By Roy McCormick

Last fall several major storms off Lake Michigan felled trees in northern Michigan vacation areas, resulting in downed power lines and damaged power company equipment. Despite the immediate response of skilled linemen and engineers, service remained suspended for lengthy periods; and eyes were opened to the food spoilage problem encountered by grocery stores in many villages and towns.

This scenario is experienced all over the country when the power supply fails during storms, tornadoes, hurricanes, floods, earthquakes or other disasters. An inevitable consequence is the loss to many commercial insureds of perishable stock requiring refrigeration or other temperature control. The grocery store or supermarket with its large inventory of meat and refrigerated and frozen foods is but one example. Other enterprises with the exposure range from small stores to giant installations, including retailers, wholesalers, distributors, storage facilities, manufacturers, service, health care providers and others. The special risk warrants careful attention by insurance providers.

In general, basic commercial property insurance does not cover loss due to failure of power or other utility service to the described premises if the failure occurs away from the premises. If, for example, lightning were to strike utility equipment or heavy snow were to fell a power line not on an insured grocery's premises, there would be no coverage for spoilage of meat and frozen foods caused by the resulting power outage.

Note, however, that if the failure of a utility service results in a covered cause of loss (such as fire), there is coverage for loss or damage from the covered cause of loss.

The exclusion for the consequences of utility services interruption is common to all of the major commercial property insurance forms that we have reviewed, with language variations but similar intent. This includes the pertinent forms and businessowners policies drafted by the Insurance Services Office and the American Association of Insurance Services.

Spoilage coverage is available by endorsement, subject to company underwriting discretion. Power outage protection insures against spoilage losses occurring due to a change of temperature or humidity resulting from complete or partial interruption of electrical power either on or off the premises, if due to conditions beyond the insured's control. Our focus is on the breakdown of utility service, but it should be noted that spoilage endorsements, in general, cover losses generated within the described premises, if due to conditions beyond the insured's control.

Specific exclusions in such endorsements apply to loss caused by: the disconnection of refrigeration, cooling or humidity control systems from the source of power; deactivation of electrical power caused by manipulation of a switch or other device used to control the flow of electrical power or current; inability of an electrical utility company or other power source to supply sufficient power due to lack of fuel or government order; the inability of a power source at the described premises to provide sufficient power due to lack of generating capacity; the breaking of any glass that is a permanent part of any refrigerating, cooling or humidity control unit.

A significant condition of endorsement coverage is that the insured must maintain a refrigeration or service agreement. Insurance under the endorsement is suspended if the insured terminates such agreement and does not notify the insurer.

The effect of the pertinent basic policy exclusion in the wake of power outage caused by storms, and the importance of spoilage coverage available by endorsement have been made clear by decisions of the higher courts. Guidelines are provided, for example, by Mapleton Foods, Inc., et al. v. Motorists Mutual Insurance Company; No. 68158; Court of Appeals of Ohio, Eighth District, Cuyahoga County; June 5, 1995. Particulars are found in 662 North Eastern Reporter 2 d 48.

High winds and severe storms struck northeastern Ohio on July 28, 1993, causing power outages and food spoilage at (among others) grocery stores owned by two firms. Each of the two firms carried businessowners special property form policies with the same insurer, one endorsed with spoilage coverage in a nominal amount, which was paid by the insurer.

Both insureds sued to recover losses from spoilage under the basic policy coverage, contending that the pertinent exclusion for such loss caused by failure of utility service away from the described premises was ambiguous. The trial court found that tripped breakers at utility substations serving the stores caused the outages. It concluded that the spoilage claims were not covered and pointed out that both insureds were aware that spoilage coverage was available. The appeal court affirmed the trial court's judgment.

Because perishable stock is defined as personal property maintained under controlled conditions for its preservation and is susceptible to threatened loss or damage if these conditions change, the list of commercial insureds with a spoilage exposure extends beyond groceries and supermarkets. This list includes: food retailers, wholesalers, distributors and storage facilities; health care providers such as hospitals, clinics, doctors' offices, blood banks and medical supply services; manufacturers and retailers of many kinds, including pharmaceutical companies. Agents need only review their account files to single out those who may need protection against spoilage.

Some insureds have efficient auxiliary (backup) power facilities. Hospitals and large firms engaged in the storage of frozen foods are obvious examples. Many businesses of all sizes have contracts with service companies to maintain and service refrigeration and other temperature control equipment. Insureds with backup power and/or service arrangements may conclude that they do not need the optional insurance protection.

However, auxiliary power equipment varies in reliability, and service companies may not be able to respond immediately to all of their customers' refrigeration problems when storms interrupt utility power. If some of your insureds have a spoilage loss exposure, it is important to advise them of the availability of insurance protection. The courts in the case cited above made this clear! *