The Rough Notes Company, Inc., is not legal counsel and we cannot give legal advice. What we can do is offer some things to think about with regard to the question presented and one possible interpretation of some of the coverage forms.
Q Please advise if there are any court decisions or information regarding whether or not the electric service line from the pole to the building is regarded as part of the building.
Our claim is based on a windstorm loss. A tree blew down. It fell and broke the service line. The line broke 6" from where it entered the conduit to enter the building. The power was out for four days.
The carrier denied the business interruption loss because there was no direct damage to the building.
A The two main keys to coverage for loss from damage to utility service or power transmission lines in a standard ISO-based policy are:
1. The occurrence of the accident or event that causes damage must be a covered peril or cause of loss.
2. The damage to the utility service or power transmission line must be on premises.
In the case of your insured, the tests of coverage are:
1. Is the insured covered by an ISO or ISO-based or other standard property coverage form?
2. Is the peril or cause of loss covered? Windstorm would be in any ISO-based policy, whether Basic, Broad or Special.
3. Did the damage to the power line occur on premises? From the description provided (6" from where it entered the conduit to enter the building), it sounds like that may be the case. However, without a diagram or other such validation, again, the damage must be on premises.
4. Are there any exclusions, endorsements or other unique provisions or limitations that are not normally a part of a standard ISO-based policy?
We hope that the answers to these questions will help you to determine whether or not to pursue the claim further.
What follows are two articles from PF&M on the subject and one applicable court decision.
The Businessowners Policy and Off-Premises Power Losses
Background
Considerable discussion revolves around off-premises power losses in the Businessowners Program (BOP), specifically, items such as low or high voltage spike damage and lightning strikes that hit off premises but run on premises. Many of those concerns revolve around what coverage is in a BOP for the property damage incurred. Some of the common loss exposures include:
1. Lightning strikes line or pole across alleyway, runs into premises, damaging either computers or phones or both. It may also burn out compressors in refrigeration equipment, furnaces, air conditioners or other electrical devices.
2. Power spike or the more common low voltage from brownout at power plant. This can cause damage to the same types of items mentioned in the previous exposure.
3. Lack of water or telephone service can render a business inoperable but, at least in this case, there is no significant property damage.
Power failure exclusion in the BOP
Under BP 00 02--Businessowners Special Property Coverage Form, B. Exclusions, the policy states:
1. e. Power Failure
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, we will pay for the loss or damage caused by that Covered Cause of Loss.
and:
2. We will not pay for loss or damage caused by or resulting from any of the following:
a. Electrical Apparatus
Artificially generated electrical current, including electric arcing, that disturbs electrical devices, appliances or wires.
But if artificially generated electrical current results in fire, we will pay for the loss or damage caused by fire.
Based upon these two exclusions, all three of the scenarios mentioned would be excluded in a BOP. The only coverage would be for any resultant damage that occurs because of a covered cause of loss (such as fire).
How to cover
So what can be done in the Businessowners Program? Here are some options:
1. One method of handling this type of exposure is a company-specific manuscript or tailoring endorsement. Many insurers that offer BOP programs have developed modifying endorsements that can be purchased for additional premium. However, many companies have not.
2. ISO developed some endorsements to its Businessowners Program in 1997, which have been approved in a number of jurisdictions. One is BP 04 56--Utility Services--Direct Damage. In this endorsement, the insured may select coverage for a variety of types of utility services including: water supply property; communication supply property (not including overhead transmission lines); communication supply property (including overhead transmission lines); power supply property (not including overhead transmission lines); and/or power supply property (including overhead transmission lines).
The coverage grant states:
We will pay for loss of or damage to Covered Property described in the Schedule, 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 property described in Paragraph B. if such property is indicated by an "X" in the Schedule and is located outside of a covered building described in the Declarations.
So, if one of the selected and scheduled utility services experiences a covered cause of loss such as lightning, and that loss results in direct property damage (to covered property) of an insured, there is coverage unless otherwise excluded.
