by indemnifying the insured for additional expenses that would not normally have been incurred, but which are not covered under their traditional business interruption provision.

However, if the business policy does not contain Extra Expense protection, these costs may never be recovered, despite the due diligence of a business enterprise to resume operations. Under an Extra Expense Coverage provision, expenses incurred for the purpose of resuming business operations are recoverable only to the extent that they, in fact, reduce the loss, and recovery is limited to variable costs directly attributable to the loss mitigation efforts, rather than fixed costs which would have been incurred even in the absence of the loss.

Examples of covered expenses could be temporary office space, temporary computer systems or furniture for the temporary space, overtime for workers who need to spend additional time outside of their normal work day due to the covered event. If employees were not able to bring their lunch to work because the employee’s lounge/kitchenette was burned in a fire, an extra expense claim could be made for feeding them during this time period.

For example, in Cotton Bros. Banking v. Industrial Risk Insurers, 951 F.2d 54 (5th Cir. 1992), the court granted expenses, such as incremental utility costs and other overhead, to the damaged business property to enable the insured to repair the property and resume operations earlier than anticipated, as well as extra expenses for security to avoid theft of business property. Also, in Northwestern States Portland Cement Co. v. Hartford Fire Ins. Co., 360 F.2d 531 (8th Cir. 1996), under a business interruption endorsement containing an "extra expense" clause, the insured was able to avoid a loss of earnings by using available raw materials to continue production; the extra cost involved in producing replacement raw materials was recoverable, although the total cost of such materials is not.

It is important to note that, as with most insurance policies, the insured has a duty to mitigate its damages after the loss. Extra Expense Coverage allows the insured to recover a measure of the incidental costs expended in trying to mitigate damages pursuant to the terms and provisions of most insurance policies. Therefore, even in tough times, it still makes business sense to keep additional insurance protections (ie. Extra Expense Coverage) to avoid wasting the same or more money the business is trying to save by downgrading coverage.