Articles and videos commemorating the one-year anniversary of Super Storm Sandy are all over the news and Internet this week (including today's issue of IIABNY Insider.) The insurance industry paid out an estimated $18.75 billion in insured property losses from the storm that ravaged the east coast a year ago yesterday. I want to talk today about a coverage that gets relatively little attention, and the surprise that some business owners who bought it got after Sandy.
Many businesses and organizations may suffer financial losses if their water, communications or power supplies fail. Usually, such outages are short-term -- a few hours or perhaps a day, at worst -- but a longer term loss of these services spells trouble. Restaurants and grocery stores have to throw out meat and other fresh foods if they lose refrigeration for any appreciable length of time. Lose water supplies and most public buildings have to close due to health considerations. And how many businesses can remain open without telephone service or Internet access?
Sure, some of these can be mitigated. The business location might be cut off from communications, but some employees might have access at home and can work from there. However, that doesn't help a whole lot if you're in a retail business, a medical facility, a museum, or any other operation that depends on foot traffic.
Fortunately, there are some standard commercial property coverage endorsements available to address this problem. ISO endorsement CP 04 17 10 12, Utility Services - Direct Damage and CP 15 45 10 12, Utility Services - Time Element, and CP 04 40 06 07, Spoilage Coverage all provide coverage for losses resulting from loss of power, water, and/or communications arising from a site off-premises. (These endorsements go with the Building and Personal Property Coverage Form, but there are similar versions for the Businessowners Policy, aka "BOP".) The spoilage endorsement covers direct damage to covered property resulting from breakdown or contamination, power outage, or both. If you store perishable food, medicine that must be refrigerated, flowers, or anything else that depends on a controlled climate, you need this endorsement. The utility services endorsements provide direct damage or business income/extra expense coverage for losses resulting from loss of water supply, loss of power supply, and/or loss of communications services. The insured can pick one, two or all three. In addition, the insured has the option to include losses resulting from downed overhead transmission lines (for communications and power.)
Now for the kicker. These endorsements provide coverage if the power outage or other outage was caused by a covered cause of loss. If your Internet access goes down for two weeks because of a fire at the provider's access point, you should have coverage. However, if the outage resulted from an excluded cause of loss, then there is no coverage. Just to pick one at random -- flooding comes to mind.
Sandy, as those who lived through it well know, generated lots and lots of water. Can you see where this is going?
I personally heard from a broker in the New York City area who insures a lot of small restaurants in Manhattan. I gather that most of them were written on BOPs. The broker told me that different insurance carriers were applying the endorsements in different ways. One carrier was applying the same endorsements in different ways for different properties. Apparently, some electrical substations shut down as a pre-emptive measure as the storm approached. Some shut down because flood waters damaged their equipment. Reportedly, electrical arcing caused an explosion at one. So, there were a variety of causes for the shut downs.
A lot of unhappy restaurant owners were denied coverage for spoilage losses because the power outages were allegedly caused by flood. I haven't heard anything on this issue in some months, but I imagine the disputes continue. Many insureds believe they lost power due to the explosion or the pre-emptive shut downs, not because of flooding. Their carriers are interpreting history somewhat differently.
The takeaway from this? First, these are coverage endorsements that every organization should at least consider. It could be that an auto parts wholesaler doesn't need it, and that's fine, but a lot of organizations may, upon examination, find that it's necessary. Second, those who buy it must be absolutely clear on its limitations. It doesn't cover losses from perils like water and earthquake. Further, there is no standard way to buy back coverage for those perils. The National Flood Insurance Program does not cover consequential loss or loss of business income. Perhaps some excess line markets do, but that will require some searching. It's better if insurance buyers know ahead of time what to expect so they don't get coverage surprises at a time when they're already stressed to the breaking point.
I think we're all breathing a sigh of relief that the Atlantic Hurricane season to date has been subdued. However, the events of October 29, 2012 should serve as a reminder that the worst can happen here. The insurance industry was ready last time, but two things are certain: There will be a next time, and we can't be too prepared for it.