Extra Expense
Coverage for expenses beyond normal operating costs incurred to continue business operations after a covered property loss.
What It Is
Extra Expense coverage pays for costs above and beyond normal operating expenses that a business incurs to continue operations or resume operations more quickly after a covered loss. These are expenses the business would not have incurred if the loss had not happened. Extra Expense can be included within the Business Income coverage form or purchased as standalone coverage.
Common extra expenses include: renting temporary office or production space, expedited shipping for replacement equipment, overtime labor for temporary workers, temporary utility connections, and premium pricing for rush-order materials. The coverage is designed to help businesses maintain operations and customer relationships during the restoration period.
For some businesses, Extra Expense is more important than Business Income coverage. Banks, hospitals, data centers, and other operations that cannot afford any downtime may spend heavily to maintain operations rather than suspend them. For these accounts, standalone Extra Expense coverage with adequate limits is critical.
Why It Matters for Brokers
Brokers must assess whether a client's business model requires high Extra Expense limits. Businesses that can simply close during restoration need primarily Business Income coverage. Businesses that must stay operational at all costs need robust Extra Expense limits. The failure to properly assess this distinction leads to either inadequate Extra Expense limits or unnecessary Business Income limits.
Real-World Example
A law firm's office building is severely damaged by fire. Rather than suspending operations for 6 months (losing $1.2M in billable revenue), the firm rents emergency office space at $18,000/month (vs. their normal $8,000 lease), purchases replacement computers and printers for $65,000, and pays $12,000 for temporary IT setup and data recovery. Total extra expenses: $137,000 over 6 months. Their Extra Expense coverage of $200,000 covers all costs, allowing the firm to maintain clients and revenue during restoration.
Common Mistakes
- 1Not including Extra Expense coverage for businesses that would need to relocate temporarily, assuming Business Income coverage alone is sufficient.
- 2Setting Extra Expense limits arbitrarily without calculating the actual costs of temporary relocation, expedited equipment replacement, and overtime labor.
- 3Confusing Extra Expense with Business Income—Extra Expense covers additional costs to stay operational, while Business Income replaces lost revenue if operations are suspended.
How brokerageaudit.com Handles This
brokerageaudit.com's Submission Intake asks specific questions about the client's ability to suspend operations versus their need to maintain continuity. Based on responses, the platform recommends appropriate Extra Expense limits. The Policy Checker verifies that businesses identified as needing continuous operations have adequate Extra Expense coverage, not just Business Income.