Utility Interruption Coverage

Downed tree on a power line
Image courtesy of [Arthur Tilley] / Getty Images.

How long could your business function without electricity? How about telephone, email or water service? Most companies can survive a brief outage of a utility service, but an extended interruption can be devastating.

A utility interruption can cause physical damage to buildings or personal property at your premises. It can also force your business to shut down and sustain a loss of income. This article will explain how you can protect your business against both types of losses.

Physical Damage to Property

The following example demonstrates how a utility interruption can cause physical damage to insured property. Tracy owns four retail bake shops called Toothsome Treats. The stores sell fancy cakes and cookies, all of which are prepared at a central facility owned by the company.

One day, a thunderstorm damages a substation owned by the local electric utility, Endurance Electric. The substation is located several miles from Toothsome Treats' production facility. The facility loses power (including refrigeration) for two days. Cakes and cookies that were in production when the outage occurred are lost. Raw ingredients that were under refrigeration, like eggs and milk, are lost due to spoilage. In all, Toothsome Treats suffers a $25,000 loss a result of the outage.

Tracy submits a claim to the Toothsome Treats' commercial property insurer. She is shocked when she receives a letter from her insurer denying the claim.

The insurer cites the utility services exclusion in Toothsome Treats' property policy as the reason the claim isn't covered.

Utility Services Exclusion

While property policies vary, many contain the utility services exclusion found in the ISO property policy. This exclusion applies to the failure of power, communication, water or other utility service supplied to the described premises.

Many commercial property policies exclude utility service outages that result from a failure that originates away from your premises. That is, an outage is excluded if it is caused by the failure of equipment not located on your premises. The outage suffered by Toothsome Treats originated at a substation situated away from the bakery's property.

In the past, policies did not exclude outages that resulted from an equipment failure, if the failure originated on your premises. However, the utility services exclusion in the ISO policy (and many insurers' policies) has expanded. Nowadays, many policies exclude failures originating on or off your premises, if they involve equipment used to supply electricity (or another utility service) from an off-premises source.

For instance, suppose that lighting strikes a transformer located just outside Toothsome Treats' production facility. The transformer is located on the bakery's property, not on property owned by Endurance Electric. The transformer is used by the utility to supply power to the bakery's production facility. If the damage to the transformer causes a power outage, any property damage that the bakery suffers as a result of the outage will likely be excluded.

Excludes Power Surge

The utility interruption exclusion found in the standard ISO policy excludes power surge that results from the same event that caused the power failure. For example, if lighting damages a switching station, causing a power failure and a power surge, the power surge is excluded. In the absence of the lightning, the power surge would not have taken place.

Covers Ensuing Loss by Fire

Finally, the utility services exclusion contains an exception. Coverage is provided for damage by a covered peril that results from a power surge or utility failure. For instance, if a power surge or loss of electricity causes a fire, the policy will cover ensuing loss or damage to covered property caused by the fire.

Utility Services Coverage

You can buy back much of the coverage that is excluded by the utility services exclusion.

Two standard ISO endorsements are available for this purpose. One provides direct damage coverage while the other affords time element (business income and extra expense) coverage. You can purchase one or the other, or both.

Both ISO endorsements allow you to choose the type of utility property you want to cover. The options include property used to supply:

  • Water Services Includes pumping stations and water mains
  • Communications Services Means property used to supply telephone, radio, microwave or television services. Includes communication transmission lines, coaxial cables and microwave relays (other than satellites). You may choose to include or exclude overhead transmission lines.
  • Power Services Means electricity, gas and steam. Includes utility generating plants, switching stations, substations, transformers, and transmission lines. You may choose to include or exclude overhead transmission lines.

Direct Damage Endorsement

The direct damage endorsement covers loss of or damage to covered property caused by an interruption in utility service to your premises. For the loss or damage to be covered, the interruption must result from direct physical loss or damage by a covered peril to the type of property (water, communications, or power services supply) that you have elected to cover.

Under the direct damage endorsement, you can elect utility services coverage for all or a portion of your covered property. For instance, Toothsome Treats might purchase power supply interruption coverage for perishable items only. If a limit is shown in the endorsement, it is part of (not in addition to) the limit shown in the policy for the covered property.

It is important to note that the utility interruption endorsement does not cover loss or damage to electronic data. Damage to electronic data can be insured under a cyber risk or electronic data processing policy.

Time Element Endorsement

If your commercial property policy includes business income (also called business interruption) or extra expense coverage, you can extend that coverage to include utility service interruption. The time element endorsement covers a suspension of operations at your premises caused by an interruption in utility service to your premises. The interruption in utility service must result from direct physical loss or damage by a covered peril to the type of property you have elected to cover (water, communications or power services supply).