The other endorsement is BP 04 57--Utility Services--Time Element, and the endorsement states:
We will pay for loss of Business Income or 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 property described in Paragraph B. if such property is indicated by an "X" in the Schedule and is located outside of a covered building described in the Declarations.
These endorsements provide additional coverage but may not be the entire solution because mechanical breakdowns are still excluded. So this option plus the following option may both be considered for broader, better protection.
3. A third consideration would be a small business boiler and machinery policy. Don't let the boiler in the title mislead you. These "boiler" and machinery programs provide solid, comprehensive machinery protection for risks that have nothing to do with boilers. The machinery insurance offered should be combined with a utility interruption endorsement to achieve the desired protection.
ISO has such coverage available in its boiler and machinery program. Many insurers have company-specific endorsements or other options for small businesses. Serious consideration should be given to this type of coverage whenever machinery, including computers and data processing equipment, is involved.
Utility Service Coverage in the Commercial Property Form and CP 04 17--Utility Services--Direct Damage
Background
What happens when wind knocks down power lines causing general power outages and specifically causing damage to electrical cooling equipment (compressors, motors, switches, etc.) at an insured premises further resulting in food spoilage? What is and is not covered by the commercial property policy? This has always been an item of concern but one which has grown in intensity, as weather-related and climatic events seem to be occurring with greater frequency.
Damage to equipment is another issue. Is there coverage for equipment damage caused by power surges or interruption of utilities from off-premises services? If yes, under what circumstances?
These are legitimate concerns that need to be analyzed and addressed.
Commercial property exclusions
To start, we will first look at CP 10 30--Causes Of Loss--Special Form and the specific exclusion regarding power and utility services:
B. EXCLUSIONS
1. We 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 cause or event that contributes concurrently or in any sequence to the loss. . .
e. Utility 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 the failure of power or other utility service results in a Covered Cause of Loss, we will pay for the loss or damage caused by that Covered Cause of Loss.
This exclusion does not apply to the Business Income coverage or to Extra Expense coverage. Instead, the Special Exclusion in paragraph B.4.a.(1) applies to these coverages...
With this exclusion, we have a situation where wind, lightning or storm loss or damage occurring directly to insured property is covered since wind, lightning and storm are causes of loss insured. The commercial property policy protects covered property from direct physical damage loss.
We also have protection for power or utility failures that result from direct wind, lightning or storm damage to on-premises power lines, transformers, pumps, etc.
However, power or utility failures that result from storm damage to off-premises power lines, transformers, pumps, etc., that ultimately result in damage to covered, on-premises property--real or personal--is not covered.
So losses such as damage to electrical cooling equipment, compressors, motors, switches, etc., would not be covered in an unendorsed commercial property policy.
Exclusion 2 of CP 10 30 contains two items that further detail what is not covered:
2. We will not pay for loss or damage caused by or resulting from any of the following:
a. Artificially generated electrical current, including electric arcing, that disturbs electrical devices, appliances or wires.
But if artificially generated electrical current results in fire, we will pay for the loss or damage caused by that fire..."
and:
d. (6) Mechanical breakdown, including rupture or bursting caused by centrifugal force. But if mechanical breakdown results in elevator collision, we will pay for the loss or damage caused by that elevator collision.
As to spoilage--without endorsements attached, the commercial property policy excludes such damage. Look at Exclusion 2.d.7.:
Exclusion 2. . . .
d. (7) The following causes of loss to personal property:
(a) Dampness or dryness of atmosphere;
(b) Changes in or extremes of temperature; or
(c) Marring or scratching.
Changes in temperature extremes (such as occurs when cooling and refrigeration systems lose power, thus causing spoilage) resulting from power outages caused by wind, lightning or other damage to off-premises utility and power sources are not covered.
Utility services--direct damage--CP 04 17
Now let's look at CP 04 17 06 95--Utility Services--Direct Damage. This is an endorsement designed to provide coverage options for additional premium for certain types of losses excluded in the commercial property program.
