Equipment Breakdown Insurance: Too Important to Ignore!

Extra Expense Coverage Versus Expediting Expense Coverage

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Since these terms can be confusing, they are compared here to provide more clarity as to their coverage functions in the equipment breakdown coverage form and in other property insurance forms where they commonly appear.

“Extra expense” is a term used to describe the extraordinary expenses that must be incurred to continue operations following physical loss or damage to covered property, which would otherwise cause the business to close. Generally speaking, there are two types of extra expense coverage.

The first type actually is more appropriately referred to as “expenses to reduce loss” coverage and is only available when business income coverage is not accompanied by extra expense coverage. This coverage pays any necessary expenses incurred to reduce the business income loss, but only to the extent that the expenses incurred reduce the business income loss. This coverage is not available separately for an additional charge. It is automatically included in both business income forms.

The second type of extra expense, which might be more appropriately called “pure extra expense insurance,” covers the necessary expenses the named insured incurs during the period of restoration (defined in the policy) that would not have been incurred had there not been direct physical loss or damage to property from a covered cause. Businesses and institutions that must continue to operate—such as banks, dairies, hospitals—are candidates for this coverage. Extra expense insurance

needs to be purchased for an additional premium. It includes the same expenses to reduce loss coverage found with business income coverage and like business income forms, it is automatically provided without additional cost.

Expediting expense coverage—found in equipment breakdown, builders’ risk and some property policies—is appropriately referred to as a mitigating cost provision. In fact, some policies refer to it as a mitigating cost provision or as a sue and labor clause. Sometimes this coverage is automatically included in forms. In others, it needs to be selected, for an additional cost.

Expediting expenses coverage in the equipment breakdown protection form of ISO is a separate coverage that can be purchased. If direct damage to covered property occurs, the insurer will pay for the extra cost necessarily incurred: (1) to make temporary repairs and (2) to expedite permanent repairs or replacement of damaged property. This appears clear enough, but disputes can still arise.

One such case is R.D. Offutt Company v. Lexington Insurance Company, No. 06-3910 (U.S. Ct. App. 8th Cir. 2007). The plaintiff (insured) owned a lot of farm land that it leased to tenants on which to grow crops.