What Is Extra Expense Insurance?

Extra expense insurance is a form of commercial insurance that pays for a policyholder’s additional costs while recovering from a major disruption. Extra expense insurance coverage applies to the period of time between when a business is forced to close temporarily and when it has been restored to normal operation.

In order for expenses to be covered under an extra expense insurance policy, they need to be considered both reasonable and necessary.

Extra expense insurance provides cash to help you stay in business while your property is being repaired or replaced. Without this financial assistance, some businesses that suffer a major loss could be faced with closing permanently.

Understanding Extra Expense Insurance

Extra expense insurance is designed to help a business with any expenses that it might incur while its normal business operations are disrupted. These expenses are often excluded from other types of insurance policies—property insurance, for example—which are designed to help pay for physical damage that results from specific perils. The expenses that are covered under an extra expense insurance policy need to be considered both reasonable and necessary, such as the cost of setting up a temporary office while the damaged office space and equipment are being repaired or replaced.

Businesses frequently purchase insurance policies to protect themselves from damage to their property. For example, a business may purchase property insurance to cover the building it operates in, and the underwriting insurance company will provide the business with funds to repair any damage that may occur. Although this type of coverage provides a level of security, it could be inadequate if the damage is severe enough to disrupt normal business operations for an extended period.

Who May Benefit From Extra Expense Insurance?

Many businesses can benefit from having extra expense insurance, but this coverage is especially applicable to businesses that fit the following descriptions:

  • The organization provides continuous services that customers depend on seven days a week. Examples would include data centers, security services, and airport shuttle services.
  • The business cannot shut down because the services it provides are essential to the community. Examples of this type of business are hospitals, medical clinics, nursing homes, homeless shelters, and banks.
  • The business could continue to operate from a temporary location to avoid or minimize the length of a shutdown.

Key Takeaways

  • Extra expense insurance covers reasonable and necessary costs that a business might incur as a result of a major disruption to its operations.
  • Businesses that provide continuous services that customers depend on seven days a week, such as data centers, and those that perform essential duties, like hospitals, are good candidates for extra expense insurance.

How Does Extra Expense Insurance Work?

Consider a manufacturer that purchases a property insurance policy to protect itself from fires. The company determined that the cost of relocating in the event of a fire would be expensive, so it also purchases an extra expense insurance policy. After an unexpected fire, the manufacturer is forced to move to a temporary location. Its extra expense insurance covers the cost of setting up a new phone and internet network, as well as the cost of connecting utilities. Because the logistics of the temporary location also reduced the company's manufacturing efficiency, the company needed to spend more money on overtime; fortunately, this also was covered by the extra expense policy.