Schedule
A critical part of the analysis of what is covered by this endorsement is an understanding of the schedule found in CP 04 17.
Utility Service(s) Covered: The first significant item on the schedule is what is and is not covered with respect to utility service providers. The specific type of utility covered must be scheduled. The options are:
* Water Supply
* Communication Supply (not including overhead transmission lines)
* Communication Supply (including overhead transmission lines)
* Power Supply (not including overhead transmission lines)
* Power Supply (including overhead transmission lines)
The insured may select one or more of the utility providers and there is a charge for each selected; however, the selection and scheduling of the utility service is of great importance. If an insured selects only communication supply because the telephone service is more important than electrical power, there would be no coverage if a storm damaged off-premises electrical power lines but the underground telephone lines remained unharmed.
Likewise, if power supply is scheduled but does not include overhead transmission lines, there would be no coverage if only a power line was damaged from a falling tree but the rest of the system (transformers, substation, switching plant, etc.) remained unharmed.
Therefore, the insured must have a full understanding of what his/her needs are with respect to loss or damages that may be sustained by off-premises utility providers. Which utility services are critical and could cause potential damage? Careful review is necessary.
Locations and Buildings Covered: Next in the schedule is the list of the locations and buildings to be covered. Again, scheduling is important. Example: Look at an insured with one location but two buildings on premises. Should only location one, building one be scheduled and the loss occurs to location one, building two, there is no coverage. All locations and structures to be covered must be scheduled.
Real vs. Personal Property: The next item in the schedule is whether or not the coverage will apply to real property, personal property or both. If the insured needs coverage for items that are considered part of the building structure, real property must be scheduled. It is the same with personal property or both.
Cause of Loss Covered: The final item that must be scheduled is the cause of loss form. This can be different than the cause of loss form applying to the rest of the commercial property coverages in order to save premium expense for the insured. The insured may decide that utility service protection is desired only for specified causes of loss such as lightning and wind and thus the basic cause of loss form may be selected.
Coverage Grant
Look now at the coverage grant in CP 04 17:
A. We will pay for loss of or damage to Covered Property described in the Schedule, 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, not on the described premises, if indicated by an "X" in the Schedule:
If an off-premises utility suffers direct physical damage from a covered cause of loss (the cause of loss selected for this endorsement--not necessarily the cause of loss applying to the covered property), and this damage results in interruption of service, the subsequent damage to covered property is covered.
This is an interesting coverage grant that needs to be examined more closely. Covered is the loss of or damage to covered property that results from an interruption of service. There are no stated exclusions, such as those found in CP 10 30, regarding what type of loss or damage is or is not covered once the off-premises utility has interrupted service. Specifically, the coverage grant does not state that the only covered loss or damage from interrupted service is that loss or damage that results--excluding arcing, spoilage or mechanical breakdown. It is silent on any such exclusions. This is extremely important.
The direct damage to the off-premises utility service is subject to the selected cause of loss form and covered perils but, again, once service is interrupted and damage or loss occurs to the insured's covered property, there are no stated exclusions or limitations. Thus, it would appear that as long as the proximate cause of loss resulting in direct physical damage to the off-premises service is a covered cause of loss, any such resultant loss or damage to the insured's covered property that can be traced directly to the interruption in service would be covered.
Spoilage is a good example. While loss from temperature extremes is excluded in the cause of loss form, if spoilage results directly from the interruption in service, it is covered via this endorsement (should the endorsement be properly scheduled).
The same is true of electrical arcing. If the utility provider interrupts service because the provider has suffered direct physical damage loss from a covered cause of loss, the loss of or damage to covered property from the interruption of service is covered. If artificially generated electrical current including arcing, etc., is a direct result of the interruption of service, it would appear to be covered via CP 04 17 and its coverage grant containing no specific exclusions.
Key to coverage in CP 04 17 is the scheduling. It tells what is and is not covered and must be completed with a great deal of thought and foresight.
