I discussed the Fifth Circuit’s new decision in Coastal Dust Control, Inc. d/b/a Sanico v. State Farm Fire & Casualty Company 1 in yesterday’s post, The Left Margin Wins: Fifth Circuit Upholds State Farm’s Restrictive Extra Expense Language.

The court held that, because of the wording and formatting of State Farm’s particular Loss of Income and Extra Expense endorsement, Sanico could recover its extra expenses only to the extent those expenses reduced the amount of its loss of income.

The decision may be the correct interpretation of this particular State Farm form. Policy language controls. But nobody should walk away from this decision believing that all Extra Expense insurance works that way. It does not.

The history, standard insurance forms, treatises, and other cases demonstrate that traditional Extra Expense coverage serves a much broader and critically important purpose, which is to keep a damaged business operating and preserving it as a going concern while it recovers from catastrophe.

Following the fire, Sanico did what most good business owners would desperately try to do. Its commercial laundry facility was destroyed, but its customers still needed clean linens and floor mats. Sanico transported those items to another facility and subcontracted with others so its customers would continue receiving service. Those expenses were incurred to keep customers and keep the business alive.

State Farm’s interpretation essentially asked a different accounting question. State Farm asked how much those business income loss expenditures saved State Farm. The Fifth Circuit agreed with State Farm because of the structure of State Farm’s particular endorsement. The court emphasized that the limiting phrase requiring the extra expense to reduce the amount of otherwise payable loss was positioned so that it applied to all three categories of Extra Expense. The opinion is unpublished, and the court expressly distinguished the Eighth Circuit’s decision in Midwest Regional Allergy 2 based upon differences in punctuation and formatting.

The distinction is important. In Midwest Regional Allergy, a tornado devastated a medical practice. The practice temporarily relocated while a permanent replacement facility was built. It incurred substantial additional expenses repairing, replacing, moving, and installing sophisticated medical equipment so it could again provide MRIs, X-rays, laboratory testing, bone-density scans, and infusion services.

The insurer had already paid the full business income loss. It nevertheless argued that the additional expenditures were not covered because they had not reduced the business income payment. The Eighth Circuit rejected that argument.

It held that expenses incurred to avoid or minimize the suspension of operations and continue the medical practice at the replacement location were covered under a separate category of Extra Expense. Those expenses were not required to reduce the Business Income loss. 3

That is not some strange outlier theory. The standard ISO Business Income (And Extra Expense) Coverage Form demonstrates the same distinction. It provides broader Extra Expense protection for necessary expenses incurred to avoid or minimize a suspension and continue operations. It separately addresses certain expenses incurred to repair or replace property where recovery is tied to reducing an otherwise payable loss.

If every dollar of Extra Expense had to reduce Business Income loss dollar-for-dollar, there would be little reason for the standard forms to distinguish between the two. The insurance industry knows perfectly well how to sell the narrower protection.

ISO’s Business Income Without Extra Expense form, CP 00 32, still reimburses certain necessary expenses incurred to reduce a Business Income loss. But those expenses are limited to the amount by which they actually reduce the Business Income loss. That is fundamentally different from broader Extra Expense coverage.

There is even a standalone ISO Extra Expense form, CP 00 50, designed for businesses that cannot afford to shut down. Hospitals, newspapers, law firms, accounting firms, insurance agencies, and other service businesses may have to spend extraordinary sums simply to remain operational following a catastrophe.

How can broader Extra Expense coverage inherently create some improper economic windfall or “moral hazard” when the insurance industry has deliberately designed and sold an entire insurance product to cover exactly those expenses? That is why I believe the Fifth Circuit’s moral hazard reasoning is fundamentally wrong.

The Fifth Circuit stated that Sanico’s interpretation could create “a runaway of unlimited liability” and suggested that State Farm’s interpretation was economically sensible because insurance policies are not designed to create moral hazard. The court’s reasoning confuses the scope of coverage with the methods insurers use to control their exposure.

Extra Expense insurance is not some accidental loophole discovered by clever policyholders. The insurance industry intentionally developed it, prices it, underwrites it, limits it, and sells it.

Insurers control Extra Expense exposure the same way they control other risks. They can establish limits. They can require the expense to be necessary. They can require it to arise from covered physical damage. They can restrict it to the period of restoration. They can impose time limitations. They can require the insured to resume normal operations as quickly as reasonably possible.

There is nothing economically irrational about an insurer agreeing to pay reasonable and necessary expenses so its policyholder can remain in business. That is how the insurance product works for the commercial policyholder.

If broader Extra Expense protection created an unacceptable moral hazard, why does ISO publish CP 00 30 providing it? Why does ISO publish CP 00 50 providing Extra Expense coverage without Business Income coverage at all? Why have insurers sold these products for decades? The court was silent about that in its opinion.  State Farm never raised or alerted the court to it in its briefing.

The existence of those forms is a rather powerful rebuttal to the suggestion that paying genuine Extra Expense without a dollar-for-dollar Business Income reduction somehow violates fundamental insurance economics.

The Eighth Circuit made the distinction particularly clear in Welspun Pipes, Inc. v. Liberty Mutual Fire Insurance Company. 4 The court enforced a provision limiting certain mitigation expenses to amounts that actually reduced covered Business Income loss. But in the very same opinion, the court reaffirmed Midwest Regional Allergy and explained that separate Extra Expense coverage can reimburse expenses that do not reduce a covered Business Income loss.

