One year has passed since the approval and implementation of the revised Cause of Loss Special Form (CP 10 30), yet many agents still do not recognize the utility service coverage their clients lost under the new wording.
Prior editions of the cause of loss special form (2002 and previous forms) extended coverage to include protection against the financial consequences of property losses caused by damage to utility service devices located on the insured’s premises; only utility service-related losses that originated off the insured’s premises were excluded. But this changed with the late-2008 adoption of the 06 07 edition of the commercial property Cause of Loss Special Form (CP 10 30 06 07).
Now the commercial property cause of loss special form excludes damage resulting from the failure of or damage to any utility service device, regardless of where the damage occurs (on or off premises). In fact, five changes were made to the utility service exclusion when the new forms were adopted in November or December (depending on the jurisdiction) of 2008:
- The Cause of Loss Special Form for both property and time element coverages now exclude damage resulting from the failure of on-premises equipment used to supply the utility service from an off-premises source. Thus, there is no coverage for damage caused by an on-premises transformer since it is used to supply power from an off-premises source.
- The exclusionary wording is now identical for both the property coverage and the time element coverage. Previous editions of the commercial property form used different exclusionary wording (based on the location of the damage causing the loss) for each.
- Communication and water services are specifically added to the list of utility services (only “power” was scheduled previously).
- The form specifically states that damage caused by power surge is excluded.
- The new exclusionary wording extends communication services to include Internet access or access to cellular or satellite networks.
The year-old utility service exclusion reads, in part (not the entire exclusionary wording):
e. 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.
One key term in this exclusionary wording is, “however caused.” This means that even if the service interruption is caused by an otherwise covered cause of loss (i.e. lightning), the resulting damage attributable solely to the interruption of utility service is excluded.
Also contained in this language is an exception to the on-premises exclusion. Note that the on-premises exclusion applies only if the damaged equipment is used to supply utility service “from a source away from the described premises.” Essentially, the exclusionary wording does not preclude coverage for damage resulting from damage to on-premises generators (for example). Direct property loss caused by damage to an on-premises “utility service,” like a generator, is covered under this wording.
A severe thunderstorm rolls through releasing damaging cloud-to-ground lightning until the storm finally passes. During the storm, a transformer on the premises of the local restaurant is struck and damaged by lightning resulting in the spoilage of thousands of dollars of food. Will the loss be covered in the unendorsed property policy applying the Cause of Loss Special Form?
As per the above policy wording, the loss to the food would be EXCLUDED by the current (06 07) edition of the form. However, if the insured were covered under the 2002 or earlier edition of the cause of loss special form (CP 10 30), the loss would be covered because these forms excluded only interruptions originating off-premises.
This change in the breadth of utility service protection necessitates the increased need for the Utility Services – Direct Damage (CP 04 17) and the Utility Services – Time Element (CP 15 45) endorsements.
Utility Services – Direct Damage (CP 04 17)
Like the Cause of Loss Special Form, the Utility Services – Direct Damage endorsement was among those updated in the 06 07 revision. The endorsement was altered to dovetail with the new exclusionary wording found in the cause of loss form and the revised wording removed the qualifying statement that the utility service property be located off premises.
Coverage provided by this endorsement hinges on three main concepts: 1) the utility services contemplated; 2) the amount of coverage purchased; and 3) the property covered by the endorsement.
Utility Services Contemplated
Losses arising out of the interruption of three main utility services divided into five classifications are eligible for coverage in this endorsement. Direct loss arising out of the interruption of water, power and communications are eligible for protection.
Power and communications are further divided to include or exclude coverage for overhead power or communication lines. If coverage for overhead transmission lines is chosen, the premium is higher due to the increased exposure; however, if the insured location is served by overhead lines, this inclusion is necessary as these lines are more susceptible to covered damage than underground lines.
Amount of Coverage
Insureds have the option of choosing a specific limit of utility service damage protection. However, this is a sublimit of the total business personal property limit purchased in the underlying commercial property policy and not an additional limit of protection.
For example, the insured with a $500,000 business personal property limit and a $200,000 utility services sub-limit has limited the amount of coverage available for a utility service loss to $200,000. These limits are not added together, the utility service coverage amount serves only as a sublimit.
An amount does not have to be chosen, it can be left blank. If no amount is indicated, the insured has the full limit (based on the classification of “covered property”) to cover the loss. The coinsurance condition does not apply to this limit and there is no separate deductible. The advantage to the insured of using a lower limit for utility service losses is that the premium for this endorsement will be lower since it is not based on the full policy limit.
Within the endorsement the insured can specify the type of property to which the utility service coverage is to attach. There is no apparent limitation on what can be written in as covered property. Examples of acceptable categories of covered property may include:
- “All machinery and production equipment;”
- “Perishable stock;”
- “Business Personal Property;” or possibly
- “All property.”
Before listing the property to be covered by the endorsement, a thorough analysis of the insured’s property subject to damage by the interruption of a chosen utility is required. Additionally, the limit chosen as discussed above must be adequate to cover the value of the property scheduled in this section of the policy.
Utility Services – Time Element (CP 15 45)
This endorsement was likewise updated in the most recent property coverage revisions. It was altered to dovetail with the new exclusionary wording found in the commercial property policy and cause of loss form by removing the qualifying statement that the utility service property be located outside a covered building.
The “suspension” of “operations” leading to a business income loss caused solely by an interruption of a supplied utility (water, communications or power) is excluded in the unendorsed business income policy. This endorsement removes that exclusion, extending business income and extra expense protection should the supply from the chosen utility be interrupted. This endorsement, like the direct damage form, allows the insured the option of extending coverage to overhead transmission lines for both communication and power supply – for an additional premium.
A separate limit of coverage must be chosen to cover the suspension caused by disruption of the covered utility service(s). This loss does not fall under the policy’s business income or extra expense limit but neither does the coinsurance condition apply to the coverage provided by this endorsement.
The Need for Utility Service Coverage
ISO’s changes to the cause of loss form narrowing the available coverage from its previous breadth must first be recognized and then remedied. The two utility service endorsements are two answers to the newly created coverage gap.