UTILITY SERVICES COVERAGE

(June 2019)

BACKGROUND

What happens when wind knocks down power lines and causes general power outages and specific damage to electric cooling equipment, such as compressors, motors, and switches at the insured's premises, ultimately resulting in food spoilage? What do commercial property coverage forms cover? What is not covered? This subject has always caused varying degrees of concern but has recently become more contentious as weather-related and climatic events occur more frequently.

Damage to equipment is another issue. Does coverage apply for equipment damage caused by power surges or interruption of utilities from off-premises services? If the answer is yes, when does coverage apply? These are legitimate concerns that must be addressed and analyzed.

This article begins by reviewing the commercial property exclusions that restrict coverage. It then examines
CP 04 17–Utility Services–Direct Damage that fills some of the gaps in coverage.

COMMERCIAL PROPERTY EXCLUSIONS

Off Premises

Excluded

CP 10 30–Causes of Loss–Special Form, Exclusion 1.e Utility Service applies when damage to a utility service results in the named insured failing to receive utility service.

Example: A fire at Megawatt Power results in Jenny’s Glass suddenly losing power. All of the glass in process is ruined because of the loss of power. There is no coverage for Jenny’s loss.

Utility service is not limited to power. It is power, communication, water, and any other utility service supplied by an outside source. .

Example: Poplar Veneer depends on a steady stream of water when it actually cuts the veneer. An explosion off premises breaks a major pipe and the machine suddenly cuts dry. This ruins both the blade and the log being veneered. There is no coverage for the damage to the blade or the log.

Communication service is not limited to phone service. It specifically lists Internet access and access to any cellular, satellite, or electronic network. Interestingly, it does not mention telephone service, but it does state that it intends that communication service be an all-encompassing term.

Example: Modern Millie automatically starts and stops processes at her factory when she is on the road. She begins a process one day that must be stopped exactly four hours later. She stops the process, but the stop notice does not go through because of a problem with her cell phone provider. The product being worked on and the equipment doing the work are damaged. There is no coverage.

This exclusion applies if the utility service supplied originates off premises. It also applies if the damaged equipment is on the insured's premises, but that equipment was supplied from an off premises utility service.

Example: Peerless Electric places a transformer on the premises of Grandly Enterprises. Lightning strikes that transformer and all power to Grandly is cut off. This event causes damage to a number of machines that require an established shutdown process. The damage to the machines is not covered.

Utility service failure is not limited to complete failure. It also means reduction of supply or insufficient supply.

Example: A brown out occurs that lowers the amount of power that comes through the lines and damages Fancy Fans' cash register. There is no coverage because this is still considered power failure and the power source was off premises.

Exceptions

Power surge is excluded only if the same event that caused a power failure causes it. This means that power surge is not always excluded. However, it is difficult to imagine an offsite power surge that would not start with an event that causes a power failure.

This entire exclusion has an important exception. If the utility service failure or power surge results in a covered cause of loss, coverage applies to any damage that covered cause of loss causes.

Example: A failure at Homegrown Utility causes a power surge at Power Up Sports Facility. The power surge causes the treadmills to jerk forward and the resistance in one of them causes a fire to start. The fire destroys the treadmill and causes smoke damage throughout the facility. The fire and smoke damage is covered along with the damage the fire-fighting efforts cause.

On Premises

The utility services exclusion is the primary exclusion, but it is not the only one. The following exclusions eliminate coverage for situations that could arise from a utility failure that takes place on-premises:

2. a. There is no coverage if artificial electrical, magnetic, or electromagnetic energy damages electrical, cellular, or satellite devices. There is an exception. If a fire results, coverage applies to the damage that fire causes.

2. d. (6) Mechanical breakdown is excluded. Rupture and bursting caused by centrifugal force is considered mechanical breakdown and is not covered.

2. d. (7) Atmospheric dampness or dryness, temperature extremes, any temperature changes, marring, or scratching are excluded.

