What is Extra Expense Insurance Coverage?

A typical property insurance policy will cover the cost to repair or replace buildings or equipment.  However, it will not cover extra expense a business is likely to experience during the time period from the occurrence of the loss to the resumption of the business operation.

According to the International Risk Management Institute, “Extra Expense Insurance is commercial property insurance that pays for additional costs in excess of normal operating expenses that an organization incurs to continue operations while its property is being repaired or replaced after having been damaged by a covered cause of loss”. If you are operating a business that cannot afford to stop production for any period of time, Extra Expense Insurance is likely right for you.

Claim example:

There is a fire in your production building and you are required to temporarily share space at another location. The expenses you incur, including sending out notices to your clientele to notify them of the change, the cost of renting the temporary space and equipment, the cost of staff sharing, the cost of utilities as well as the cost associated with setting up the new phone lines to receive calls from clients, are all covered under Extra Expense Insurance coverage.

These types of excess expenses must be incurred to avoid or minimize the suspension of business due to a covered cause of loss, and can include repairs and replacement of property as well as the restoration of lost information. We recommend Extra Expense coverage for all our clients. Limits can be adjusted according to need. 

The Value of Replacement Cost Coverage

Most production companies, and related businesses buy insurance to cover the repair/replacement of loss of damaged property, cameras, production equipment and office equipment. Generally speaking, insurance companies do a good job of managing claims and helping the owners get their property back to a pre-loss condition. One important part of the insurance process is to understand the difference between Replacement Cost (RC) and Actual Cash Value (ACV) coverage.  Let’s start with definitions of each:

Replacement Cost (as defined by the International Risk Management Institute)

A property insurance term that refers to one of the two valuation methods for establishing the value of most of the insured property for purposes of determining the amount the insurer will pay in the event of loss. It is usually defined in the policy as the cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation.

Actual Cash Value (as defined by the International Risk Management Institute)

ACV is typically calculated one of three ways: (1) the cost to repair or replace the damaged property, minus depreciation; (2) the damaged property's "fair market value"; or (3) using the "broad evidence rule," which calls for considering all relevant evidence of the value of the damaged property.

When you suffer a loss of equipment you want to have the funds to replace it, as close to the actual item cost as possible. Replacement cost does that. This is especially true for companies that have expensive production equipment. We will always recommend replacement cost coverage.

Is there ever a time when ACV would be recommended?

The only time we might consider ACV is if there is such a unique building or piece of equipment that the insurance company might only offer ACV, or if the cost of replacement cost is so expensive that it is not cost effective.  

The good news is today, most insurance companies have reduced the cost of RC to the point where it motivates the buyer to not even consider ACV. Considering the high value of production equipment, cameras and specilaity equipment, RC coverage is important.There is little doubt that RC provides the most positive claims experience.  So unless cost becomes the obstacle, RC is the preferred way to go