(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the part of a series she is writing on business interruption claims).
The Standard ISO Extra Expense provision reads as follows:
[Insurer] will pay necessary Extra Expense you incur during the ‘period of restoration’ that you would not have incurred if there had been no direct physical loss or damage to property at the described premises … caused by or resulting from a Covered Cause of Loss.
Extra Expense means expense incurred:
(1) To avoid or minimize the suspension of business and to continue ‘operations’:
(a) At the described premises …
(2) To minimize the suspension of business if you cannot continue ‘operations.’
(3) (a) To repair or replace any property …
to the extent it reduces the amount of loss that otherwise would have been payable under this Additional Coverage or Additional Coverage f., Business Income …
After reading the extra expense provision, it is ascertainable that the timing of when an expense is incurred is just as important as the fact that it is incurred at all. The provision expressly states that extra expense is limited to those costs actually incurred by the insured itself during a period of restoration. However, most policies do not define the term “incur”. As such, courts are often required to interpret the plain meaning of this provision and a set of facts.
Chatham v. Dann Insurance, 812 N.E. 2d 483 (Ill. App. Ct. 2004) provides a detailed analysis on this issue. Chatham ran a medical equipment sterilization facility. After an explosion, the facility was shut for seven months. During that time, Chatham could not sterilize equipment for one of its main customers. Pursuant to Chatham’s contract with its main customer, Chatham was obligated to arrange for alternate sterilization and pay the cost of shipping the customer’s unsterilized goods to the alternate facilities. The contract, however, did not require Chatham to pay for shipping the sterilized equipment back to its customers and Chatham never did pay for such “outbound freight” costs. Chatham submitted a claim that included those return shipping costs that its main customer incurred and sought coverage under their policy extra expense provisions.
The carrier paid for the reconstruction of the facility and for $1MM of “inbound freight” costs as extra expenses claimed by the insured as a result of the explosion, but it refused to pay an additional $1MM in return shipping costs incurred by Chatham’s biggest customer. Chatham filed suit.
Although the carrier had made a partial payment for extra expenses, the court found that the carrier had not waived its coverage defense and held that the costs of shipping products from an insured’s alternate facilities to the insured’s customers were not covered, reasoning that Chatham had not itself incurred those expenses:
We are unable to find any ambiguity in the contract language regarding extra expenses.[…] This commonly understood meaning encompasses expenses that the named and additional insureds to the policy, Chatham and SSV, were required to incur during the reconstruction of the sterilization facilities. It does not encompass expenses that the insureds may have wanted to incur on a gratuitous or voluntary basis, which would have been the opposite of “necessary.” It also does not encompass expenses that other, nonparties to the contract were required to incur during the facility reconstruction period. The only party required to pay for the cost of shipping [the customer’s] sterilized products away from the alternate sterilization facilities was [the customer’s] itself, not Chatham or SSV.
The court further defined the meaning of incurred:
“Incur” is another term that was not defined in the contract, but it has a plain, ordinary, and popular meaning of “to become liable or subject to through one’s own action; [to] bring or take upon oneself.” Random House Webster’s Unabridged Dictionary 969 (1998). Chatham never became liable or subject to the expense of [the customer’s] outbound freight. [Its customer] did.
In conclusion, under the standard extra expense provision, although certain extra expenses may be a direct consequence of a loss, they will not necessarily be covered unless the named insured incurs it on its own — not through a third party.