Because of the above, loss or damage due to changes or extremes of temperature, such as those that occur when cooling and refrigeration systems lose power and result in spoilage are not covered.

CP 04 17–UTILITY SERVICES–DIRECT DAMAGE

This endorsement is designed to fill the gaps in coverage the exclusions outlined above create.

Schedule

This coverage endorsement is very flexible. The coverage varies by covered property and by location. These options allow the named insured to purchase coverage for only the property at a specific location that is most vulnerable to damage from utility service being interrupted.

• Locations and Buildings Covered

This section on the endorsement schedule is the list of locations and buildings covered. The premises number(s) and building number(s) must match the number(s) on the declarations. It is very important to keep these numbers coordinated when building(s) and premises on the declarations are removed.

Example: Dilly Dairy has three locations. Location 1 is the office, Location 2 is the main plant, and Location 3 is a dwelling. Dilly purchases utility coverage at only Location 2. The office location is combined into the main plant midway through the policy year. The renewal policy is issued with only Location 1 and Location 2. The Utility Service endorsement should be also updated to show Location 1 as the only covered location. However, that update is not made, and the Utility Services endorsement lists only Location 2 as being covered. Coverage is denied when a utility service loss occurs at Location 1 because based on the endorsement utility service is available only at Location 2 (the scheduled dwelling).

• Covered Property

The covered property must be described. This can be building, personal property, or personal property of others. Any and/or all can be covered. CP 00 10–Building and Personal Property Coverage Form has descriptions of building, business personal property, and personal property of others when considering the appropriate entry to make on the endorsement schedule.

Related Article: CP 00 10–Building and Personal Property Coverage Form Analysis

• Covered Causes of Loss

The causes of loss form that applies to this coverage does not have to be the same as the one that applies to other commercial property coverages. This is usually done so the insured can reduce its premium. For example, the insured may decide to insure utility service coverage for only specified causes of loss (such as fire, lightning, and wind) and select CP 10 10–Causes of Loss–Basic Form. Note that this form applies to direct physical damage that occurs to the utility service that causes the utility service interruption.

Example: Polly Precious selects CP 10 10–Causes of Loss–Basic Form for utility services coverage. A windstorm at the power plant occurs and power at Polly's factory goes out. The following losses to Polly’s property as a result of the power outage are covered:

• A machine is destroyed because the centrifugal force of the process was suddenly disrupted.
• The clean room is contaminated because the ventilation and cleaning system stopped operating.
• Stock that must be kept at a certain temperature is damaged and must be destroyed because the temperature exceeded the acceptable range.

• Utility Service(s) Covered

The specific type of utility covered must be selected. This can vary by location and also by covered property. The options are:

• Water Supply Property
• Communication Supply Property, including overhead transmission lines
• Communication Supply Property, not including overhead transmission lines
• Power Supply Property, including overhead transmission lines
• Power Supply Property, not including overhead transmission lines

The insured may select one or more utility services providers. If it selects only communication supply because telephone service is more important than electrical power, there is no coverage if a storm damages off-premises electrical power lines but does not damage the underground telephone lines.

Similarly, if power supply not including overhead transmission lines is checked, there is no coverage if a falling tree damages only a power line and the rest of the system, including transformers, substations, and the switching plant, is not damaged.

Note: These issues are becoming increasingly complicated and harder to understand because it is difficult to maintain communications without power. For example, what is communication supply if telephone service is through a cable or Internet provider instead of through the telephone company?

As a result, the insured must completely understand its needs with respect to loss or damage sustained by off-premises utility providers. The insured must know the utility services that are important and that could potentially cause damage.

• Utility Services Limit of Insurance

If there is not a limit, the limit of insurance available for the type of property at the premises and building listed is the limit available for this endorsement. If a limit is entered, it is a sub-limit, not an additional limit of insurance. Using a sub-limit is appropriate because the premium is based on the limit of insurance.

