Utility Interruption Coverage
Suppose that a fire damages a switching station owned by your local utility, causing a power outage at your facility. How long can your business function without electricity? Your supplier of telephone, email, or water service could also experience an interruption. Could your business operate without these services? While many companies can survive a one or two-day utility interruption, they may not survive an extended outage.
A utility interruption can cause physical damage to buildings or personal property at your premises. It can also force your business to shut down, causing it to lose income or incur extra expenses. You can protect your business against both types of losses by purchasing utility interruption insurance.
Physical Damage to Property
One of the risks of a utility outage is physical damage to business-owned property. The following example demonstrates how this might occur.
Tracy owns four retail bake shops called Toothsome Treats. The stores sell fancy cakes and cookies, all of which are prepared at a manufacturing facility the company owns.
One day, lightning damages a substation owned by the local electric utility, Endurance Electric. The substation is located several miles from Toothsome Treats' production facility. The building loses power for three days. Cakes and cookies that were in production when the outage occurred are lost. Eggs, milk and other raw ingredients stored in refrigerators are lost due to spoilage. In all, Toothsome Treats suffers a $25,000 loss a result of the outage.
Tracy submits a claim to the Toothsome Treats' commercial property insurer. She is shocked when she receives a letter from her insurer denying the claim. The insurer cites the utility services exclusion in Toothsome Treats' property policy as the reason the claim isn't covered.
Utility Services Exclusion
While property policies vary, many contain the utility services exclusion found in the standard ISO Special Causes of Loss form. This 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 commercial property policy excludes utility service outages that result from a failure that originates away from your premises. That is, an outage is excluded if it is caused by the failure of equipment not located on your premises. The outage suffered by Toothsome Treats originated at a substation situated away from the bakery's property.
In the past, the ISO policy did not exclude outages that resulted from an equipment failure that originated on your premises. However, the utility services exclusion in the ISO policy was expanded in 2007. It now excludes failures originating on or off your premises if they involve equipment used to supply electricity (or another utility service) from an off-premises source. Many insurers that draft their own proprietary policies have incorporated the expanded exclusion into their insurance contracts.
Here is an example of how the expanded language might apply. Suppose that lightning strikes a transformer located just outside Toothsome Treats' production facility. The transformer is located on the bakery's property, not on property owned by Endurance Electric. The transformer is used by the utility to supply power to the bakery's production facility. The lightning damages the transformer, triggering a power outage at the facility. If the outage causes damage to Toothsome's property, the damage will likely be excluded.
Excludes Power Surge
The utility interruption exclusion found in the standard ISO policy excludes 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 on your property. If the power surge damages a piece of machinery, the damage will be excluded. Both the power surge and the power failure resulted from the same event, namely the lightning strike.
Covers Ensuing Loss by a Covered Peril
Finally, the utility services exclusion contains an exception. Coverage is provided for 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
You can buy back much of the coverage that is excluded by the utility services exclusion. ISO offers two standard utility services endorsements. One covers direct damage while the other affords time element (business income and extra expense) coverage. You can purchase one of these or both.
Each endorsement allows you to choose the type of utility property you want to cover. The options include property used to supply:
- Water Services. Includes pumping stations and water mains
- Communications Services. Means property used to supply telephone, radio, microwave, or television services. Includes communication transmission lines, coaxial cables, and microwave relays (other than satellites). Overhead transmission lines may be covered or excluded.
- Power Services. Means electricity, gas, and steam. Includes utility generating plants, switching stations, substations, transformers, and transmission lines. You may choose to include 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 that you have elected to cover.
Under the direct damage endorsement, you can elect utility services coverage for all or a portion of your covered property. For instance, Toothsome Treats might purchase power supply interruption coverage for perishable items only. Utility services coverage is subject to the limit shown in the endorsement. This limit is part of (not in addition to) the limit shown in the policy for the covered property. If no limit appears in the endorsement, then utility services coverage is included in the limit that applies to the covered property.
Time Element Endorsement
If your commercial property policy includes business income (also called business interruption) 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).