Covered Property--Utility Services
The endorsement describes what is considered to be covered property for each of the utility services that may be scheduled. For example:
1. Water Supply Services, meaning the following types of property supplying water to the described premises:
a. Pumping stations; and
b. Water mains.
2. Communication Supply Services, meaning property supplying communication services, including telephone, radio, microwave or television services to the described premises, such as:
a. Communication transmission lines, including optic fiber transmission lines;
b. Coaxial cables; and
c. Microwave radio relays except satellites.
It does not include overhead transmission lines unless indicated by an "X" in the Schedule.
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.
It does not include overhead transmission lines unless indicated by an "X" in the Schedule.
What is covered?
So what does all this mean? Without CP 04 17 or its equivalent, there is no coverage in an otherwise unendorsed commercial property policy for spoilage or damage to covered property that results from damage to utility services that occurs off premises.
Even with CP 04 17, care must be given to scheduling to provide desired coverage. The key items of concern are the scheduling of the utility service, whether or not to include overhead power transmission lines, the scheduling of the insured's property in the endorsement, the selection of real or personal property or both, and finally the causes of loss selected.
Example:
The insured has one location with two buildings. Building #1 is storage with older, walk-in freezers; building #2 is storage including a large stand-alone freezer.
Insured purchases CP 04 17, selects power utility--with overhead transmission lines, building #1 only, personal property only, special causes of loss.
Wind pulls down power line, there is a power outage causing spoilage in both buildings and equipment damage to the older freezers in building #1 when the power restarts.
The walk-in freezers in building #1 are not covered; they are permanently built in and attached to the building and thus are real property. The insured did not select real property. The food (personal property) is covered. There is no coverage for food in building #2, because it was not scheduled.
If the insured had purchased real and personal property for both buildings, more of the loss would have been covered.
Limit of Insurance
Finally, we must look at the application of the limit.
B. If a Utility Services Limit of Insurance is shown in the Schedule, such limit is part of, not in addition to, the Limit of Insurance stated in the Declarations or in the Separation of Coverage endorsement as applicable to the Covered Property.
If no Limit of Insurance is shown for Utility Services, coverage under this endorsement is subject to the applicable Limit of Insurance on the Covered Property as shown in the Declarations or in the Separation of Coverage endorsement. But this Utility Services endorsement does not increase the applicable Limit of Insurance.
Purchase of CP 04 17 does not give an additional amount of coverage on top of that already shown; it merely provides broader causes of loss for the existing covered property. So if the building limit is shown at $100,000 in the declarations and CP 04 17 is added for $100,000, the insured cannot collect $100,000 for a fire that occurs plus an additional $100,000 if an off-premises utility service interruption occurs at the same time. The maximum available is $100,000.
It is important to note that the limit shown in CP 04 17 will act as a sub-limit if it is less than the total amount shown. So in the same scenario where the building limit is shown at $100,000 in the declarations and CP 04 17 is added for $10,000, the most the insured can collect for a loss from utility service interruption is $10,000. Should a major fire loss also occur at the same time, the remaining $90,000 is available for fire.
Related court case
Multi-peril property insurance included in a commercial package policy carried by a supermarket company was subject to the following exclusion: "This policy does not insure under this form against loss caused directly or indirectly by the interruption of power or other utility service furnished to the designated premises if the interruption takes place away from the designated premises. If a peril insured against ensues on the designated premises, this Company will pay only for loss caused by the ensuing peril."
A substantial loss was incurred as a result of food spoilage in two of the insured's stores caused by windstorm generated by a hurricane. There was loss of electrical power for almost a week in a wide area in which both stores were located. The insurance company appealed a trial court judgment favorable to the insured on its claim, the court having found the exclusion ambiguous.
