An extra expense is a necessary ex- pense that would not have been otherwise incurred resulting from
the triggering event in order to continue
operations, or minimize the suspension
of operations during the recovery period.
The 3 types of Extra Expenses are:
ONE: An increase in an otherwise
normal expense incurred to
continue operations.
Example;One:
A business may incur overtime payroll costs to continue operations
resulting from inefficiencies resulting from the triggering event. Projected labor costs are compared
to labor costs actually incurred,
in order to determine what, if any,
excess may represent an extra
expense. Conversely, if the actual
labor costs incurred are equal to
or less than the projection, there
is no extra expense.
Example;Two:
A business may incur greater than
normal security expense during
the recovery period in order to
safeguard the business’s assets
while repairs are being completed.
TWO: A cost that is not normally
incurred by the business and was
incurred as a direct result of the
triggering event.
Example;One:
A business sends a special mailing
to clients and prospective clients
‘Extra Expense’ is one area of economic damages which can arise
in any business recovering from a disaster, also called the
“triggering event”.
ADVERTISEMENT
Economic Damages:
How to Assess ‘Extra Expense’ Damages
DAVID SUTHERLAND, CPA/CFF, CFE, CLEA
EPPS FORENSIC CONSULTING PLLC
Dave specializes in financial investigations, forensic accounting, litigation
support, fraud examination, and law enforcement consulting services.
He also teaches Financial Forensics in Law Enforcement (FFLE®).
480.595.0943, dsutherland@eppsforensics.com
www.eppsforensics.com
13880 N. Northsight Blvd., Suite 115, Scottsdale, AZ 85260
notifying them that they are still
in operation, or that they are
temporarily closed but intend to
reopen.
Example;Two:
A business may relocate to a new
location temporarily or permanently so as to minimize the impact the
triggering event has on operations.
The additional costs may include,
but are not limited to, rental costs
for the new facility, relocation
costs, new location utility setup
costs, repair or renovation costs
in order to begin operations, etc.
THREE: The purchase of equipment
to continue operations or minimize
the suspension of operations.
This is a less likely situation than either
of the two above identified types of
extra expense, however, it can occur.
Example:
A business that purchases equipment, which will be used temporarily until their normal equipment
can be repaired or replaced. Since
temporary equipment will have
some residual value following the
recovery period, that value should
also be considered as an offset to
the extra expense.
A claim for extra expenses of any type
should include the reason the expense
was incurred and a demonstration that
the expense was in excess of normal
expenses resulting from the triggering
event.
Relevant Business Records
The specific business records that can
be relevant to supporting an extra expense claim will vary by business, industry, type of expense incurred, and
the duration of the affected period.
Assuming a lengthy recovery period,
the most common business records
may include:
1. Federal Income Tax Returns ( 3 years
prior and affected year(s));
2. Monthly or annual profit and loss
statements ( 3 years prior and
affected year(s));
3. Expense Invoices;
4. Payroll Records.
The suggestion is to request, at a
minimum, three years of prior records; because if one or even two
years of tax returns are provided
and show a significant difference in
operating expense amounts or ratios,
there is no way to tell if one year or
the other is abnormal. When three
years are provided, there is a much
higher probability that an abnormal
year will be identified and addressed.
Once again, the above list is not intended to be all-inclusive. The point
is that the more support that can be
provided for projections and actual
expenses, the less potential there is
for an argument that the projected expenses are speculative.
