Power outages in ComEd’s service territory have been much in the news of late, and we’ll have more to say about how they’re treated under ComEd’s recent “Smart Grid” legislation. But what happens when a business tries to make a claim under business interruption coverage that it may have under its property/casualty policy?
The standard property/casualty policy provides that the insurer:
…will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other causes or event that contributes concurrently or in any sequence to the loss.
. . .
Off-Premises Services
The failure of power or other utility service supplied to the described premises, however caused, if the failure occurs away from the described premises.
But if failure of power or other utility service results in a Covered Cause of Loss [e.g., fire], [the insurer] will pay for the loss or damage caused by that Covered Cause of Loss.
Under this policy provision, loss or damage caused by an electric utility outage is not covered. But, for an additional premium, the insurance company will sell you a Utility Services – Direct Damage endorsement that covers loss or damage caused by the outage. That’s not the only type of loss a business will experience because without power, they’re literally out of business. So the insurer will sell them a Utility Services – Time Element endorsement under which the insurer covers (or says they’ll cover):
1. Loss of Business Income; or
2. Loss of Extra Expense
at the described premises caused by the interruption of service to the described premises. The interruption must result from direct physical loss or damage by a Covered Cause of Loss to the following property, located outside of a building described in the Declarations, supplying the following services if indicated in the Declarations:
…
3. Power Supply Services, meaning the following types of property supplying electricity, steam or gas to the described premises:
a. Utility generating plants;
b. Switching stations;
c. Substations;
d. Transformers; and
e. Transmission lines.
Coverage does not include loss caused by or resulting from loss or damage to overhead transmission lines unless indicated in the Declarations.
When Utility Services – Time Element coverage is sold to a business one can legitimately ask, as many courts have, what is the reasonable expectation and purpose of the ordinary business-person when making this contract with the insurance company? The sales pitch is that even standard business interruption coverage protects them only from interruptions caused by direct physical loss or damage to the covered premises or to covered business personal property at the covered premises.
The common-sense answer is that the business will be covered for business income losses and related expenses occasioned by a power outage. But that’s not what they’re really getting.
The trick is that the endorsement goes on to carve a hole in the coverage through which the insurer then drives an 18-wheeler: Damage to “overhead transmission lines” is not covered. Most customers don’t realize how big an exception from coverage the “overhead transmission” exception is.
For most people, the infrastructure of the electricity grid blends into the background, and though we pass by it every day we barely take notice of it. However, if you take a look next time you’re driving around, you’ll see that the vast majority of the grid is in fact overhead. The only other place to put a transmission line is underground, but that’s expensive and usually done only in downtown areas and other places in which appearance or a very high safety margin is a paramount consideration. It is impossible for the most common “Covered Cause of Loss” that interrupts utility service – windstorm – to inflict damage on an underground transmission line.
The property/casualty insurers’ sale of the Utility Services – Time Element endorsement is tantamount to a fraud on business customers. There is no doubt that the insurer’s billboarding of lost business income creates in the mind of the customer the impression that if there is a power outage, they’ll be covered for that business interruption loss. The body of the Utility Services – Time Element endorsement even lists transmission lines as one of the covered causes of interruption. But the protection afforded by the Utility Services – Time Element endorsement is almost entirely illusory. The insurance companies are well aware of this, but the customer finds this out only when, after having paid a few years’ worth of premiums, a bad storm comes through the area and he makes a claim.
There are, however, ways to fight back…
Energy Law, Policy and Development 