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  • Writer's pictureDavid Sutherland

Economic Damages: Evaluating & Assessing "Extra Expense" Damages

One area of economic damages that may arise when a business is recovering from a triggering event, such as a natural catastrophe (e.g. fire, storm, etc.), theft, vehicle collision, a breach of contract, or other tort, is "Extra Expense". An extra expense is typically a necessary cost incurred by a business, as the result of a triggering event. It is a unique area of damages in that the alleged costs would not have been incurred "but-for" the triggering event. Furthermore, the greater than normal costs are incurred in order for the business to resume or continue operations as the business recovers from the triggering event.

Three Types of Extra Expense

  1. An increase in an otherwise normal expense incurred to continue operations.

  2. A cost that is not normally incurred by the business and was incurred as a direct result of the triggering event.

  3. The purchase of equipment to continue operations or minimize the suspension of operations.

First, a business may find that an otherwise normal expense needs to be increased in order to continue operations after a triggering event. For example, a business may incur overtime payroll costs to continue operations resulting from inefficiencies directly caused by the triggering event. Under this scenario 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. As another example, a business may incur greater than normal security expense during the recovery period for purposes of safeguarding the business's assets while repairs are being completed. In these two examples, the key issue is that the business historically incurred the categorical expense; however, as a result of the triggering event, the business incurred greater than normal, resulting in extra expense.

Second, a business may be required to incur a cost that was never historically incurred as a result of the triggering event. For example, a business sends a special mailing to clients and prospective clients notifying them that they are still in operations, or that they are temporarily closed but intend on reopening. As another example, 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, moving costs, utility set up, interior renovations, all of which are necessary in order to begin operations at the new location.

Third, although a less likely scenario, a business may be required to purchase a piece of equipment for temporary use in order to minimize the suspension of operations. The affected equipment may be expensive and a key component of the overall operations of the business. The temporary equipment would be used while the damaged equipment is being repaired or replaced. Since the 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 expense 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, but are not limited to:

  1. Federal Income Tax Returns (3 years prior and affected year(s)), including all schedules, attachments, worksheets, etc.

  2. Monthly or annual profit and loss statements (3 years period and affected year(s)).

  3. Expense invoices, receipts, work orders, estimates, etc.

  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.


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