Summary: This article discusses the nature and scope of the utility services exclusion and coverage endorsements available with the ISO property insurance program. Utility Services—Direct Damage, CP 04 17 06 07 is necessary if coverage is desired against physical loss or damage to covered property stemming from interruption of utility service on or away from the described premises.

Utility Services—Time Element, CP 15 45 06 07 is necessary if coverage is desired for loss of business income and/or extra expenses caused by the interruption of service to the described premises resulting from direct physical loss or damage by a covered cause to the appropriate utility services selected.

Those businesses confronted with possible loss to perishable stock can also obtain coverage via Spoilage Coverage, CP 04 40 06 07 covers loss by the (1) breakdown or contamination from mechanical breakdown or mechanical failure of refrigerating, cooling, or humidity control apparatus, (2) contamination by a refrigerant; or (3) power outage either on or off the described premises.

To make an informed decision about whether to purchase coverage for overhead transmission lines, one needs to determine what precisely these lines encompass and whether they differ from overhead power lines and distribution lines. The endorsements available are not helpful in this regard.

Topics covered: Introduction Exclusion prompts need for coverage Utility services—direct damage coverage Utility services—time element Overhead transmission lines Spoilage coverage Court cases upholding the exclusion Utility service coverage still of no help Conclusion

Introduction

It is not only natural occurrences, such as hurricanes, tornadoes, earthquakes, and other forces of nature, that are potential sources of power outages. Problems inherent in the production process can also be sources of serious damage and consequential loss. For example, a utility power station's transformer that explodes and burns in a remote area of the United States may take hours to replace, thus resulting in the spoilage of foodstuffs in store and warehouses. Another example is when a private water company's supply is curtailed to an industry because of destruction of a pumping station that requires extensive work to replace.

The nature and kind of available coverage required will depend, in part, on the kind of business and its operation, and how its property insurance is currently being managed. With the possible exception of some manuscript policies, most property policies will likely require some kind of form or endorsement to obtain direct damage and time element coverages against the direct physical loss or damage and interruption of utility services.

Exclusion Prompts Need for Coverage

Whether it is the basic, broad, or special causes of loss form of the standard ISO commercial property insurance program that applies, the utility services exclusion signals the need for coverage. The utility services exclusion of these three causes of loss forms all read alike. The following exclusion appears in the Causes of Loss – Special form, CP 10 30 06 07 and addresses both direct physical loss or damage and time element losses.

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.

Utility Services

The failure of power, communication, water or other utility service supplied to the described premises, however caused, if the failure:

(1)Originates away from the described premises; or

(2)Originates at the described premises, but only if such failure involves equipment used to supply the utility service to the described premises from a source away from the described premises.

Failure of any utility service includes lack of sufficient capacity and reduction in supply.

Loss or damage caused by a surge of power is also excluded, if the surge would not have occurred but for an event causing a failure of power.

But if the failure or surge of power, or the failure of communication, water 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.

Communication services include but are not limited to service relating to Internet access or access to any electronic, cellular or satellite network.

What may be noteworthy about this exclusion, as opposed to the 2002 edition of this exclusion it replaced, are the following:

Item (2) was newly added. So, for example, if a utility were to install some kind of equipment (a generator, for example) on the named insured's premises to better facilitate utility service from a source away from those premises, no coverage should be expected for any loss or damage.

Secondly, no coverage applies for loss or damage caused by a power surge if the surge would not have occurred but for an event causing a power failure. If a failure of service or surge of power results in loss or damage from a covered cause such as fire or explosion, coverage applies to ensuing loss to the extent of that covered cause.

Finally, reference to communications services includes (but is not limited to) service relating to access of the Internet or any electronic, cellular, or satellite network.

Utility Service—Direct Damage Coverage

In light of the preceding exclusion, if coverage against physical damage to covered property stemming from interruption in utility service on or away from the described premises is desired, it is necessary to add the Utility Services—Direct Damage endorsement, CP 04 17. A schedule within the endorsement lists the exposures that are available for coverage as follows:

Water Supply. The term "water supply services" is defined in this endorsement to mean pumping stations and water mains supplying water to the described premises.

Communication Supply (including overhead transmission lines) or (not including overhead transmission lines). The term "communication supply services" is defined to mean "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." Overhead transmission lines are not included unless indicated with an X in the schedule.

Power Supply (including overhead transmission lines) or (not including overhead transmission lines). The term "power supply services" is defined to mean "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 transmission lines. Overhead transmission lines are not included unless indicated by an X in the schedule.

Space is also allocated in the Utility Services—Direct Damage endorsement for listing the covered property and the applicable causes of loss form. Electronic data is specifically precluded as covered property. The meaning of "electronic data" appears in the coverage forms to which this endorsement is attached. These coverage forms are Building and Personal Property, Builders' Risk, Condominium Association, Condominium Commercial Unit-Owners, Tobacco Sales Warehouses, and the Standard Property Policy.

Although space is allocated for a utility services limit of insurance, another provision of this endorsement states that the coverage under this endorsement is part of, and not in addition to, the limit of insurance stated in the declarations. This provision states: