Topics covered:

Introduction

Exclusion prompts need for coverage

Utility Services—Direct Damage Coverage

Utility Services—Time Element

Overhead Transmission Lines

Spoilage Coverage

Conclusion

Introduction

It is not only natural occurrences, such as hurricanes, tornadoes, earthquakes, and other forces of nature, that are potential sources of power outages. Problems inherent in the production process can also be sources of serious damage and consequential loss. For example, a utility power station's transformer that explodes and burns in a remote area of the United States may take hours to replace, thus resulting in the spoilage of foodstuffs in stores and warehouses. Another example is when a private water company's supply is curtailed to an industry because of destruction of a pumping station that requires extensive work to replace.

The nature and kind of available coverage required will depend, in part, on the type of business and its operation, and how its property insurance is currently being managed. With the possible exception of some manuscript policies, most property policies will likely require some kind of form or endorsement to obtain direct damage and time element coverages against the direct physical loss or damage and interruption of utility services.

Exclusion Prompts Need for Coverage

Whether it is the basic, broad, or special causes of loss form of the standard ISO Commercial Property insurance program that applies, the utility services exclusion signals the need for coverage. The utility services exclusion of these three causes of loss forms all read alike. The following exclusion appears in the Causes of Loss – Special form, CP 10 30 10 12 and addresses both direct physical loss or damage and time element losses.

We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

Utility Services

The failure of power, communication, water or other utility service supplied to the described premises, however caused, if the failure:

(1) Originates away from the described premises; or

(2) Originates at the described premises, but only if such failure involves equipment used to supply the utility service to the described premises from a source away from the described premises.

Failure of any utility service includes lack of sufficient capacity and reduction in supply.

Loss or damage caused by a surge of power is also excluded, if the surge would not have occurred but for an event causing a failure of power.

But if the failure or surge of power, or the failure of communication, water or other utility service, results in a Covered Cause of Loss, we will pay for the loss or damage caused by that Covered Cause of Loss.

Communication services include but are not limited to service relating to Internet access or access to any electronic, cellular or satellite network.

Therefore, if a power surge occurs, or a water main breaks, or any other event occurs off the insured premises that results in a failure of the utility service to the described premises, this endorsement will provide coverage if so indicated on the endorsement schedule.

Paragraph (2) may need some further explanation. If, for example, a utility were to install some kind of equipment (a generator as example) on the named insured's premises to better facilitate utility service from a source away from those premises, no coverage should be expected for any loss or damage.

Secondly, no coverage applies for loss or damage caused by a power surge if the surge would not have occurred but for an event causing a power failure. If a failure of service or surge of power results in loss or damage from a covered cause such as fire or explosion, coverage applies to ensuing loss to the extent of that covered cause.

Lastly, reference to communications services includes (but is not limited to) service relating to access of the Internet or any electronic, cellular, or satellite network.

Utility Service—Direct Damage Coverage

In light of the preceding exclusion, if coverage against physical damage to covered property stemming from interruption in utility service on or away from the described premises is desired, it is necessary to add the endorsement, Utility Services—Direct Damage  CP 04 17. A schedule within the endorsement lists the exposures that are available for coverage as follows:

Water Supply Services, defined to mean pumping stations and water mains supplying water to the described premises.

Communication Supply Services, (including overhead transmission lines) or (not including overhead transmission lines). This is defined to mean property supplying communication services, including telephone, radio, microwave or television services to the described premises, such as:

1. communication transmission lines, including optic fiber transmission lines;
2. coaxial cables; and
3. microwave radio relays except satellites.

Overhead transmission lines are not included unless indicated with an X in the schedule.

Power Supply Services (including overhead transmission lines) or (not including overhead transmission lines), defined to mean the following types of property supplying electricity, steam or gas to the described premises:

1. utility generating plants;
2. switching stations;
3. substations;
4. transformers; and
5. transmission lines.

Here also, overhead transmission lines are not included unless indicated by an "X" in the schedule.

Space is also allocated in the Utility Services—Direct Damage endorsement for listing the covered property and the applicable causes of loss form. Electronic data is specifically precluded as covered property. The meaning of "electronic data" appears in the applicable coverage form to which the endorsement is attached. These coverage forms are Building and Personal Property, Builders' Risk, Condominium Association, Condominium Commercial Unit-Owners, Tobacco Sales Warehouses, and the Standard Property Policy.

Although space is allocated for a utility services limit of insurance, another provision of this endorsement states that the coverage under this endorsement is part of, and not in addition to, the limit of insurance stated in the Declarations. This provision states:

If a Utility Services Limit of Insurance is shown in the Schedule, such limit is part of, not in addition to, the Limit of Insurance stated in the Declarations or in the Separation of Coverage endorsement as applicable to the Covered Property.

If no Limit of Insurance is shown for Utility Services, coverage under this endorsement is subject to the applicable Limit of Insurance on the Covered Property as shown in the Declarations or in the Separation of Coverage endorsement. But this Utility Services endorsement does not increase the applicable Limit of Insurance.

