What Is Additional Expense Coverage?

Additional expense coverage is coverage that provides funds for expenses above what the policyholder was paying before a claim was made. It is provided to a policyholder, if certain criteria are met, and may have a maximum time period over which benefits can be received and a policy limit of the amount of coverage that will be provided.

Key Takeaways

  • Additional expense coverage provides funds for expenses in case of a disaster, such as a fire, or change in circumstances, such as renovation by the apartment building's owner.
  • The insurance company sets a baseline for everyday expenses to determine the veracity of the policyholder's claim that additional expenses need to be compensated.
  • Policyholders must be able to verify that additional expenses have been accrued as a result of the change in circumstances or disaster, including receipts or other documented proof of having paid additional fees.
  • In commercial policies, extra expense coverage is used by business owners to cover expenses due to altered situations or disasters.

Understanding Additional Expense Coverage

In order for an expense to be considered for repayment by an insurer under a homeowner's policy, it must meet a certain number of qualifications. The expense must be considered necessary, must be incurred by the policyholder, must be for the purpose of continuing a normal standard of living, and must be caused by the insurable event occurring. For example, in the case of a homeowner who has his property damaged in a fire, additional expense coverage may cover expenses related to extra costs for food, laundry, and transportation.

How Additional Expense Coverage Works

Before providing funds for additional expense coverage, insurers will try to establish a baseline of what the policyholder was paying for everyday expenses before a claim was made. This baseline is used to determine whether the costs that the policyholder stated in a claim are above what he or she usually pays.

For example, if the homeowner spends $300 a month on fuel to travel to work before a fire damaged the property and $400 a month after a claim was filed, the $100 would be considered extra. However, if a policyholder paid $100 a month for cell phone use and this cost did not change due to the fire, then the insurer is unlikely to cover this expense because it did not exceed the baseline.

Special Considerations

Insurers will likely require the policyholder to provide receipts for expenses. Policyholders may not recover expenses if a receipt is not provided. For example, if a policyholder temporarily moves into an apartment while repairs are made to his or her home, but the apartment does not charge for utilities, the policyholder won’t be able to collect insurance proceeds for utility expenses.

For commercial policies, this type of coverage would pay additional costs in excess of normal operating expenses that a business would incur to keep operating while its property or plant is being repaired or replaced under the covered claim.

Extra expense coverage can be purchased in addition to or instead of business income coverage, depending on the size and needs of the organization. Extra expense coverage kicks in after a disaster has occurred and the business has moved to a different location or has had to change its regular mode of functioning. Such coverage can be purchased as a separate insurance policy or as a rider to an existing policy.