What are some things companies can do to cover extra expenses?
Clients are obliged to mitigate their losses to the best of their ability under the terms of the policy. So more often than not, an organization will have some level of mitigation it can employ in the event of a major interruption.
Insurers actually prefer to spend money on mitigation than to hand out money on a loss of profits claim, because a loss of profits claim will invariably go on a lot longer than an extra expenses claim. Insurers prefer to have that extra expense coverage implied and utilized by the client.
There are two elements of extra expense. The first is expense to reduce loss, which basically means you can spend a dollar in order to avoid losing a dollar. Of that potential lost gross profits, you can spend that amount in order to prevent losing it.
The second element is a separate extra expense clause best defined as a separate sublimit — it’s a separate bucket of cash. If there is anything that falls outside the realm of the expense for reduced loss, then it falls into that extra expense category. It’s a safety net for additional spending that a client may incur trying to mitigate its losses.
Also, a client may potentially elect to insure extra expense only. An organization may be comfortable with its own mitigation options that it elects not to have coverage for gross profits and will only cover extra expenses.
In doing that, an organization must be comfortable with its mitigation options because any loss of revenue is subsequently not covered.
How can companies determine what their plan should be?
It is essential for organizations to regularly review their business interruption coverage because there are changes every day in business, and if you don’t change, you’re going to fall by the wayside.
Many organizations have diversified or made acquisitions, and they must make sure these changes are reflected in the business interruption values provided to insurers. In the current economic climate, if an organization simply provides the same values to the insurer it did the prior year, it may well be missing out on a premium reduction. If revenue and profits have gone down, the values you provide to insurers should go down. All other things being equal, the premium associated with that should also go down.
