BP 04 15-Spoilage Coverage, BP 04 56-Utility Services-Direct Damage, And BP 04 57-Utility Services-Time Element

BP 04 15–SPOILAGE COVERAGE, BP 04 56–UTILITY SERVICES–DIRECT DAMAGE, AND BP 04 57–UTILITY SERVICES–TIME ELEMENT

(September 2019)

INTRODUCTION

Utilities are important to every business. Their failure to operate properly results in minor inconveniences for some businesses and substantial losses for others.

 

Examples:

  • Lightning strikes a nearby transformer, runs through the line into the building, and damages computers, telephones, and equipment. It may also burn out compressors in refrigeration equipment, heating units, air conditioners, or other electrical devices.
  • Power spike (or the more common low voltage from brownout) at a power plant can cause damage to the same property in the example above.
  • Loss of water or telephone service may shutdown a business and employees are sent home after half a workday.

 

 

BP 00 03–BUSINESSOWNERS COVERAGE FORM POWER FAILURE EXCLUSIONS

There are three exclusions in the Insurance Services Office (ISO) BP 00 03–Businessowners Coverage Form that involve power failure.

Exclusion B. 1. e. Utility Services

This excludes loss or damage caused by or that results from failure of power, communication, water, or other utility service to the described premises if the failure originates away from such premises. There is also no coverage if the loss or damage is due to failure of on-premises equipment of the off-premises utility services. Utility service failure includes reduction in supply and insufficient capacity. In addition, any loss or damage that a power surge causes that would not have occurred except for an event that causes power failure is excluded.

There is a very broad exception to this exclusion. A covered cause of loss may result from power surge or power failure or from the failure of any of these utility services that causes loss of damage. In that case, coverage applies but for only the loss or damage that results from the particular covered cause of loss.

Another exception states that this exclusion does not apply to loss or damage to computers or electronic data.

The term “communication services”  includes Internet access service and access to any electronic, cellular, or satellite network. However, it is not limited to just these.

Exclusion 2. a. Electrical Apparatus

There is no coverage for damage, disturbance, disruption, or any type of interference with any electrical or electronic wire, device, appliance, system or network or device, appliance, system, or network that utilizes cellular or satellite technology when it is caused by or that results from artificially generated energy.  The type of artificially generated energy varies. This exclusion provides examples of the types of energy excluded but they are not the only ones. The examples provided are:

·        Electrical currents, including arcing

·        Electrical charges that magnetic or electromagnetic fields produce or conduct

·        Electromagnetic energy pulses

·        Electromagnetic waves or microwaves

The exception is that if fire results, coverage applies to the loss or damage the resulting fire causes.

Loss or damage to computers due to artificially generated energy is covered but under only limited conditions. The loss or damage must be caused by either an occurrence that takes place within 100 feet of the described premises or by a blackout or brown-out caused by an occurrence that takes place within 100 feet of the described premises.

Exclusion 2. o. Electrical Disturbance

This exclusion states that magnetic injury, electrical injury, disturbance, or erasure of electronic data is excluded, except to the extent that Businessowners Coverage Form Section I–Property Additional Coverages p. Electronic Data provides. However, coverage does apply to direct loss or damage that lightning causes.

COVERING POWER FAILURE UNDER THE BUSINESSOWNERS COVERAGE FORM

BP 04 15–Spoilage Coverage Analysis

BP 04 15–Spoilage Coverage insures loss or damage to stock that spoils because of a power outage and/or breakdown and contamination. The endorsement schedule must include the location and a description of the perishable stock, the limit of insurance and  the deductible amount. Either yes or no must be checked as to whether a refrigeration agreement is in effect. The last item is  the causes of loss that apply. These are not the causes of loss on the rest of the property form. There are only two causes of loss. Breakdown or contamination is one cause of loss and the other is  power outage.

Perishable stock is not limited to only refrigerated goods and merchandise. It can include any property that requires climate control and could therefore  be damaged if the controlled climate changes.

The cause of loss “power outage” is not defined as applying either on site or off site and most power outage situations are covered, with five exceptions:

The cause of loss breakdown or contamination  applies when the climate changes because the equipment that provides the climate control breaks down Stock contaminated by the refrigerant used to control temperature is part of this cause of loss. If this coverage option is selected, the named insured can agree to purchase a refrigeration maintenance agreement. However, such agreements scheduled on the endorsement create a warranty situation and a lapse in it also causes coverage to lapse.

BP 04 56–Utility Services–Direct Damage Analysis

BP 04 56–Utility Services–Direct Damage covers property damaged because of a covered cause of loss at a utility service provider.

Note: This analysis is of the 07 13 edition of this endorsement. Changes from the 01 10 edition are in bold print.

Endorsement 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 interruption.

Locations and Buildings Covered

This section 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/or premises on the declarations are removed.

Covered Property

The covered property must be described. This can be building, personal property, or personal property of others. Any or all can be covered. The definitions of building and personal property as covered property must be considered carefully.

