Partners Karen Karabinos and Eric Mull continue their analysis of coverage provisions and exclusions that may be involved in COVID-19 related first party property claims. Today’s focus is on coverage for extra expenses.
COVERAGE PROVISION – EXTRA EXPENSES
Commercial property insurance policies generally cover extra expenses incurred by the insured in connection with a covered loss. Extra expenses typically are associated with coverage for business interruption. But what are covered extra expenses? While it depends on the terms of each policy, two types of extra expense coverage are usually found.
One provision provides coverage for costs the insured incurs to reduce or avoid a business interruption loss. The other type would provide coverage for extra costs incurred by the insured if there had not been a direct physical loss or damage to property caused by or resulting from a covered peril. Both types require that the loss of business income have been caused by or resulted from a covered cause of loss before the extra expenses incurred by the insured will be covered. Therefore, to obtain extra expense coverage resulting from the Coronavirus outbreak, the loss claimed by the insured must be covered under a particular provision of the policy.
There are other limitations. The extra expenses incurred must be for the property for which coverage is afforded under the policy and incurred on behalf of the entity insured under the policy. For example, in Lavoi Corp., Inc. v. National Fire Insurance of Hartford, 293 Ga.App. 142, 666 S.W.2d 387 (2008), the Georgia Court of Appeals rejected the insured’s attempt to recover extra expenses at the two covered bakeries that were incurred to meet the demands of clients for the third bakery, which did not have extra expense coverage. And in DiLeonardo v. Hartford Casualty Insurance Co., 2012 WL 1074290 (USDC, D. RI March 29, 2012), a federal court rejected an extra expense claim by an affiliate, not an named insured, who claimed coverage that a loss covered by affiliate may eventually impact the parent corporation, who was a named insured.
To mitigate the losses in connection with COVID-19, extra expenses may include the costs incurred by an insured to fund a disaster recovery and business continuation plan. Extra expenses also could include paying employees for extra hours, or even continuing working, during a temporary shutdown of insured premises. The costs incurred by the insured to purchase extra equipment, such as computers, so employees can work from home may also constitute an extra expense. Further, restaurants are purchasing supplies need to shift their business to take-out only, which could constitute an extra expense. Just this past week we have seen companies change their business models for the safer production and delivery of their products and services. Those costs may be covered extra expenses.
Extra expenses are just that – extra expenses that are incurred by an insured above the insured’s normal operating expenses. Therefore, any analysis of an extra expense claim must include a review of the company’s prior operating expenses. Once a claim is received, an insurance company should ask the insured to produce, at a minimum, the following pre-loss financial records:
- Profit and loss statements
- Purchase orders
- Bank statements
Most extra expense coverage provides a time element for coverage, generally referred to the “period restoration.” We will be discussing that time element in a future edition.