A natural question arises as to why a provision is made to insert a limit when, in fact, the limit is part of, and not in addition to, the policy limit. The answer is to accommodate those businesses whose properties are scheduled when not all of the properties are exposed to utility services losses. The same rationale applies to businesses with properties written on a blanket basis when not all locations are confronted with the utility service exposure.

The criteria for coverage under this endorsement are:

(1) loss or damage to covered property (e.g., building, the named insured's business personal property, or personal property of others) as described in the schedule of the endorsement, exclusive of any electronic data;

(2) caused by the interruption of service to the described premises; and

(3) the interruption must result from direct physical loss or damage by a covered cause of loss to the selected property exposures (e.g., water supply, communication supply, or power supply services).

Assume, for example, a grocery store purchases this coverage, subject to a broad causes of loss form. If it sustains a power supply outage that causes spoilage to foodstuffs due to an act of vandalism at the supplier's premises, coverage would apply, subject to any deductible, because the criteria for coverage has been met, as follows:

(1) there was loss or damage to the insured's covered business personal property (foodstuffs);

(2) there was an interruption of service to the described premises; and

(3) the interruption resulted from direct physical loss or damage by vandalism, a covered cause, to the power supply services.

It is important to emphasize that all of the criteria must be met. If, for example, the power outage were caused by flood or artificially generated electric currents, neither of which is covered by the ISO forms, coverage would not apply for any loss or damage to the insured's covered property.

Utility Services—Time Element

If a business decides one or more of its locations is a candidate for utility services—direct damage coverage, it also should consider time element coverage if one of the business income or extra expense coverage forms is applicable. In fact, the time element exposure is often a more important consideration than is the direct damage exposure.

To obtain coverage for loss of business income and/or extra expenses caused by interruption of service to the described premises resulting from direct physical loss or damage by a covered cause of loss to the appropriate utility services selected, it is necessary to attach the endorsement, Utility Services—Time Element, CP 15 45.

A condition precedent for attaching that endorsement is that the named insured must also have purchased some form of business income and/or extra expense coverage. The appropriate coverage forms to which the Utility Services—Time Element endorsement can be attached are Business Income (and Extra Expense) Coverage Form, Business Income (Without Extra Expense) Coverage Form, or the Extra Expense Coverage Form.

A review of the Utility Services—Time Element endorsement reveals that it contains the same schedule of exposures (water supply, communication supply, and power supply, with or without overhead transmission lines) as appears in the direct damage endorsement. However, an additional coverage option is added for wastewater removal property. The terms water supply property, communication supply property, and power supply property are defined identical as to how these utilities are defined in the direct damage endorsement. Wastewater removal property is defined to mean a utility system for removing wastewater and sewage from the described premises, other than a system designed primarily for draining storm water. The utililty property includes sewer mains, pumping stations and similar equipment for moving the effluent to a holding, treatment or disposal facility, and includes such facilities.

The scope of coverage in this endorsement is significant. When this endorsement is purchased, coverage under the appropriate business income and/or extra expense coverage form is extended to apply to:

(1) a suspension of operations at the described premises;

(2) caused by an interruption in utility service to that premises; and

(3) with the interruption in utility service resulting from direct physical loss or damage by a covered cause of loss to the property described as indicated by an "X" in the endorsement's schedule—water supply property, wastewater removal property, communication supply property, or power supply property.

It is important to keep in mind the purpose for the direct damage and time element utility services endorsements. Since the basic, broad, and special causes of loss forms specifically preclude coverage for certain kinds of utility services damage and time element, it may be necessary to purchase either or preferably both of the utility services endorsements, one covering direct damage and the other time element.

Utility services time element coverage can be obtained only when the policy includes one of the business income and/or extra expense coverage forms. The utility services time element coverage is not activated unless there is an otherwise covered loss involving the Utility Services—Direct Damage form. This is the same requirement that applies to business income and extra expense coverage written in conjunction with property policies; that is, until there has been otherwise covered physical loss or damage to property from a covered cause, time element coverage is not triggered.

Overhead Transmission Lines

An important question that needs to be considered is whether coverage should include overhead transmission lines. Before that decision can be made, however, one needs to determine what overhead transmission lines are and whether there is any difference between these and overhead power lines. Maybe they are the same. The insurance forms certainly are not going to give the answer. And, how many insurance buyers and their representatives have ready access to sources that can explain the difference? Do not consult search engines or dictionaries, since they are quagmires for this purpose.

In reviewing another, non-ISO utility services coverage form, "power supply services" is defined to mean transmission lines, excluding overhead transmission and distribution lines. What begs the question here is what the difference(s) may be between a transmission line, overhead transmission line, and a distribution line. It is an enigma that needs to be resolved if someone is interested in purchasing the appropriate coverage.

