7.06.05.02 Defects, erasures, errors, limitations or viruses in computer equipment and programs;

I have fairly limited experience with this coverage part. Any thoughts on the application of this coverage to this situation would be appreciated. I felt that a breakdown was something that was internal to the equipment and this would not address something from outside causes such as this.

Question – Part 2:

Or would this type of loss be better covered under an off-premises service interruption coverage, if the covered causes of loss included a load reduction, etc.? Is there a form out there that you are aware of that would provide coverage – it seems like there are areas where rolling blackouts are common so I wonder how this is addressed coverage wise in an area where this is a common situation?

Nebraska Subscriber

Answer – Part 1:

Because the damage was done due to an intentional load reduction by the municipality, and not a covered cause of loss, you are correct that there would be no coverage under the Utility Services – Direct Damage endorsement.

In the equipment breakdown language you provided, the loss does not meet the coverage requirements of sudden and accidental Breakdown of Covered Equipment or a part thereof, which manifests itself by physical damage. The load restriction was an intentional act by the municipality and affected customers were likely made aware of the reduction before it commenced, therefore not being sudden and accidental. Also, there must have been direct physical damage to the covered equipment, and the reduction in electricity would have been an indirect loss rather than direct loss.

Further, the computer and software would likely fall under the limitation exclusion you referenced: 7.06.05.02. Defects, erasures, errors, limitations or viruses in computer equipment and programs.

Answer – Part 2:

The off-premises service interruption coverage provided under CP 04 17 Utility Services – Direct Damage, would not cover this type of loss because the interruption in utility service was not a result of a direct physical loss that would be covered under the property policy causes of loss. The same holds true for equipment breakdown coverages.

Whether the utility company could be sued for the property damage is not likely. We have from time to time addressed rolling blackouts, and we recently looked to NOLO for information on whether you can sue a public utility. A public utility sets out the terms of its customer service contract in a tariff book, which is a rule describing situations in which the public utility can be held legally responsible for a customer's losses in the event of an "interruption in service" or "insufficiency of supply". The tariff books are agreed to by the state's public utility commission. The tariff book may contain specific language describing the utility's right to carry out planned service interruptions, such as rolling blackouts, and other restrictive measures to reduce the risk of larger service-related problems. These liability shields of utility services are often rationalized as necessary to keep customers' service rates reasonably low; otherwise if the utility had to pay for losses resulting from often unavoidable problems that can have widespread impact, it would result in a financial burden that would inevitably be passed on to customers.

Since it appears that rolling blackouts may be around for a while, businesses should institute risk management procedures in an effort to mitigate potential losses. For example, onsite generating systems could be considered. Employee training on what to do if the establishment suddenly darkens is imperative. Data stored on computer systems should be backed up frequently. Stores that sell perishable goods might consider refrigeration units that can generate their own power. Businesses may revert to or install backup manual systems that were prevalent before processes became largely automated and powered by electricity. Insurance companies that specialize in boiler and machinery coverage should be able to provide information on loss control and risk management procedures that could save your clients both money and headaches.