Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

The New York Times reported this weekend that:

Russell Hunter, who owns Pfau’s Hardware in West Hartford, said that after a bizarre fall snowstorm knocked out power to nearly one million people in his state and millions more throughout the Northeast last weekend, his store was cleaned out of all storm-related supplies. They went at about five times the normal rate of sale, with everything from batteries to oil lamps to gas grills flying out the door as fast as he could order them.

While Mr. Hunter may have increased sales as a result of the snowstorm, not many other businesses are enjoying the same luck. Retail and service related enterprises are probably bleeding to death as they wait for the slow recovery.

Power outages are common following major weather events. Loss of income and other damage may be caused by off-site damage, similar to the power outage experienced by the businesses in Connecticut. For such situations, it is important to have off-site power outage coverage endorsed to the policy. When there is no direct damage to covered property, but damage to property of others results in a loss of power, most commercial property insurance policies will not provide for loss of income and other losses by definition. Off-premises damage resulting in loss of power is generally added as an endorsement.

For example, Utility Service Interruption Coverage generally provides:

We will pay for loss of or damage to Covered Property described in the Schedule, caused by an interruption in utility service to the described premises. The interruption in utility service must result from direct physical loss or damage by a Covered Cause of Loss (as indicated in the Schedule) to the property described in Paragraph C. if such property is indicated by an ‘‘X’’ in the Schedule and is located off the described premises.

The loss still needs to be caused by a covered peril, but this endorsement adds coverage otherwise excluded. Some business interruption forms are more restrictive and eliminate coverage for income losses if the failure occurs ‘‘outside of a covered building,’’ rather than loss of power on premises.

Restaurants, food stores and food brokers should also purchase Spoilage Coverage. This provides for losses caused by power outages on or off premises with the following language:

Power Outage, meaning change in temperature or humidity resulting from complete or partial interruption of electrical power, either on or off the described premises, due to conditions beyond your control.

Power outage is a common and significant threat to businesses. Prudent risk management requires power back-up systems as well as proper insurance coverage for these disasters. Otherwise, a second financial disaster will likely occur.

The Ft. Myers News-Press reported on the disaster:

The TECO People’s Gas line has been repaired, after being damaged by a
construction vehicle...Approximately 6,500 customers lost their gas connection, and company representatives say it could take up to a week to get all service restored.

As in any emergency, restoration of the utility will occur in order of
priority with the largest and most critical customers, such as hospitals,
nursing homes, assisted living facilities and emergency service facilities,
first.

Commercial customers, such as hotels and restaurants will be next, and
residential customers will be third. If a less critical customers is on the
same line as a critical facility, then their service may be restored more
quickly (similar to what happens in restoring power following a hurricane).

Power outages are common following major hurricane events. The loss of income and other damage may be caused by off-site damage, similar to the power outage experienced by the businesses in Ft. Myers. For such situations, it is important to have off-site power outage coverage endorsed to the policy. Since there was no direct damage to covered property, but damage to property of others resulting in a loss of power, most commercial property insurance policies will not provide for loss of income and other losses by definition. Off-premises damage resulting in loss of power is generally added as an endorsement.

For example, Utility Service Interruption Coverage generally provides:

We will pay for loss of or damage to Covered Property described in the Schedule, caused by an interruption in utility service to the described premises. The interruption in utility service must result from direct physical loss or damage by a Covered Cause of Loss (as indicated in the Schedule) to the property described in Paragraph C. if such property is indicated by an ‘‘X’’ in the Schedule and is located off the described premises.

The loss still needs to be caused by a covered peril, but this endorsement adds coverage otherwise generally excluded. Indeed, some business interruption forms are more restrictive and eliminate coverage for income losses if the failure occurs ‘‘outside of a covered building,’’ rather than loss of power on premises.

Restaurants, food stores and food brokers should also purchase Spoilage Coverage. This provides for losses caused by power outages on or off premises with the following language:

Power Outage, meaning change in temperature or humidity resulting from complete or partial interruption of electrical power, either on or off the described premises, due to conditions beyond your control.

Power outage is a very common and significant threat to businesses. Prudent risk management requires power back-up systems as well as proper insurance coverage for these disasters. Otherwise, a second financial disaster will likely occur.

