Demystifying Common Clauses: Extra Expense coverage

02 January 2020

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.
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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.

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  • John CooperJohn Cooper

    John joined JLT in 1987 having spent three years with Leslie & Godwin (now Aon) in the Marine Hull Technical Department.

    John gained extensive knowledge in the technical design and servicing of energy related insurance programmes covering physical damage, business interruption, control of well and liability exposures for a wide spectrum of energy clients including oil & gas lease operators, mobile rig contractors, oil & gas service companies, and major integrated oil companies.

    At JLT Risk Solutions John sat on the "Energy Executive Committee" that oversaw the management and strategy of the Energy Business Unit. In January 2005 John moved from JLT Risk Solutions to Lloyd & Partners where he has responsibility for managing the Energy team. He sits on the Energy & Marine Executive Committee and is a strategic advisor to the LPL Board.

    He is also a broker consultant representative to the London Joint Rig Committee and has worked on a consultancy basis with Oil Insurance Limited (OIL). In the combined Marsh JLT Specialty, Energy and Power team, John now performs the role of Global Chief Client Officer.

    If you would like to talk about any of the issues raised in this article, please contact John Cooper, Global Chief Client Officer on +44 (0)20 8108 9542.

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DISCLAIMER

Services provided in the United Kingdom by Marsh JLT Specialty, a trading name of Marsh Ltd and JLT Specialty Limited (together “MMC”). Marsh Ltd is authorised and regulated by the Financial Conduct Authority for General Insurance Distribution and Credit Broking (Firm Reference No. 307511). JLT Specialty Ltd is a Lloyd’s Broker, authorised and regulated by the Financial Conduct Authority for General Insurance Distribution and Credit Broking (Firm Reference No. 310428).

This is not legal advice and is intended only to highlight general issues relating to its subject matter. Whilst every effort has been made to ensure the accuracy of the content of this document, no MMC entity accepts any responsibility for any error, or omission or deficiency. The information contained within this document may not be reproduced. If you are interested in utilising the services of MMC you may be required by/under your local regulatory regime to utilise the services of a local insurance intermediary in your territory to export insurance and (re)insurance to us unless you have an exemption and should take advice in this regard.