Power Outages and Catastrophes
Evaluating Utility Services Exclusions
By Susan Massmann
From the January 2012 issue of Claims Magazine
From a record outbreak of tornadoes in April to a pre-Halloween snowstorm in the Northeast, 2011 saw its share of catastrophic weather events. The year also broke the record for billion-dollar disasters, a title previously held by 2008 with nine; 2011 brought twelve.
Usually, such disasters also result in localized or widespread power outages. Often, insureds do not suffer any direct damage but experience losses solely because of power outage or the resultant power surge when electricity is restored.
The latest editions of the ISO commercial property causes of loss forms contain utility services exclusions that preclude coverage for power or other utility failure that is supplied to the premises. The exclusions apply if the failure occurs away from the described premises or originates at the described premises but involves equipment used to supply the utility service to the premises from a source away from the described premises.
Utility Service Failures
The exclusion focuses on off-premises suppliers regardless of whether the failure originates away from the insured premises or if the equipment that actually fails and leads to the loss, is located on the insured premises. The intent is to preclude coverage for utility failure related to an off-premises provider, regardless of where the actual failure occurs.
Some power company transmission lines and transformers, for example, may actually be located on the insured premises. If that type of supply equipment fails, causes a service interruption, and causes a loss, then the exclusion is triggered even though the failed equipment is located on the insured premises.
Off-premises power failures that do not result in direct damage to insured property but still cause losses are the subject of many questions we receive from FC&S subscribers.
For instance, a municipality lost electricity for five days due to tornadoes in May. A tornado damaged power lines off premises although the municipality itself did not suffer any direct damage. The insured rented a generator to get city hall functioning and wanted to submit a claim for the cost of the generator as extra expense.
The municipality's form contains the following language:
All of the exclusions contained in Section D of the Property Coverage Form apply to this coverage form except:
b. Exclusion 1.i., Off Premises Utility Services, is replaced by the following:
The interruption, failure or fluctuation of power or other utility service(s) provided to the covered premises if the cause of the interruption, failure or fluctuation occurs outside a building at the plan member's premises.
While typically forms exclude damage because of power failure away from the insured premises, the more precise language in this form that excludes failure that occurs outside the insured's building still does not provide coverage for the loss. The power lines were outside a building on the plan member's premises, so the extra expense of the generator would not be covered.
Spilled Milk and Perishables
Another type of loss that frequently accompanies power outage is spoilage or other losses to perishable inventory. An illustration of this type of loss comes from an FC&S subscriber whose insured, an ice cream company, did not experience direct damage from Hurricane Irene but lost inventory because of a power outage that occurred after the hurricane.
The carrier denied coverage because the form contained the North Carolina Windstorm exclusion, which excludes any loss because of wind. The carrier said that the wind was the cause of the loss of power, thus no coverage was available.
The insured, however, also carried a temperature change endorsement, which provides coverage for complete or partial failure of electrical power. The endorsement deleted the power outage exclusion of the underlying form.
Read together, it is apparent that the forms do provide coverage for the loss of inventory because of the power outage. The windstorm or hail exclusion states that if windstorm or hail results in a covered cause of loss other than rain, snow, sand, or dust, the insurer will pay for the physical loss or damage caused by the covered cause of loss.
Because the temperature change endorsement provides coverage for complete and partial failure of electrical power—thus making it a covered cause of loss—the windstorm or hail exclusion would allow coverage for the loss.
As can be seen from these examples, it is important to read all applicable provisions and exclusions to determine how damage caused by power outages may or may not be covered in different situations.