Can your business function without electricity, telephone, email or water? Most companies can survive a brief outage, but an extended interruption in a utility service can be devastating. Utility outages are a fact of life so it's important to plan ahead for them.
A utility interruption is not just an inconvenience. It can cause damage to buildings or personal property that may not be covered under your firm's commercial property policy.
Consider the following example.
Tracy owns Toothsome Treats, a chain of four retail bake shops that sells fancy cakes and cookies. All of the company's products are made at the its main production facility, which is located in a building owned by Toothsome Treats.
One day, wind from a severe thunderstorm damages a substation owned by the local electric utility, Endurance Electric. The substation is located several miles from Toothsome Treats' production facility. The facility loses power (including refrigeration) for two days. Cakes and cookies that were in production when the outage occurred are lost. Raw ingredients that were under refrigeration, like eggs and milk, are also lost. In all, Toothsome Treats suffers a $25,000 loss a result of the outage. Toothsome Treats' submits a claim to its commercial property insurer. Tracy is shocked when the claim is denied. The reason for the insurer's denial is the utility servicesexclusion in Toothsome Treats' property policy.
Utility Services Exclusion
Utility services exclusions may vary from one policy to another. Many policies include the same exclusion found in the current ISO policy. In this policy utility service includes the following:
- Power supply services, meaning electricity, gas and steam;
- Water supply services; and
- Communications supply services, meaning telephone, radio, microwave or television services.
Most commercial property policies exclude electrical and other utility service outages that result from a failure that occurs away from your premises. That is, an outage is excluded if it is caused by the failure of equipment that is not located on your premises.
In the past, policies did not exclude outages that resulted from an equipment failure that originated on your premises. In recent years, however, the utility services exclusion in the ISO policy (and many insurers' policies) has expanded. Nowadays, many policies exclude not only off-premises failures but also any on-premises failures that involve equipment used to supply electricity (or another utility service) from an off-premises source.
For instance, suppose that lighting 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. If the damage to the transformer causes a power outage, any property damage that the bakery suffers as a result of the outage will likely be excluded.
Many utility services exclusions specify the type of utility property that must be damaged for the exclusion to apply. For instance, the ISO utility services exclusion precludes a power outage caused by damage to a power generating station, substation, switching station, transformer or transmission line. In the Toothsome Treats scenario described above, the bakery's production facility lost power because wind damaged a substation owned by the utility. Thus, damage to the bakery's products caused by the power outage is excluded under the bakery's property policy.
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, if lighting damages a switching station, causing a power failure and a power surge, the power surge is excluded. In the absence of the lightning, the power surge would not have taken place.
Finally, 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.
Utility Services Coverage
You can buy back much of the coverage that is excluded by the utility services exclusion. Two standard ISO endorsements are available for this purpose. One provides direct damage coverage while the other affords time element (business income and extra expense) coverage. You can purchase one or the other or both.
Both ISO endorsements allow you to choose the type of utility property you want to cover. The options are:
- Water supply property
- Communications supply property, including overhead transmission lines
- Communications supply property, not including overhead transmission lines
- Power supply property, including overhead transmission lines
- Power supply property, not including overhead transmission lines
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.
Direct Damage Endorsement
The direct damage endorsement covers loss of or damage to covered property caused by an interruption in utility service to the 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 property (communications supply, power supply etc.) that you have elected to cover.
It is important to note that the utility interruption endorsement does not cover loss or damage to electronic data. Damage to electronic data can be insured under a cyber risk or electronic data policy.
Business Income and Extra Expense 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 time element endorsement covers a suspension of operations at your premises caused by an interruption in utility service to your premises. The interruption in utility service must result from direct physical loss or damage by a covered peril to the type of property you have elected to cover (water supply, communications supply etc.).