In other words, the insurance industry recognizes both products. One pays expenses essentially because they reduce the insurer’s Business Income exposure.  The other pays necessary additional expenses because the policyholder purchased insurance to keep operating. Those are not the same coverage.

The historical authorities recognize the same distinction. In Detroit Edison Co. v. Protection Mutual Insurance Company, the Sixth Circuit discussed traditional Extra Expense insurance as coverage for additional costs incurred so an insured can continue the normal conduct of its business during restoration. 5

The Massachusetts Appeals Court explained the business purpose even more clearly in Verrill Farms, LLC v. Farm Family Casualty Insurance Company. 6 Extra Expense coverage is particularly important for businesses that cannot simply close after a catastrophe because an interruption can cause the permanent loss of customer goodwill.

The court put it wonderfully: “Continuity of service is the key to success.”

That is exactly what Sanico was trying to accomplish.

I have written about this before using the example of a tanning salon whose equipment was damaged. Rather than telling prepaid customers to come back in several months, the owner paid another tanning salon to serve those customers temporarily.

Why would a sensible business owner do that? Because losing the customer may be far more damaging than losing today’s sale.

A business owner confronted with catastrophe is not sitting at the kitchen table asking whether spending $1 today will reduce next month’s forensic accountant calculation by precisely $1. The owner is asking how to keep customers, employees, production, reputation, and market share.

How do I keep this disaster from destroying what took me twenty or thirty years to build? Those are survival questions.

And this brings me to something the Coastal Dust case should cause commercial policyholders and insurance agents to consider. My personal view is that the State Farm commercial product reflected in this case is inferior on this important point. State Farm chose language that, according to the Fifth Circuit, limits Extra Expense recovery to the amount of Business Income loss avoided. Yet the commercial insurance marketplace clearly offers broader forms of Extra Expense coverage.

Why would a business owner knowingly want the lesser protection? If my business suffers a catastrophic fire, I may rationally spend more keeping customers, employees, and operations intact than an accountant can demonstrate I saved in immediate lost income. I would want insurance that permits me to make those reasonable business-survival decisions.

I would not want coverage that effectively tells me that I may spend the money to save your business, but we only reimburse it to the extent the expenditure saves us Business Income payments. That is materially different protection, and it raises an important question for State Farm agents.

Are commercial policyholders being clearly told that this State Farm Extra Expense provision may provide substantially less protection than broader Extra Expense forms available in the marketplace? Are they being offered a way to purchase that broader protection? Based upon the form involved in this case and what I have seen in practice, I am concerned they are not.

If State Farm offers commercial customers a broader form of pure Extra Expense coverage comparable to the broader coverage available elsewhere, I would be pleased to see it. But the policy sold to Sanico certainly did not provide that protection according to the Fifth Circuit.

Agents and brokers should understand these differences before recommending commercial coverage. Business owners should ask what happens if they need to spend more to save their enterprise than the carrier would otherwise owe for lost income. Public adjusters and attorneys should obtain the actual Extra Expense form rather than assuming the words “Extra Expense” always mean the same thing. Claims adjusters and forensic accountants should be equally careful not to import a dollar-for-dollar mitigation limitation into a policy that does not contain one.

A catastrophic property loss can put an otherwise healthy business on the edge of failure almost overnight. Buildings can eventually be rebuilt. Machinery can be replaced. But customers may not come back. Employees may find other jobs. Market share can disappear. A business that took a generation to build can die while everybody debates an accountant’s spreadsheet. This is precisely why Extra Expense coverage can be among the most valuable insurance a commercial policyholder buys.

The lesson from Coastal Dust should not be that Extra Expense always means “spend a dollar only if it saves the insurer a dollar.” The lesson is to read the policy very carefully and understand exactly what was purchased.

Sometimes the most important expense following a catastrophe is not the expense that saves today’s Business Income claim. It is the expense that makes certain there is still a business tomorrow.

Thought For The Day

“It is the first duty of a business to survive.”

—Peter F. Drucker, The Practice of Management (1954)

1 Coastal Dust Control, Inc. d/b/a Sanico, L.L.C. v. State Farm Fire & Cas. Co., No. 25-60653 (5th Cir. Sept. 8, 2026) (per curiam) (not designated for publication).

2 Midwest Regional Allergy, Asthma, Arthritis & Osteoporosis Center, P.C. v. Cincinnati Ins. Co., 795 F.3d 853 (8th Cir. 2015).

3 Midwest Regional Allergy, 795 F.3d at 858-59 (The court held that Extra Expenses incurred to continue operations at a replacement location were not required to reduce the Business Income loss under the policy language at issue).

4 Welspun Pipes, Inc. v. Liberty Mutual Fire Ins. Co., 891 F.3d 351 (8th Cir. 2018). (Distinguishing mitigation expenses tied to reducing Business Income loss from separate Extra Expense coverage and expressly reaffirming Midwest Regional Allergy’s recognition of Extra Expense coverage not connected to the Business Income provision).

5 Detroit Edison Co. v. Protection Mutual Ins Co., 134 F.3d 790 (6th Cir. 1998). (The court discussed traditional Extra Expense insurance and distinguished it from the narrower expediting-expense coverage actually before the court).

6 Verrill Farms, LLC v. Farm Family Cas. Ins. Co., 86 Mass. App. Ct. 577, 18 N.E.3d 1125 (2014).