In this regular feature we take a look at common clauses found in Energy Insurance that are often not well understood and try to look at what their intentions are, and what they cover or exclude. In this article we look at Extra Expense coverage.
Insurance policies often contain reference to ‘Extra Expense’ coverage, but what does that actually mean?
Extra Expense coverage is designed to cover a business for the extra costs and expenses of conducting business while normal business operations are disrupted by a covered loss.
Sometimes Extra Expense is referred to as Increased Costs of Working but in this article we will simply refer to as Extra Expense.
Extra Expense is not Business Interruption Insurance (which covers the loss of revenue following a physical damage event) but is often provided within Business Interruption coverage sections.
The types of costs and expenses covered usually have to be considered reasonable and necessary, such as the cost of setting up a temporary office while a damaged office is being repaired.
If an Insured purchases Business Interruption they are usually obligated to take reasonable steps to try to avert or minimize such loss, and such costs or expenses, incurred to reduce the loss are usually covered as part of the business interruption loss.
However, any reimbursement of these costs under a Business Interruption policy will usually be subject to an economic test limitation.
For example if 95 cents are spent to continue to earn a dollar, that will be covered, but if 105 cents are spent to continue to earn a dollar, only a dollar would usually be covered under Extra Expense cover within a Business Interruption policy.
It is however possible to purchase Extra Expense cover within a property damage policy when no Business Interruption is purchased, which will usually be subject to an agreed sublimit.
Whether provided as part of a Business Interruption cover, or covered in a property damage section of a policy, it is possible to cover ‘Additional Extra Expenses’ which are expenses incurred that do not pass the above referenced economic test.
These may be specifically described as ‘Additional Extra Expenses’ or the Extra Expense clause may simply have no economic test provision.
Such expenses will be incurred by the Insured to ensure that they can continue to provide its products or services to customers, even if the additional costs exceed any business interruption loss (whether insured or self-insured).
Examples of Extra Expense cover for Energy Insureds can include:
- The shipping in of mobile power generators in the event of damage to on site power generation.
- Trucking product by road in the event of a loss of pipeline access.
- Chartering of shuttle tankers to move crude to temporary Floating Storage Unit (FSU) in the event of FPSO damage.
The above is provided as a general overview of some of the coverage often provided by the aforementioned clauses.
This is not intended to be an extensive and exhaustive analysis of the insurance coverage provided by such clauses. The comments above are the opinion of the Marsh JLT Specialty only and should not be relied on as a definitive or legal interpretation.
We would encourage you to read the terms and conditions of your particular policy and seek professional advice if in any doubt.