What happens when a loss is caused by damage from a covered peril to property away from the insured’s premises?
Hector, a restaurant owner, saw the news and knew that the hurricane was heading toward the Florida coast. Being nearly 70 miles inland, he wasn’t too concerned about catastrophic winds or any potential storm surge, but he still wanted to ensure that his building would withstand tropical force-winds and heavy winds. He made sure that the gutters were clean and adequately strapped. All of the windows were sealed and re-caulked. Once the hurricane warning was issued for his community, he closed the restaurant early so that all of the outdoor tables, chairs, and patio umbrellas could be brought inside.
As the forecast predicted the major damage was centered around the coast, although there was some flooding in the low-lying areas of his town. His restaurant was spared any structural damages and he considered himself lucky. However, the biggest problem, though, were the downed trees. They were everywhere!
With all of the damage near the shore and the way the heavy rains lingered over the state, there were fewer and fewer linemen available to repair the downed power lines. All told, Hector’s restaurant was without power for a little over a week. All of the food in the walk-in freezers had spoiled, and it was right after a shipment came in (his supplier had warned him that shipping might be a problem after the storm, so Hector had stocked up). Not only did he lose all the food stored, but he wasn’t sure when the new supplies would arrive, even after the power came back on.
By the time he was ready to open his doors and have customers again, he had been closed for nearly two weeks without any revenue and with a huge loss of supplies.
Hector was insured under a standard ISO Business owners Policy (BOP). When he submitted his claim to his carrier for the business income and inventory losses, he was appalled to learn that his claim was denied. The claims adjuster referenced the Utility Services exclusion in the coverage form as the basis of the denial.
While Hector first considered himself lucky that his restaurant was spared direct damage from the storm, he was now wishing that a tree would’ve fallen through his roof instead of on a power line—at least then, he would’ve had a covered claim.
But what if there is no direct damage to the premises? This is when utility services coverage becomes key.
Utility services is an often-overlooked endorsement that protects businesses when there is an interruption of water supply, communication supply, or power outage, when the loss is caused by damage from a covered peril to property away from the insured’s premises. This can include damage that occurs at the power stations, sub-stations, lines, and transformers. Coverage for these off-premises power failures is typically excluded in most standard commercial policies, but businesses can buy back some of the coverage that is excluded by the utility services exclusion by purchasing one or both or two specific endorsements:
- Utility Services—Direct Damage. This endorsement is an extension of the property insurance, providing protecting against damage to tangible property resulting from an interruption of any of the utility services named in the policy because of a covered cause, such as a storm.
- Examples of losses covered by this endorsement include: 1) Hector’s loss of perishable foods due to the power outage. 2) Damages to the restaurant’s kitchen appliances caused by a lightning strike to a nearby transformer.
- Utility Services—Time Element. This form modifies the Business Income and Extra Expense coverage forms. In the event that winds break down a power line or if a water main is broken, this coverage can cover losses, including loss of income and expenses, up to a predetermined dollar limit or until the power or water service is restored.
- Examples of losses covered by this endorsement include: 1) If a truck crashes into a water main, causing a water outage at a local car wash. This prevents the car wash from serving any customers for five days. 2) If a fire at a power substation severs power to a day spa, forcing the spa to close for the remainder of the week.
The extent of coverage provided by each of these forms will depend on the options selected in the actual endorsement. When rating utility services, the insured will choose the types of utility property they want to cover:
- Water Supply. Pumping stations and water mains.
- Communication Supply. Telephone, radio, internet, microwave, and television services, including satellite dishes, optic fiber transmission lines, and coaxial cables. Covered properties may include or exclude overhead transmission lines.
- Supply. Properties supplying electricity, steam, gas, including generating plants, switching stations, substations, and transformers. Covered properties may include or exclude overhead transmission lines.
As the agent, you can help your client determine how much or how little coverage is needed. While telephone and internet services are crucial for an IT firm, a small coffee shop that handles cash may decide that they need coverage for water and power only.
Below is an example of the property schedule in the Utility Services—Direct Damage form (BP 04 56). You will see that in addition to the limit of coverage provided, the available coverage options are to be specified with an “X”:
When Power Supply is selected (and really, why wouldn’t it be?), you’ll notice that there is additional verbiage as to whether coverage applies to overhead transmission lines. Many carriers will not provide for the overhead transmission lines automatically, especially in regions that are highly susceptible to windstorms. You will need to specifically request this coverage, which may be subject to further underwriting considerations.
It’s also important to remember that the perils covered by these endorsements are subject to the policy’s cause of loss form. So as flood and earthquakes are commonly excluded on commercial property policies, they would also be excluded under Utility Services endorsements.
While certain industries are at a greater risk of shutting down than others, most business owners take for granted the importance of municipal utilities in their daily operations. Your clients, both large and small, Main Street or otherwise, are counting on you to ensure that they adequately protected when storms hit or when lighting strikes—even when the lightning strikes elsewhere. Their businesses depend on you and your coverage knowledge, and proper utility service coverage can help keep them in business when weather or other disasters happen.
Article By: Cat Ferris
Source: The Rough Notes Company Inc.