Utility Service(s) Covered

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

The named 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?

The named insured must completely understand its needs with respect to loss or damage that off-premises utility providers sustain. It must know the utility services that are important and that could potentially cause damage. Careful review is necessary because of this and related issues.

Utility Services Limit of Insurance

If there is not a limit, the limit of insurance on the declarations that is 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 may be appropriate because the premium is based on the limit of insurance.

A. Coverage

The coverage this endorsement provides is interesting and must be examined carefully. 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 power being interrupted. As with all coverages, there is a restriction but this one relates to how the utility interruption occurs. The utility service must be interrupted because the utility sustained direct damage by a covered cause of loss.

If 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 named insured’s covered property that can be traced directly to the interruption in service. This means that the exclusions in BP 00 03 described above do not apply to this endorsement.

In addition, none of the other exclusions apply. Spoilage is a good example. The Businessowners Coverage Form excludes loss caused by or that results from extremes in temperature and also from consequential loss. However, this endorsement can provide coverage as long as covered property was damaged because service was 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 usually excluded. In another situation, this endorsement's coverage applies if artificially generated electrical current (including arcing) is the direct result of the service being interrupted. This is because there are no specific exclusions.

The key to this endorsement providing effective coverage is making the proper entries on the endorsement schedule. The schedule indicates what is covered and what is not covered and should not be completed without considering and evaluating all possible scenarios.

B. Exception

The only exception that applies to the insured's covered property involves loss or damage to electronic data. This includes such data becoming corrupted. There is no coverage for destruction, corruption, or any other type of loss or damage to electronic data. As a result, coverage does not apply if the insured does not back up its computer data, even when this endorsement is attached. The insured should consider a separate electronic data processing coverage form or policy to cover this situation.

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 schedule are defined.

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

1. Water Supply Services

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

2. 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 these. The types of property are transmission lines, coaxial cable, and microwave radio relays. Communication property includes satellite dishes but excludes satellites themselves. Overhead transmission lines may be included or excluded, depending on how the endorsement schedule is completed.

3. 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.

D. Transmission Lines (07 13 addition)

Transmission lines as used in this endorsement include all lines that transmit power, communication, or service. A distribution line is one type of transmission line.

E. Limits of Insurance

The last element is how the limit is applied.

Purchasing BP 04 56–Utility Services–Direct Damage does not provide any additional amounts of coverage. It simply eliminates a gap in coverage on the 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 named insured receives is $100,000 for the combination of fire and utility services.

BP 04 57–UTILITY SERVICES–TIME ELEMENT ANALYSIS

Note: This analysis is of the 07 13 edition of this endorsement. Changes from the 01 10 edition are in bold print.

BP 04 57–Utility Services–Time Element is very flexible. It offers several options the named insured can select to cover the type or types of utility interruption coverage it desires. The options available are:

Communication Supply Property or Power Supply Property coverage requires that the named insured decide if it wants coverage to apply to damage to overhead transmission lines. Downed power lines are frequently the reason that communications and power is interrupted. However, there is a significant premium charge to insure them.

An unusual feature of this endorsement is that a business income coverage limit of insurance must be entered. This limit replaces the 12-month actual loss sustained treatment that the Businessowners Coverage Form provides but only for this endorsement. This limit should be based on reasonable estimates of the length of time that an interruption of service will result in lost income, extra expense, or both.

A. Coverage

BP 04 57 covers loss of income or extra expense because covered utility services are interrupted due to a covered cause of loss that occurs at the covered premises. The interruption must result from direct physical loss or damage to the utility service listed on the endorsement schedule. The direct physical loss or damage must be to utility property located outside a covered building listed on the endorsement schedule.

B. Exception

The coverage provided does not apply if the utility service interruption damages, destroys, or corrupts electronic data as the Businessowners Coverage Form defines. Coverage for electronic data is available in electronic data processing coverage forms or policies.

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 schedule are defined.

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

1. Water Supply Services

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

2. Wastewater Removal Property (07 13 addition)

This is not a system whose primary function is to drain storm water. It is utility property such as sewer mains, pumping stations, and other facilities that remove wastewater and sewage from the premises this endorsement lists and describes. This term includes any facility that holds, treats, or disposes of wastewater or sewage.

However, heavy rainfall or flooding may cause water or sewage discharge that results in service to the premises being interrupted. In that case, there is no coverage for that interruption.

3. 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 these. The types of property are transmission lines, coaxial cable, and microwave radio relays. Communication property includes satellite dishes but excludes satellites themselves. Overhead transmission lines may be included or excluded, depending on how the schedule is completed.

4. 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 schedule is completed.

D. Transmission Lines (07 13 addition)

Transmission lines as used in this endorsement include all lines that transmit power, communication or service. A distribution line is one type of transmission line.

E. Limits of Insurance

The limit of insurance on the endorsement schedule applies in place of C. Limits of Insurance in the Businessowners Coverage Form. This means that a specific limit applies to this endorsement instead of the standard 12 months limit of coverage.