Coverage Analysis

A. Coverage

The coverage this endorsement provides is interesting and must be examined more closely. Coverage is for loss of or damage to covered property due to service being interrupted. There are no exclusions with respect to the type of loss or damage covered. The only requirements are that the covered property must be damaged, and the damage must result from an interruption of power. As with all coverages, there is a restriction that relates to how the utility interruption occurs. The utility service must be interrupted because it sustained direct damage by a covered cause of loss.

As a result, as long as the proximate cause of loss that results in direct physical damage to the utility service is a covered cause of loss, coverage applies to any such resulting loss or damage to the insured’s covered property that can be traced directly to the interruption in service.

Spoilage is a good example. The causes of loss forms exclude loss caused by or that results from extremes in temperature. However, this endorsement provides coverage if spoilage results directly from service being interrupted. The same is true of electrical arcing. If the utility provider's service is interrupted because it sustains direct physical damage from a covered cause of loss, coverage applies to the loss of or damage to covered property from the interruption of service that is normally excluded. In another situation, this endorsement's coverage applies if artificially generated electrical current, including arcing, is the direct result of service being interrupted. This is because there are no specific exclusions.

The key to this endorsement providing effective coverage is the endorsement schedule. The schedule shows what is covered and what is not covered. Selections should not be made without considering and evaluating all possible scenarios.

B. Exception

This endorsement uses the term “exception” instead of the terms that should be used: “exclusion” or “property not covered.”

There is no coverage for loss or damage to electronic data. The exception specifically states that the corruption or destruction of the data is not covered but it also eliminates all type of loss or damage.

The insured should consider separate electronic data processing coverage to cover electronic data.

Related Articles:

AAIS Electronic Data Processing Equipment and Business Computer Coverage Forms

ISO Computer Systems Coverage Form

C. Utility Services

The utility services listed on the endorsement schedule are defined.

Note: There is no requirement that the services provided be off-premises or that a party other than the insured own the utilities or equipment.

• Water Supply Services

These are pumping stations and water mains that supply the covered premises.

• Communication Supply Services

This is the property that supplies communication service to the covered premises. Telephone, radio, microwave, and television are communication services, but the term is not restricted to only those. The types of property are transmission lines, coaxial cable, and microwave radio relays. Satellites are not included as communication property, but satellite dishes are also not excluded. Overhead transmission lines may be included or excluded, depending on how the endorsement schedule is completed.

• Power Supply Services

This means five specific types of property used to supply electricity, steam, or gas to the scheduled property. They are generating plants, switching stations, substations, transformers, and transmission lines. Transmission lines may be included or excluded, depending on how the endorsement schedule is completed.

Example: Farley's Freezer owns one location with two buildings. Building 1 has storage with older, walk-in freezers. Building 2 also provides storage, including a large stand-alone freezer. Farley purchases CP 04 17–Utility Services–Direct Damage, selects power utility including overhead transmission lines for Building 1 for personal property coverage with CP 10 30–Causes of Loss–Special Form to apply.

Strong winds down an overhead power line and a power outage causes property in both buildings to spoil. It also damages equipment in the older freezers in Building 1 when power is restored.

The walk-in freezers in Building 1 are permanently built in and attached to the building and are therefore considered building property but can also be considered personal property. Farley did not select coverage on building property but because the freezers are machinery and equipment, they are covered. The spoilage damage to personal property that consists of food is covered. Coverage does not apply to food in Building 2 at all because Farley did not select coverage on that building.

Farley’s premium on Building 1 would have been less had he scheduled building and personal property separately.

D. Limits of Insurance

The last element to review is how the limit is applied.

Purchasing CP 04 17–Utility Services–Direct Damage does not provide any additional amounts of coverage. It simply eliminates a gap in coverage on existing covered property. If the building limit on the declarations is $100,000 and this endorsement provides a $25,000 limit, the insured cannot collect $100,000 for a fire that occurs and an additional $25,000 if a utility service interruption occurs at the same time. The most the insured receives is $100,000 for the combination of fire and utility services losses.