You might be surprised by what is or is not covered by property insurance if you lose electricity, water, or communication services. Matt Bickford and Laura Rickman uncover a hidden aspect of protecting your business: the connection between your physical property and the essential utilities that keep it running. They explain why these matter and offer practical tips to ensure your business stays resilient, even when faced with unexpected challenges.
Property Insurance
When business owners assess threats to their property(ies) and operations, this assessment must include direct physical threats to their own properties and buildings but also indirect threats, such as damage that could be caused if their water, power, or communications supply becomes unavailable for a period of time. Businesses must review and negotiate coverage extensions and appropriate sublimits on their property policy for utility/service interruption, which can provide coverage for both direct physical damage and time element business interruption losses that result from a covered direct physical loss or damage that occurs at their premises or to physical damage away from their premises if this results in an interruption, failure, or fluctuation of services to their premises. While some carriers may expand the covered cause of loss related to service interruption coverage due to any accident (e.g. operator error at power plant), typically, it only applies when the initial damage or loss is caused by a covered peril (e.g. fire at power plant).
This coverage is typically provided with a sublimit and is subject to a waiting period such as 24 hours, meaning that available coverage does not apply until after the hourly waiting period has passed. To determine an adequate limit, you should estimate your potential direct damage loss (e.g. perishable products) plus loss of earnings that could result if you lose service for multiple days. For example, some businesses like grocery stores and manufacturers or distributors of perishable goods could suffer substantial losses from spoiled inventory if electricity is not available for a period of time. Most businesses could come to a virtual standstill if internet service is out for an extended period, though coverage for data and communications services is often better handled under system failure or dependent system failure under a cyber liability policy as property carriers may either exclude or apply a very low sublimit. You should also determine likely extra expenses from damage to your equipment, inventory, or in-process product caused by a specific utility interruption and ensure that your policy includes spoilage coverage for loss of perishable goods.
Since insurers treat this coverage differently, with great variations in terms and conditions, the specific coverage grant is very important. For example, while often excluded, service interruption coverage can sometimes include overhead transmission lines as covered property, but typically this must be specifically added.
In addition to reviewing and negotiating limits, business owners should assess and match their exposures in the policy to the new reality of likely perils caused by climate change. Changing weather patterns have brought new risks of wildfire, flooding, and damaging windstorms to areas previously little affected by such events and could lead to interruptions of business resulting from loss of utilities, though business owners should be aware that service interruption coverage typically excludes, or limits coverage caused by such catastrophic perils.
It’s also important to remember that property insurance is only one part of a comprehensive risk management program. Businesses should consider augmenting their insurance program with supplemental systems such as installing backup generators and contracting with alternate sourcing suppliers prior to a loss for services critical to their operations.
