CHAPTER 7

Introduction:

  • For some insureds, it may be important to continue operations after a loss even if the increase in costs to do so exceeds the amount by which the loss would thereby be reduced.
  • It may be important to have insurance to cover this increase in costs – called extra expense insurance.

The Need for Extra Expense Insurance:

  • Some businesses must avoid the shutdown.
  • Alternatives should be arranged before a loss.
  • Insurance brokers and adjusters, too, must remain operational – if those types of businesses were shut down.
  • Finding temporary accommodation and having telephone and communications systems installed.
  • All of the expenses would be in addition to the normal operating expenses of the office.
  • Many classes of risk have the need to continue operations after a loss.
  • There are only two forms of extra expense coverage.

Extra Expense (Named Perils) (IBC Form 4110A)

  • Definitions:
  • Business means the business of the insured as specified on the declarations page.
  • Damage – means the direct physical loss of or damage to property at the premises from a peril insured.
  • Declarations Page – the Declarations Page applicable to this form
  • Extra expense means the excess (if any) of the total cost during the indemnity period for the purpose of continuing the insured’s business over and above the total cost that would normally have been incurred to conduct the business during the same period had no loss occurred. The costs in each case to include expense of using other property or facilities of other concerns or other similar necessary emergency expenses. In no event, however, shall the insurer be liable under this form for loss of income nor for the cost of repairing or replacing any of the described property that has been damaged or destroyed by the perils insured against, excepts cost in excess of the normal cost of such repairs or replacements necessarily incurred for the purpose of reducing the total amount of extra expense. Any salvage value of such property remaining after resumption of normal operations shall be taken into consideration in the adjustment of any loss hereunder.
  • Indemnity period – means the period beginning with the occurrence of the damage and ending not later than such length of time, not exceeding 12 calendar months, as would be required with exercise of due diligence and dispatch to rebuild, repair or replace the lost or damaged property. However, if media for, or programming records pertaining to, electronic data processing or electronically controlled equipment including data thereon be lost or damaged by a peril insured against then the indemnity period in respect thereof shall not extend beyond: (i) 30 consecutive days after the occurrence of such damage or (ii) the date upon which liability ceases under this form for loss arising from other property lost or damaged by the same occurrence, whichever is less.
  • Month means 30 consecutive days.
  • Normal means the condition which would have existed had no loss occurred.
  • Premises – means the entire area within the property lines and areas under adjoining sidewalks and driveways at the location(s) described on the Declarations page and in or on vehicles within 100 metres (328 feet) of such location(s).
  • Indemnity Agreement – in the event that the business shall be interrupted as a direct result of damage, the insurer shall pay to the insured the necessary extra expense incurred by the insured during the indemnity period in order to continue as nearly as practicable the normal conduct of the business, in accordance with the terms and conditions of this form.
  • Limits of Insurance – the insurer, regardless of the number of persons and interests insured under this form, shall not be liable for more than the applicable amount of insurance specified on the Declarations page. The liability shall in no event exceed that percentage of the amount of this insurance which is stated below for the determined indemnity period.
  • 40% when the indemnity period is not in excess of 1 month
  • 70% when the indemnity period is in excess of 1 month, but not in excess of 2 months.
  • 90% when the indemnity period is in excess of 2 months, but not in excess of 3 months.
  • 100% when the indemnity period is in excess of 3 months but not in excess of 4 months.
  • Resumption of operations – as soon as practicable after the damage, the insured shall resume complete or partial operations of the business and in so far as practicable, reduce or dispense with such expenses as are being incurred.
  • Perils insured are:
  • Fire or lightning
  • Explosion
  • Impact by aircraft, spacecraft or land vehicle
  • Riot, vandalism or malicious acts
  • Smoke
  • Leakage from fire protective equipment
  • Windstorm or hail
  • All but one of the exclusions in the extra expense (named perils) form are identical to those in the standard business income (named perils) form. The first set comprises almost comparable as to the direct damage form, the one exception being the by-laws exclusion found in the business interruption forms. The first set includes:
  • Electrical devices and related property
  • Application of heat
  • War risks
  • Nuclear incident
  • Radioactive material
  • Money and similar property
  • Automobiles, watercraft, aircraft
  • Vacancy, unoccupancy or shutdown of more than 30 consecutive days.
  • The second set of exclusions is almost the same as the second set of four in the standard business income (named perils) form, which are in turn identical to the four additional exclusions of the gross earnings (mercantile or non-manufacturing form. These four are as follows:
  • By-laws
  • Strikers or labor disturbances
  • Penalties for breach of contract or non-completion or other penalties
  • Suspension, lapse, or cancellation of any lease, license, contract or order.
  • The second set also includes a fifth exclusion not found in any of the forms studied previously.
  • The cost of compiling books of account, abstracts, drawings, card index systems or other records including film, tape, disc, drum, cell or other magnetic recording or storage media for electronic data processing.

