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Article January 25, 2019

Additional extra expense explained

Additional extra expense, known as "additional increased cost of working" in some territories, is one of the valuable new features we've added to our latest cyber policy. Here we explain how this important cover works.

When an organization falls victim to a cyber attack that results in their computer systems being rendered unusable, they will usually suffer from a drop off in income as a result. In order to mitigate the impact of this interruption to their business, the organization will also typically incur some extra costs in addition to their normal operating expenses.

Both the income loss and extra expense will be covered by the business interruption cover on their cyber policy. However, the extra expenses that they incur will usually be subject to what is known as the “economic test” or “economic limit”. The economic test states that the additional expenditure to mitigate the event should not exceed the amount that would potentially be lost during the indemnity period. So if the extra expenses section has an economic test in place, the insured will need to carefully justify their expenditure and ensure that they do not spend more than a dollar to save a dollar on the loss of income claim.

To make this concept a little easier to digest, let’s take a look at a hypothetical example. Let’s say you have a widget manufacturer that has automated processes in place to produce their widgets, and these automated processes are tied to the company’s computer systems. The manufacturer gets hit by a malware attack that shuts down their computer systems and completely halts production at their plant. To make matters worse, they have an annual contract in place worth $200,000 to provide their widgets to a very important customer with an urgent deadline in the near future. Anxious to avoid disappointing and therefore potentially jeopardising their future business relationship with this customer, the business engages another widget manufacturer to produce the items necessary for the order. As this is done at short notice, it costs $300,000. In this case, the business’s extra expenditure has failed the economic test: the amount spent ($300,000) has exceeded the amount that they saved ($200,000) over the course of the year-long indemnity period. The extra expense section will only pay for $200,000.

However, the manufacturer in question might legitimately argue that despite the costs being uneconomic in the short term, it will have been economic if it means that they keep this customer’s business over the long term. By spending $300,000 now, they might save $400,000 or more by continuing to renew contracts with this customer in the future. And this is where the concept of additional extra expense comes in to play. Additional extra expense cover works in much the same way as extra expense cover, but crucially it does not require an economic test. So in the example above, as long as the additional costs fall within the scope of the policy and are deemed to be reasonable in the long run, a policy with additional extra expense cover will pay for the additional $100,000 expended, on top of the $200,000 paid under the extra expense section.

Our policy

CFC’s cyber product now includes additional extra expense cover as standard up to a maximum of $100,000. This comes in addition to the income loss and extra expense section, providing a top up for policyholders should their losses fall outside the remit of that section of cover.