Service Interruption coverage usually reads as follows:

In consideration of additional premium, the Time Element [ie business interruption] coverage of this Policy is extended to cover the actual loss sustained caused directly by the interruption of the specified incoming services during a Period of Service Interruption, or if applicable, during the Restoration of Normal Operations […]

Coverage is provided for loss resulting from interruption of the following specified incoming services: Gas, Water, Electricity, Telephone […] by reason of any accidental [occurrence] to the facilities of the following suppliers: Any Public Utility[,] that immediately prevents in whole or in part the delivery of useable services specified[..]

Because reality bites harder than illusion, a case which illustrates the importance of “service interruption” coverage is in order. In Red Bird Egg Farms, Inc. v. Pennsylvania Mfrs. Indem. Co., 15 Fed. Appx. 149 (4th Cir. 2001), the insured ran an egg farm with more than half a million chickens. In this type of facility, constant ventilation is required or the chickens perish within an hour. To prevent this massacre, the insured employed an extensive system of electric ventilation fans that required a “three-phase” alternating current to operate correctly and keep the chickens cool.

For those who don’t know, alternating currents oscillate between positive and negative voltage. In ordinary household current, this oscillation is a straightforward sine wave and it is called a “single-phase” current. A three-phase current is essentially the “stacking” of three single phase voltage oscillations on a single line. This stacking enables greater power transmission over an existing electrical line. Each stacked wave is slightly out of phase with the others. Electric motors, such as the ones housed in the chicken facility, were built to handle only one type of alternating current. Three-phase power is used mainly in industrial applications. Three-phase motors will burn out if they are supplied with single phase current.

In this case, lightning struck outside the chicken facility and the power supply was interrupted. The facility’s generators, which were capable of generating three-phase alternating currents, responded immediately, but then failed because of a ruptured coolant hose. As the facility’s employees worked to fix the generators, the local power plant restored service, but only in a single-phase power, which blew out the motors of 100 ventilation fans. An employee disconnected the incoming power and activated a secondary generator, but that generator failed as well, at least partly because it could not handle the increased load of the burned out fan motors. All 500,000 chickens died.

The chicken facility submitted a claim for the loss of the birds, debris removal, damage to the generators, and business interruption. The carrier paid approximately $1,000,000 for the loss, but denied the business interruption claim under a loss of power exclusion endorsement, which read as follows:

(1) Any loss caused directly or indirectly by the failure of power or other utility service supplied to the described premises, however caused, if the failure occurs outside of a covered building.

But if the failure of power or other utility service results in a Covered Cause of Loss, we will pay for the loss resulting from that Covered Cause of Loss.

After a bench trial, the lower court found that the introduction of single-phase current caused the motors to blow out, which led to the demise of the chickens. The trial court also found that the power failure and restoration incident fell under the exclusionary language above. The facility appealed and argued that that since the motors in the fans burned out, the introduction of single phase power cannot properly be considered an “interruption” in power, and, in fact, can best be characterized as too much power for the three-phase fans.

The appellate court upheld the trial court’s finding stating:

First, the language of the policy excludes business interruption losses caused by a “failure of power or other utility service,” and does not mention “interruptions.” Accordingly, Red Bird's detailed discussion of the accepted meanings of the word “interruption” is irrelevant. It is the language of the policy that controls.

Second, the record evidence supports the determination that, contrary to Red Bird's assertions, single-phase current was not “too much” power for the ventilation fans. Rather, single-phase power was the wrong type of power for the fans. Red Bird's argument that single-phase power should be considered to be “too much” power is unsupported by the record.

Surprisingly, the trial court was not persuaded by the facility’s ensuing loss argument, that since the motors “blew out” there was business interruption coverage as a result of a fire. The appellate court was not so kind either.

Once the electric motors in the ventilation fans were exposed to single-phase current, the motors in many of the fans “burned out.” This appears to have involved overheating, melting of the insulation around wires in the motors, and some smoke. But, there was no evidence of any flames. The district court found as a fact that although the motors “burned out,” there was no actual “fire” involved. The damage caused in this case is enough like fire that perhaps a finding that the damage was fire damage would be supported by the evidence. However, the damage is not so obviously “fire” damage as to render the district court's factual finding clearly erroneous.

If there’s a lesson to be learned from this chicken demise, is that “service interruption” coverage should be strongly considered if a business heavily relies on utilities. As seen above, service interruption coverage would have provided business loss protection because the power supply was interrupted by the lightning, irrespective of the sophisticated power needs of the chicken facility.