Like most businesses, your company probably depends on local utilities to provide power, water, and telecommunication services. If equipment used to provide one of these services is damaged by a fire or other peril, that service could be interrupted. A utility interruption could damage your buildings or personal property. It could also force your business to shut down, causing it to lose income or incur extra expenses. You can protect your business against such losses by purchasing utility interruption insurance.
Damage to Property and Loss of Income
A utility outage can cause both physical damage to business-owned property and income losses. The following example demonstrates how such losses might occur.
Carla owns a popular restaurant called the Cozy Cafe. One day, a severe windstorm knocks down power lines located a mile from the restaurant. The lines are owned by the local electric utility, Pro Power. The restaurant has no power for five days.
Because the Cozy Cafe is forced to close for the duration of the outage, it loses the revenue it would otherwise have earned during that period. It also loses milk, produce, ice cream, and other perishable foods stored in its refrigerators and freezers. In all, the Cozy Cafe suffers a $25,000 loss as a result of the outage.
The Cozy Cafe is insured under an ISO business owners policy (BOP). Carla submits a claim to her insurer for her income and property damage losses. She is shocked when she receives a letter denying coverage. The insurer cites the utility services exclusion in the property section of the BOP as the reason for the denial.
Utility Services Exclusion
Many commercial property and BOP policies contain the utility services exclusion found in the standard ISO Special Causes of Loss form. The exclusion eliminates coverage for loss or damage caused by the failure of power, communication, water or other utility service supplied to the described premises. "Failure of utility service" includes any lack of sufficient capacity and reduction in supply (such as a brown-out).
The ISO form excludes utility service outages that result from a failure that originates away from your premises. In the Cozy Cafe scenario outlined above, the exclusion is applicable because the outage was caused by damage to utility-owned equipment not located on the restaurant's property.
In the past, the utility services exclusion did not preclude outages that resulted from an equipment failure originating on your premises. However, the exclusion was expanded in 2007. It now applies to failures originating on or off your premises if they involve equipment used to supply a utility service from an off-premises source. Many insurers that draft their own insurance contracts have incorporated the expanded exclusion into their proprietary policies.
The following example demonstrates how the current language might apply. Lightning damages a transformer on a utility pole situated on the Cozy Cafe's premises. The transformer is used by Pro Power to supply electricity to the cafe. The damage to the transformer triggers a power outage at the cafe. If the outage causes damage to the Cozy Cafe's property, the damage will likely be excluded.
Excludes Power Surge
The standard utility interruption exclusion precludes a power surge that results from the same event that caused the power failure. For example, lightning damages a switching station, causing a power failure and a power surge at the Cozy Cafe. If the power surge damages an oven, the damage will be excluded.
Covers Ensuing Loss by a Covered Peril
Finally, the utility services exclusion contains an exception that applies to damage by a covered peril that results from a power surge or utility failure. For instance, if a power surge or loss of electricity causes a fire, the policy will cover ensuing loss or damage to covered property caused by the fire. The loss is covered because fire is an insured peril.
Utility Services Coverage
Businesses can buy back some of the coverage that is excluded by the utility services exclusion by purchasing one or both of two ISO endorsements. One covers direct damage while the other affords time element (business income and extra expense) coverages. Both cover utility property used to supply the following. You can decide which type of property to insure.
- Water Services. Includes pumping stations and water mains
- Communications Services. Covers property used to supply telephone, radio, microwave, or television services. Includes communication transmission lines, coaxial cables, and microwave relays (other than satellites). You may cover or exclude overhead transmission lines.
- Power Services. Includes electricity, gas, and steam. Covers utility generating plants, switching stations, substations, transformers, and transmission lines. You may cover or exclude overhead transmission lines.
Direct Damage Endorsement
The direct damage endorsement covers loss of or damage to covered property caused by an interruption in utility service to your premises. For the loss or damage to be covered, the interruption must result from direct physical loss or damage by a covered peril to the type of utility property you have elected to cover.
You can elect utility services coverage for all or a portion of your covered property. For instance, Carla might choose to cover perishable items only for losses caused by an interruption in power supply. The most the insurer will pay for a loss is the limit shown in the endorsement or (if no limit appears there), the limit shown in the declarations. Any limit that appears in the endorsement is included in the property limit.
Time Element Endorsement
If your property policy includes business income or extra expense coverage, you can extend that coverage to include utility service interruption. The utility services time element endorsement covers a suspension of operations at your premises caused by an interruption in utility service to your premises. The interruption must result from direct physical loss or damage by a covered peril to the type of property you have elected to cover (water, communications or power services supply).