Posted in News on 29 Jan 2020
In this article, Benjamin Jones, a Loss Adjuster with specialist loss adjusting firm Lloyd Warwick, examines how insurance policy wordings address the incurring of additional costs after a loss – and how it is essential to understand the different in how these clauses apply. Benjamin has particular experience in handling claims from the international Power Generation, Renewables, and Energy sectors.
Following a Power Generation loss, it is not uncommon that aninsured will want to incur costs in addition to the physical repairs, aimed at minimising the effects of the loss upon their business. Depending on the circumstances and applicable policy wording, we commonly see such additional costs presented under the Increased Cost of Working (ICOW), Expediting Expenses or Extra Expenses clauses. Sometimes these can lead to confusion.
At first glance, these terms may appear to be similar, but they can have a significant impact on the quantum of a recoverable claim. It is therefore of paramount importance that parties fully understand the nuances of each, and how to correctly and fairly maximise their recovery.
Increased Cost of Working (ICOW) is normally defined as, “the additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in turnover”. This provision does not define specific types of expenditure. It is generally included within the Business Interruption (BI) section of a policy but is subject to an economic test. i.e. the amount cannot exceed the indemnity that would otherwise have been payable under the BI section of the policy. In simple terms “you can spend one dollar to save two”.
A practical example from the power generation industry might be following a fire at a plant. Overtime working can run up a large bill and normally this would not be indemnified by the Property Damage insurers. If it can be shown that the savings in time have proved to be economic with regards to costs versus BI losses, then this element is often dealt with as an ICOW. There are many other examples.
This is a very important aspect of handling the claim correctly. Matters can get a little complicated when costs are incurred within the waiting period and with this in mind, it is always good practice to liaise closely with the brokers and insurers before incurring major expenditure.
An Expediting Expense clause is often included in the Property Damage section of the policy to pay costs incurred to expedite rebuilding, repair, replacement or recommissioning of the property insured. The only criteria to be applied is that the costs are reasonable, but they are not subject to an “Economic Limit”.
It is not unusual to see this additional item of coverage being subject to its own restrictive sub-limit.
By far the most common usage for this clause is when repairs have to be carried out in an expeditious manner. Whereas sea freight may have been used for delivering parts for the original construction, the urgency necessitates the use of far more expensive airfreight.
It is important that the insured reviews the coverage carefully and ensures that the sub-limit is adequate for their needs as hiring specialised aircraft can be very expensive.
Extra Expense or as sometimes referred to, Additional Increased Cost of Working, can differ greatly with regards to the ambit of their coverage. Initially this wording was found predominantly in US based policies and once again was subject to a very restrictive limit with the only test applied being one of reasonableness and not the application of an “Economic Limit”. However, we have seen coverage in this regard being extended over the years and it is always essential to look at the specific wording and make sure that this meets your requirements.
Whilst this article offers a high-level summary of the way in which we have generally seen these clauses be applied, the application of each is very much dependent on policy language and it is therefore essential that the specific wording is carefully reviewed. Where significant expenditure is incurred, some would deem it good practice to liaise closely with the underwriters and seek agreement beforehand.
FOR MORE INFORMATION, PLEASE CONTACT
Matthew Savitt | Partner
Alesco is a specialist insurance and risk management business located in the heart of the City of London. Founded in 2008 by a team of experienced professionals, we provide a wide range of risk-management services and insurance solutions which are fundamental for protecting organisations. We work closely with underwriters in the London markets, in key global insurance centres, and with local broking partners in 150 countries.