A windstorm knocks down an electrical transformer outside of your restaurant, causing you to lose power for a week. The food in your refrigerators spoils, and you’re unable to service customers. Are you covered by your commercial property insurance?

The unfortunate truth is that this type of scenario is likely excluded from your typical commercial property policy. While many business owners assume they may be fully covered from loss or damage due to natural disasters, commercial property policies commonly exclude property damage or loss due to utility failure. In these situations, Utility Service Interruption Coverage is needed.

What is Utility Service Interruption Coverage?

Utility Service Interruption Coverage, also known as off-premises power coverage, protects businesses from property damage and loss due to utility failure, originating away from the premises of the insured property, caused by a covered peril. Commonly added as an endorsement to commercial property and business income policies, Utility Service Interruption Coverage addresses the utility exclusions that are included in most property policies.

These are some examples of situations that would generally be covered by Utility Service Interruption Coverage:

• A windstorm knocks over a major power line, severing electricity to the building where your IT business is located for several days.
• A wildfire devastates a nearby telecommunications station, preventing your mobile phone company from accessing the internet for nearly 48 hours.
• An explosion at the regional water station prevents your restaurant from obtaining any tap or sink water for one week.

What does Utility Service Interruption Coverage cover?

Utility Service Interruption Coverage can cover direct damage to property, losses in income, and extra expenses incurred to keep your business running in the event of a utility failure caused by a covered peril. These coverages come in the form of endorsements that extend coverage provided in your commercial property policy, business income insurance, and extra expense coverage. Utility Service Interruption Coverage cannot be purchased as a stand-alone policy as it serves to close the gap left by utility exclusions listed in most commercial property policies.

The extent of your coverage, however, will depend on many of the details chosen in your endorsements. These are the key factors you will need to consider:

Utility Services: In your coverage, you’ll choose the types of utility property you want to insure. While telephone service may be critical for a call center, a retail store may be able to go without the service for a short period of time. You’re able to decide how much or little you want covered. Note that coverage can only be provided if covered utility property is damaged by a covered peril, so you’ll need to pay close attention to what utility property you select.

The following are the types of utility property you can insure:

• Water: Pumping stations and water mains
• Communications: Telephone, radio, internet, microwave, and television services, including satellite dishes, optic fiber transmission lines, coaxial cables, and overhead transmission lines*
• Power: Properties supplying electricity, steam, or gas, including generating plants, switching stations, substations, transformers, and overhead transmission lines*

*Overhead transmission lines typically aren’t covered by insurance companies automatically. You will need to request coverage for this service specifically and add it to your endorsement, usually for an additional premium.

Covered Property: Any property, including buildings, contents, and property of others in your care, that you want to insure from damage or loss due to utility interruption. Note that the damage or loss to your covered property can only be covered if it is caused by damage to a covered utility property by a covered peril.

Covered Causes of Loss: The perils that you want to insure against. These often mimic the perils covered by your property policy and may include:

• Fire
• Lightning
• Windstorm or hail
• Explosion
• Sinkhole collapse or building collapse

Note that both flood and earthquakes are commonly excluded from property insurance policies.

Utility Services Limit of Insurance: The maximum amount covered for damages and loss due to utility failure. This is typically the sublimit covered for losses. Usually ranges from $2,500 to $25,000, but may be increased depending on the insurance company and business risk.

What types of losses does Utility Services Interruption Coverage cover?

Utility Service Interruption Coverage typically provides coverage for two types of losses—direct damage loss and time element loss—and it can be extended to cover for either or both of these losses depending on the coverage you are adding your endorsement to. Here are the key differences between the two:

Direct Damage Endorsement

Utility Service Interruption Coverage can extend your commercial property policy to cover any losses or damage to your covered property caused by an interruption to utility service. The damage or loss to your covered property can only be covered if the utility failure is caused by damage to a covered utility property by a covered peril. Some examples of situations where direct damage loss would be covered include:

• Lightning strikes a nearby electrical transformer, creating a power surge that causes a microwave at your office to explode.
• An explosion at the power plant causes a power outage at your restaurant for three days. You lose all of the perishables in your refrigerators.
• A fire at the local water pumping station causes a water outage at the plant nursery you own. Your inventory of rare native plants dies off due to the lack of water.

Time Element Endorsement

Utility Service Interruption Coverage can extend your business income or extra expense coverage to cover any losses in income or incurred extra expenses due to a suspension of business operations caused by an interruption to utility service. Coverage can only be awarded if the utility failure is caused by damage to a covered utility property by a covered peril. Some examples of situations where time element loss would be covered include:

• A fire at the power plant causes a power outage at your fitness studio, preventing you from running fitness classes for three days.
• An explosion near the local water main causes a water shortage at your water park, preventing you from serving any customers for two days.
• The senior living facility you own is hit by a power outage due to a hurricane damaging a local electrical substation. You incur added expense when you need to rent portable generators to keep power going to critical medical equipment at your facility.

It’s important to keep in mind there are different versions of property policies out there. Make sure you read both the original policy and the endorsement carefully to ensure you are getting the coverage you expect. If you need help, talk to an insurance professional first.

Do I need Utility Service Interruption Coverage?

Certain businesses are at greater risk of financial difficulty than others due to utility failure. Consider investing in Utility Service Interruption Coverage if one or more of the following cases applies to your business:

• Your business is located in a region with a history of devastating natural disasters
• Utility services near your business tend to experience interruption or failure fairly frequently
• Your business would experience financial difficulty or loss if a utility service (e.g., electricity, telephone, water) went out for several days or longer
• Your business owns equipment, property, or machinery that would be difficult to replace

These examples, while not exhaustive, hopefully provide you with a sense of whether your business would benefit from Utility Service Interruption Coverage. Businesses tend to take utilities for granted until they lose them or go out for an extended period of time. It’s best to prepare ahead of time to assess whether the loss of utilities would adversely affect your business and whether your property would be damaged by utility failure.

How much does Utility Service Interruption Coverage cost?

Although insurance companies usually provide coverage at different prices, they all tend to base their metrics and premiums on similar factors. These factors usually include:

Named or Open Perils: If your original policy covers losses on an open perils basis, your premium may be more expensive. This is because open perils coverage is typically more comprehensive than named perils coverage.

Number of Covered Causes of Loss: Generally, the more causes of loss you choose to insure against, the higher your premium. This is because the insurance company has a higher chance of paying out.

Deductible: The higher the deductible on your original policy, the lower your premium. This is because you will be helping the insurance company by paying off a greater portion of the incurred loss than if you had a low deductible.

Type of Business: The type of business you operate and the risk of loss associated with it greatly impacts the cost of your premium and policy. Generally, your premium will increase if there is a high chance of an incident occurring due to a covered peril.

Location of Business: Where your business is located will greatly impact the cost of insuring against utility service interruptions. If your business is in an area known to experience high incidence of natural disasters, your premiums will most likely be higher.

It’s important to note that Utility Service Interruption Coverage does not provide additional coverage on top of what is already provided in the original policy. It is simply an endorsement that extends coverage to insure against the exclusions included in most commercial property policies.

Final Word

Businesses often underestimate the importance of utilities to daily work, but the loss of utilities can be fairly inconvenient at best and downright troublesome at worst. To add on, your business could be financially devastated depending on the length and severity of the interruption. Utility Service Interruption Coverage protects your business and assets from loss and damage in the usually unexpected case of utility failure when it originates away from the premises of your property. If you live in an area with frequent natural disasters or, more simply, would experience financial difficulty through the loss of services, consider investing in Utility Service Interruption Coverage.