Miscellaneous Clauses:

  • Interruption by civil authority, permission, breach of conditions, reinstatement, subrogation, property protection systems are identical to the corresponding clauses in the other forms.

Extra Expense (Broad Form) (IBC Form 4110B):

  • Definitions:
  • One difference is that they include a definition of named perils which is not found in the Named Perils form.
  • The perils insured against are all risk except as otherwise excluded in this form.
  • Exclusions in the first group comprise of the following:
  • Sewers, drains, watermains and other specified property, except for loss by named peril
  • Vacancy, unoccupancy or shutdown of more than 30 consecutive days
  • Electrical devices and related property, except for loss by fire or explosion as defined under named perils in the definitions
  • Growing plants, trees or shrubs
  • Animals, birds or fish, except for loss by named peril or theft or attempted theft
  • Money and related property
  • Automobiles and related property, except as qualified
  • Furs, jewelry, pre-recorded videotapes and related property, except for loss by named peril
  • Property while waterborne or covered by marine insurance
  • Property illegally acquired or kept
  • Pressure vessels (the boiler and machinery exclusion)
  • Exclusions in the second group:
  • Earthquake, except for ensuing loss by specified named perils
  • Flood and related loss, except as caused by specified named perils
  • Seepage, leakage or influx of water
  • Centrifugal force or breakdown, except for ensuing fire
  • Dampness or dryness of atmosphere and related losses
  • Smoke from agricultural smudging or industrial operations
  • Rodents, insects or vermin
  • War risks
  • Nuclear incident
  • Contamination by radioactive material
  • Dishonest or criminal acts by the insured
  • Snowslide or other earth movement except for ensuing loss by specified named perils
  • Explosion and other specified loss to specified types of property, except for ensuing fire loss
  • Settling, expansion and related perils
  • War and tear and related perils
  • Mysterious disappearance or shortage
  • Loss or damage to contents being worked on
  • Disturbance of erasure of electronic recordings.
  • The second set in the second group of exclusions in the extra expense (broad form), taken from the gross earnings (mercantile or non-manufacturing) form, is augmented by the one further exclusion, not found in the other forms. They comprise of:
  • By-laws
  • Strikers or labor disturbances
  • Penalties for breach of contract or non-completion or other penalties
  • Suspension, lapse or cancellation of any lease, license, contract or order
  • The cost of compiling books of account or other records.

Rating the Extra Expense Forms:

  • Rating for new forms is likely to be based on old forms.
  • The shorter the indemnity period, the higher the rate.
  • The higher the percentages of the amount of insurance allocated to earlier months os a given indemnity period instead of later ones – that is, the more weighted the distribution is to the earlier months – the higher the rate.

Choosing an Amount of Insurance:

  • Down-time analysis and plan of action are critical to choosing an amount of insurance.

Loss Settlement:

  • Loss settlement is easier in principle than practice.
  • The insurer determines the indemnity period.
  • The loss may not conform to distribution of limit.
  • Insurer becomes liability after the indemnity period.
  • Insurer may agree to advance payments.