After querying one seasoned electrical engineer, the following was his response regarding the difference between overhead transmission lines and overhead power lines: "Overhead transmission lines are very high voltage lines used to transmit power over long distances, typically the kind of high towers one sees traversing the countryside. By using high voltage, smaller wires can be used. Usually the power emanates or terminates in substations, which then distribute the power to overhead power lines, which are those commonly seen on poles around town. The power can be both high and low voltage."

Here is another question for which an answer should be sought: could the transmission lines of a utility be considered equipment used to supply service to the described premises from a source away from the described premises? (This same question applies when a form includes reference to a distribution line.) The reason this question is important is, as was explained earlier, because of the utility services exclusion found in the basic, broad, and special causes of loss forms. In other words, if the power failure originates at the described premises because of the failure of equipment used to facilitate the utility service to the premises from a source away from the premises, coverage is excluded without the special coverage endorsements for utility direct damage and time element losses.

Let's say an insured maintains property insurance under a Building and Personal Property Coverage Form with a Special Causes of Loss form. As a result of high winds and tornadic conditions, the overhead power lines on poles in a given town become disengaged, including those at the business premises of the insured who had purchased the foregoing coverage. The question here is whether the insured has coverage for damage to the wires and power failure brought about by the winds. Much will depend on whether the transmission lines are considered to be equipment used to supply utility service to that business premises. If they are considered to be equipment, then the Utility Service—Direct Damage form would be necessary.

Of course, if the downed power lines were to cause a fire or other ensuing loss, coverage would apply to the ensuing loss or damage. Ensuing loss is customarily covered by property forms.

Let's assume further that the insured does not believe that the power lines to its place of business are considered to be furnished equipment of a utility but is sold on the idea that purchasing Utility Services—Direct Damage and Time Element coverages is a good idea. The question is to buy or not to buy the coverage that includes overhead transmission lines. Cost will likely be the major obstacle. If the power lines servicing the business premises are considered equipment (important for purposes of the utility services exclusion) and considered to be overhead transmission lines for purposes of Utility Services—Direct and Time Element coverages, it would be advisable to select coverage for the inclusion of overhead transmission lines.

The reason pure and simple is to avoid any argument that may arise when there is an otherwise covered loss brought about by interruption of service resulting from direct physical loss or damage from a covered cause. In other words, it might be worth the extra cost in purchasing coverage to include overhead transmission lines (whatever that means) simply to avoid any argument over coverage.

Spoilage Coverage

Those businesses confronted with possible loss to perishable stock can also obtain coverage. The Spoilage Coverage endorsement, CP 04 40, covers loss by:

(1) breakdown or contamination from mechanical breakdown or mechanical failure of refrigerating, cooling, or humidity control apparatus equipment at the described premises;

(2) contamination by a refrigerant; or

(3) power outage (meaning change in temperature or humidity from interruption of electrical power) either on or off the described premises due to conditions beyond the insured's control.

This coverage endorsement, which is available only with the Building and Personal Property Coverage Form and Condominium Commercial Unit-Owners Coverage Form, applies solely to direct damage and not to time element loss. The endorsement's schedule requires the description of the property and the deductible. If coverage applies on a selling price basis, this needs to be designated by an "X" in the schedule since the valuation loss condition is amended to take the selling price into consideration. Also, if the insured has a refrigeration maintenance agreement, this also needs to be declared in the schedule if the insured purchases coverage against spoilage from breakdown or contamination.

This provision has a similar effect to a protective safeguard condition. If the maintenance or service agreement is terminated without notice to the insurer, the insurance is considered to be suspended at that location. This means that if a loss were to occur involving spoilage, coverage likewise would not apply.

Given the broad coverage provided by the Spoilage Coverage endorsement, some insureds may find it unnecessary to also want to purchase time element coverage. In those cases where time element is also an important exposure, insureds will have to look elsewhere for that coverage since no ISO forms are available for that purpose.

Spoilage coverage along with loss of business income is available, however, under the Equipment Breakdown insurance offered by ISO. Presumably, these policies of other insurers likewise offer this coverage. Under the 2013 edition of the ISO Equipment Breakdown forms, coverage is available for spoilage loss caused as a result of service interruption by private or public utility resulting from breakdown, along with loss of business income.

Conclusion

Utility services coverages are not limited to the standard ISO endorsements but are also available under independently filed forms. Whether coverage will apply in a given instance, however, will depend on the facts and the coverage forms in question.

Any kind of a catastrophe can leave an insured subject to power outage, perhaps for long periods of time. For this reason, it would behoove businesses that have utility services exposures that can produce substantial direct physical loss or damage to property along with time element loss to consider purchasing some kind of coverage.

In contemplating the purchase of coverage, prospective insureds should ponder the coverage forms carefully and attempt to obtain answers to questionable areas of forms. This would include the difference among transmission lines, overhead power lines, and distribution lines, as well as the meaning of "equipment," as these terms are used in the ISO standard utility services endorsements.

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