Power interruptions could impact you wherever you are. As virtually the entire northeastern United States and part of Canada recover from the largest power system failure in our nation’s history, and Atlantic coast regions suffer lengthy power failures caused by Hurriance Isabel, numerous policyholders have suffered losses. And there is no guarantee that another power outage will not take place before the grid system is overhauled. Smaller, more localized blackouts, due to weather, human or mechanical failure, or designed “rolling blackouts,” are a regular fact of life. These power disruptions may spell serious problems for businesses nationwide. Imagine, for example, that you’re a large dairy with thousands of gallons of milk needing constant refrigeration. Or that you’re a semiconductor manufacturer with hundreds of silicon wafers in mid-production in your “clean
room.” If the electric stops flowing, you stand to lose and to lose big. That’s the bad news.
The good news is that you may have insurance that will cover the losses you have suffered or might suffer in the future. Your property insurance may provide coverage.
Your Property Insurance Policies May Cover Your Loss
Property policies can cover policyholders for damages suffered as a result of damage to both tangible and intangible property. Tangible property runs the gamut from items in production to inventory to business records. Intangible property includes anticipated profits and income. Under most property policies, the insurance company promises to pay for financial loss caused by direct physical damage to insured property or loss of use of insured property.
Business Interruption Coverage and Service Interruption Coverage
Business Interruption, or BI, insurance is designed to protect policyholders who have to suspend their business or production, resulting in lost sales and loss of profits. It also should reimburse policyholders for expenses that continue despite the cessation of income, such as salaries, taxes, rent, professional fees, certain utility charges and insurance premiums. BI insurance is intended to do financially for the policyholder just what the business would have done had the interruption not occurred.
While specific policies differ, BI insurance generally provides coverage when there is: (1) loss; (2) resulting from business interruption; (3) caused by direct physical loss of, or damage to, property or loss of use of insured property; (4) caused by a covered peril.
Although property policies sometimes exclude BI coverage for power interruptions, coverage may be bought back with a “service interruption” provision. Service interruption coverage is designed to provide coverage for business income losses attributable to dislocation of utility or telecommunications service, often including electric power services. A business’s costs in avoiding or minimizing service interruption losses should also be covered, under contingent extra expense coverage, or under provisions in the policy promising to pay for a policyholder’s efforts to avoid or minimize loss. Such clauses — which come in many varieties, including “sue and labor” and “expense to reduce
loss” provisions — simply reinforce the established “loss mitigation” rule of insurance law, which holds that a policyholder’s costs in avoiding or mitigating covered losses are themselves covered. As discussed below, the mitigation provisions in your policy can be critical.
The Court of Appeals of North Carolina recently affirmed an award to a policyholder and against an insurance company for losses incurred as a result of a loss of electricity due to hurricane flooding, under just such a policy with a service interruption clause. Great American Insurance Company, v. Mesh Café, Inc., 580 S.E.2d 431 (Table), 2003 WL 21267942 (N.C. App. Unpublished Disposition June 3, 2003). The insurance policy in Mesh Café provided that:
When indicated in the Declarations that this Coverage applies, we will pay for loss of Business Income or Extra Expense, caused by the interruption of service to the described premises. ...
(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;
(e) transmission lines.
The appellate court affirmed the decision of the trial court which found that, “Mesh Café, Inc. suffered loss of business income based upon interruption of water and power supply based upon direct physical loss to the water supply stations and electric power supply stations providing power to Mesh Café, Inc.’s restaurant business, and therefore Mesh Café, Inc. had coverage under its policy with Great American for its losses.” In another case, a federal court in Arizona confirmed business interruption insurance coverage when a power outage caused a policyholder’s mainframe computers to lose information. The court recognized coverage for the substantial amount of lost business. Am. Guar. & Liab. Ins. Co. v. Ingram Micro Inc., 2000 WL 726789 (D. Ariz. Apr. 18, 2000), appeal dism’d, No. 00-80913 (9th Cir. Aug. 14, 2000). The court rejected the insurance company’s argument that there was no “physical damage” to the policyholder’s property because the computers could be reprogrammed and functionally restored. The court ruled that loss of use and functionality of the computer system for a period of time constituted covered “physical damage” under the policy.
In addition to the coverage provided by service interruption provisions, applicable insurance often provides coverage for “Extra Expenses,” defined as:
The excess of the total cost during the policy period of restoration of the damaged property chargeable to the operation of the insured’s business over and above the total cost that would normally have been incurred to conduct the business during the same period had no loss occurred.
This provides coverage for all necessary emergency expenses incurred, over and above ordinary fixed operating costs, to continue as nearly as possible the normal conduct of the policyholder’s business. Among other things, these expenses may include the cost of paying for emergency generators or alternative power sources, extra compensation to employees, additional rent at a temporary location, and other miscellaneous costs.
One critical point — policyholders entitled to insurance coverage might have to take steps to minimize their losses. Policies sometimes include express mitigation provisions. If your policy contains this condition, your recovery may be reduced if you do not reduce your losses.
What You Should Do If An Energy Interruption Causes You A Loss:
- Take Immediate Steps To Minimize Your Damages. As noted, your insurance policies might expressly condition your recovery on your taking steps to minimize your loss.
- Locate and Read Your Policies. Getting your coverage depends on knowing your coverage. Many different types of property insurance policies contain coverage for your loss. Know your coverage and know who sold it to you.
- Give Notice of Your Claim or Loss As Soon As Possible. Timely notice is a requirement under most insurance policies. Too frequently, policyholders forget to notify their insurance companies. If you have a loss, notify your insurance agent or broker and your insurance company as soon as possible.
- When You Make A Claim, Don’t Take “No” for An Answer. Insurance companies routinely deny claims, even if they ultimately have no basis for doing so. Be persistent — the difference between coverage and non-coverage often is directly related to the determination and persistence of the policyholder.