Posted In: Insurance Recovery, Insurance Recovery & Insurance Recovery
Are You Afraid of the Dark? After a Power Outage, What Exclusions Might You Find Lurking In Your Policy?
on August 31, 2016
The thunder rolls, the lightning strikes and the room goes dark. There is no power and as the minutes turn to hours, your operations come to a halt and you must send your employees home. The electric company promises to restore power in 3 days, but will your company be able to bear the loss that comes with an extended power outage?
Whether caused by severe weather conditions, technical failures or collisions with utility equipment, power outages are a common and significant threat to businesses. A proactive approach to risk management includes not only a disaster recovery plan, but also insurance coverage for other business interruptions. Depending on the type of insurance policy in force at the time of the power outage, your business may be able to recover certain losses.
Will Property Insurance Cover the Cost and Expenses of a Power Outage?
While standard commercial property insurance policies do not cover purely economic losses (such as lost profits, or costs associated with suspended operations), commercial property insurance policies commonly cover “direct physical loss or damage” to the business structure or premises. For example, if a fallen tree rips the wiring from your building, or a fallen wire leads to a fire, there is physical damage and your commercial property insurance will cover the loss.
Commercial property policies, however, do not cover losses due solely to a power outage or other utility service disruption that results from damage away from the covered premises. For instance, if a car accident involving utility equipment a block away causes the power to go out, then there is no physical damage to the covered premises (i.e. the business listed in the declarations) and a commercial property insurance policy will not cover the loss.
Commercial property insurance and basic business interruption endorsements only cover an insured’s costs when there is damage to the insured’s property that forces the insured to relocate or cease operations for a period of time. The purpose of business interruption coverage is to provide enough capital to keep the business afloat during the time it takes to rebuild or repair the property that was damaged. These policies do not provide coverage for the extra expenses and losses sustained solely as a result of a utility or service interruption.
How Do I Ensure Coverage for Utility Service Interruption?
Consequently, a comprehensive risk management plan will include the specialized coverage for utility or service interruptions. A service interruption is broader than a power outage and may include coverage for losses and expenses caused by power, water and telecom outages, which can also have a significant impact on business operations.
When a utility interruption occurs, every business is susceptible to damage and loss: perishable goods spoil, computer equipment shuts down, and production or productivity is reduced if not stopped, which means business income is lost. By purchasing utility service interruption coverage, insureds can be certain that they are covered for any loss resulting from an interruption of any specified utility service such as water, communications, Internet, gas or electricity. Policyholders should note however, that satellite coverage may not be included in telecommunications and may need to be explicitly listed in the coverage.
Furthermore, policyholders must also be deliberate in the type of utility service interruption coverage they select. Insurers often offer two different types of coverage for utility service interruption: direct damage or time element. A time element endorsement extends commercial property insurance coverage to include the economic losses and extra expenses caused by a utility service interruption for a specific duration. This coverage however, is still subject to a number of exclusions and prerequisites to coverage such as a “covered peril” or “direct physical loss or damage.” Alternatively, a direct damage endorsement provides coverage for a service interruption that is caused by a specified “covered cause of loss.” Unless a service interruption is caused by a listed “covered peril” such as a storm-related outage, there is no coverage.
What Else May Prevent Coverage?
Finally, policyholders should also look for exclusions and “waiting periods” that may affect coverage. Coverage may not attach until after a set amount of time. The ISO (commercial property coverage) forms, for example, have a 72-hour waiting period. As a result, in some cases, power outages may be too brief, for the insured to recover.
Other applicable exclusions that Insureds should be on the look-out for include:
- Off-Premises Exclusions: Some forms are more restrictive and preclude coverage for income loss if the failure occurs “outside of a covered building” rather than loss of power on premises.
- Acts or Decisions Exclusions: This exclusion precludes coverage where a person’s or entity’s deliberate decision causes the outage and subsequent loss, such as a rolling blackout.
- Idle Periods Exclusions: This exclusion precludes coverage for losses sustained during a business interruption when business operations would have been suspended for other reasons absent the damage or physical loss covered by the policy.
As with any risk management plan, businesses must carefully assess their specific risks and responsibly select the appropriate coverage. Restaurants, grocers, bakeries and perishable food or medicine retailers should also consider purchasing Spoilage Coverage. Additionally a more comprehensive business interruption response plan will limit exposure and mitigate losses by documenting key processes, establishing emergency roles for key individuals, ensuring sensitive and vital information is stored securely in a secondary location, and ensuring communication of delays and updates reach affected clients or customers.
This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2024 Brouse McDowell. All rights reserved.
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