Extra Expense Coverage for Logistics Service Providers
Since the beginning of the pandemic, there has been a torrent of news stories about insurance litigation. The media has prominently highlighted Business Interruption claims for losses due to government orders and shut downs have been prominently highlighted. This increased scrutiny has all industries, including logistics service providers, asking, “What is Business Interruption Insurance, and do I need it?”
What Is Business Interruption Insurance?
Business Interruption insurance coverage is intended to step in and pay the policy holder for a loss to revenue when normal business is interrupted by a covered incident. Typically a covered incident will be due to physical damage to a structure – think “a fire” rather than a “global pandemic”. It is a property coverage whose purpose is not to replace your lost property but to reimburse you for lost revenue when the property damage keeps you out of your place of business or otherwise makes conducting normal business impossible.
This type of policy is very useful for companies whose deliverables are directly tied to a specific piece of property or location, for example, a manufacturing company where a plant is shut down due to a fire or some other destructive accident. When the plant goes down, operations cease, and income is lost. These operations require special machinery, trained employees, and the proper space, and they cannot resume offsite. If it takes six months for production to resume, the manufacturer could essentially be out of business for that length of time, and the business interruption coverage is intended to carry them through until operations can resume. Business interruption insurance is meant to provide lost business income including expected net income and continuing operating expenses such as payroll.
Extra Expense Coverage Fills the Gap
Business Interruption coverage is valuable but not the ideal solution for a logistics service provider since the flow of the supply chain does not stop (or so we hope). If an accident destroys your property or has you locked out of your office space, you can’t simply tell your clients to wait for the repairs to happen. The cargo owner needs your help now. If you can’t provide it, then your client will have no choice but to work with someone else. So what do you do?
There’s another insurance coverage intended to help fill the gap when these types of accidents happen. It is called Extra Expense. Its purpose is to help you stay in business while your property is being repaired, and it will respond whether that property is rented or owned. Extra Expense coverage pays for your non-ordinary expenses when business is disrupted by a qualifying incident. Non-ordinary expenses are necessary expenses that you have to carry while your property is being repaired or replaced, specifically expenses that are over and above what you would normally pay had you not suffered the initial property loss.
How Does Extra Expense Help?
For example, consider a mid-sized freight forwarder operating out of offices near a large airport like O’Hare, JFK, or LAX. What happens if that office building suffers a catastrophic incident and is unusable? The forwarder needs to relocate almost immediately in order to keep business flowing for their clients. But so does every other forwarder in the building. Lots of urgent competition for a reduced supply of office space can lead to serious spikes in rents.
If the freight forwarder normally paid $10,000 a month in rent, an urgent move to a new location might create a serious uptick in cost. If the new space is normally $15,000 a month to rent and there’s a price jump because of the timing and competition it might jump as high $17,000 or more per month. That is a $7,000 increase per month. Over a six month restoration timeline the increased rent is going to cost the freight forwarder an extra $42,000 in expense.
But the extra expenses don’t end with rent. Existing furniture and equipment for staff will need to be shipped to the new, temporary location. The purchase of new equipment may be required. Phone and internet connections will need to be worked out with providers. Communications need to be issued to clients, partners, suppliers, and subcontractors.
An Extra Expense policy is designed to cover the difference between normal operating expenses and all these additional expenses brought on by the covered loss. There may still be a slight dip in actual revenue due to all the moving around, and that lost revenue could indeed be covered by a Business Interruption policy. However, the larger need for the logistics company is coverage for all the necessary “extra” costs to keep the operation up and running.
Have a Plan that Includes the Right Coverages
The first line of defense should be a good business continuity plan. Work with your insurance broker and internal staff to map out what you would do if you suddenly lost access to your physical facility. Where would you go? What equipment and services would you need, and how would you get them? Thinking about this and the associated “extra” costs beyond your normal work expenses will help determine an insurance limit that is right for you. If you need a starting place, work with your broker to complete an Extra Expense worksheet.
For the logistics industry, there is no such thing as “down time”. If you’re down, your customers will have no choice but to find a new service provider. Focus on a continuity plan and an insurance coverage with limits that will keep you up and running. For the logistics service provider, it’s Extra Expense first and Business Interruption second.
Contact a Roanoke insurance expert for a review of your insurance program and collaborate with us to find the right coverages and limits for your needs. Reach out to us at firstname.lastname@example.org or call us at 1-800-ROANOKE (800-762-6653).
About the Author
Matt Reese is the Regional Vice President in Roanoke’s Schaumburg, IL office and for the Midwest division. Matt has extensive knowledge of property and casualty insurance lines and his insurance career has been strongly focused on the risk management needs of the international trade and logistics community.
This blog post is provided for informational purposes only and does not constitute legal advice. It should not be construed as an offer to represent you, nor is it intended to create, nor shall the receipt of such information constitute, an attorney-client relationship. Readers are urged to seek professional or legal advice from appropriate parties on all matters mentioned herein.