State Farm Insurance License Practice Exam

What is the purpose of Extra Expense coverage?

1. To cover materials needed to repair damage

2. To prevent losses due to employee turnover

3. To cover additional operational expenses after a direct loss

4. To protect against equipment breakdown

The correct answer is: To cover additional operational expenses after a direct loss

Extra Expense coverage is designed to cover the additional operational expenses that a business incurs after experiencing a direct loss due to an insured event, such as a fire or natural disaster. When a business faces a disruption, it may need to take specific actions to continue operations or reduce the loss of income, such as renting temporary facilities, using alternative suppliers, or paying for expedited shipping to maintain business continuity. This coverage helps to mitigate the financial impact of the loss by reimbursing the extra costs that arise during the recovery period, ensuring that the business can keep functioning despite the setbacks. The other options highlight different insurance needs. For instance, covering materials needed to repair damage pertains to property insurance or builders' risk policies rather than extra expenses. Preventing losses due to employee turnover relates more to human resources and operational strategies than to insurance coverage specifics. Protecting against equipment breakdown is typically addressed by specific equipment breakdown policies rather than by extra expense coverage. Thus, Extra Expense coverage serves a unique and crucial role in helping businesses manage unforeseen interruptions effectively.