The Rhode Island Supreme Court cited Pressman v. Aetna Casualty & Surety Company, 574 A.2d 757 (R.I. 1990). It said: "In Pressman, we considered a similar exclusion to that advanced in the case at bar. We observed that in effect this exclusion would preclude coverage in almost any circumstances unless the insured had his or its own generator located inside the building. We asserted that this result would be unconscionable. It would render the multi-peril coverage in respect to power interruption illusory ... We further held that the terms should be read in the same sense that the insurer had reason to believe would be the way they would be interpreted by the ordinary reader and purchaser."
The court said that the result would be the same as the one it condemned in the cited case if the power interruption clause were interpreted to be applicable only to interruption caused on the insured premises. Noting that, with respect to the exclusion, coverage was provided for an ensuing peril, it was of the opinion that the food spoilage was caused by "the protracted inability to restore power due to the severity of the hurricane damage" rather than by "a momentary interruption in power." This was found to be an ensuing peril.
The court concluded that the insured had reason to believe, and that the ordinary reader would believe, that coverage was provided for a loss of the kind that occurred by virtue of the policy provisions. The judgment of the trial court was affirmed in favor of the insured and against the insurance company.
Jerry's Supermarkets, Inc., Appellee v. Rumford Property and Liability Insurance Company et al., Appellants. Rhode Island Supreme Court. No. 89-225. February 14, 1991. CCH 1991 Fire and Casualty Cases, Paragraph 2998.
Q We write a number of financial institutions in the area. In recent years most of the larger financial institutions have been bought by out-of-state banks, so we now write mostly small town banks ranging from $20 million to $100 million.
Most banks farm out their data processing, but we have one bank in the $20 million range that does everything "in house." The insurance program we have for this bank includes a commercial package policy providing insurance on the bank building, $94,000 on business personal property, special covered cause of loss with $500 per occurrence deductible, commercial general liability and an endorsement to add special coverages for electronic data processing equipment and boiler and machinery breakdown. The electronic data processing endorsement is for $160,000 on data processing equipment and information systems and the equipment, component parts and related peripheral equipment including air conditioning and fire protection equipment used solely for data processing operations along with $5,000 on laptops, notebooks or similar equipment and $25,000 while in transit to or from covered locations, subject to a $500 per occurrence deductible.
Also attached to the Commercial Union Insurance Company policy is their Nameplate boiler and machinery insurance providing the typical broad coverages for an unlimited amount of insurance subject to a $500 per occurrence deductible.
In addition to the above coverages the bank has a hardware service contract for parts and labor and a software contract covering banker application software and the Unix operating system. We know there is overlapping coverage, but we wonder if there is overkill with the service contracts, electronic data processing and boiler and machinery coverage.
A You are correct with your assessment that there is an overlap in the coverages provided. On the other hand, each of the coverage items mentioned has its own pertinent set of coverage items in what it provides, so to offer full protection to a client, pieces and parts of all of the types of protection mentioned are necessary.
One side note on overlapping coverages: If all of the policies or coverages that provide overlapping coverage are with the same insurance carrier, the insured should be able to legitimately expect some pricing breaks on the redundancy.
Maintenance contracts always are good ideas where they are affordable and make sense. Maintenance contracts cover losses that often are excluded in insurance policies. For those losses that are covered by both, using the maintenance contract approach instead of insurance helps to keep loss ratios down. So maintenance contracts never should be discounted and replaced by insurance until all of the ramifications have been reviewed.
One good approach to the EDP coverage problem has been developed by AAIS with their Commercial Output Policy (COP). It is a comprehensive property program that has a good, solid equipment breakdown coverage part. A computer endorsement can be attached to the equipment breakdown coverage part to enhance it with the provisions necessary to address EDP issues.
This type of approach (either an EDP policy with equipment breakdown attached or an equipment breakdown policy with an EDP endorsement attached) appears to be a reasonable, affordable alternative. However, the key is to find insurers that have access to and experience with this approach.
A number of insurers provide good EDP and breakdown coverage. One good source of information is The Insurance Marketplace, a publication of The Rough Notes Company. It is available online at our Web site (www.roughnotes.com) at no cost if you wish to look up some insurers or brokers. *