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Insurance Coverage For Power Interruptions — In The Northeast And Elsewhere

By Rhonda Orin, Michele Gallagher and Mark Garbowski

Power interruptions could impact you wherever you are. As virtually the entire northeastern United States and part of Canada recover from the largest power system failure in our nation’s history, numerous policyholders have suffered losses. And there is no guarantee that another power outage will not take place before the grid system is overhauled. Smaller, more localized blackouts, due to weather, human or mechanical failure, or designed “rolling blackouts,” are a regular fact of life. These power disruptions may spell serious problems for businesses nationwide. That’s the bad news.

The good news is that you may have insurance that will cover the losses you have suffered or might suffer in the future. Your property insurance may provide coverage.

Your Property Insurance Policies May Cover Your Loss

Property policies can cover policyholders for damages suffered as a result of damage to both tangible and intangible property. Tangible property runs the gamut from items in production to inventory to business records. Intangible property includes anticipated profits and income. Under most property policies, the insurance company promises to pay for financial loss caused by direct physical damage to insured property or loss of use of insured property.

Business Interruption Coverage and Service Interruption Coverage

Business Interruption, or BI, insurance is designed to protect policyholders who have to suspend their business or production, resulting in lost sales and loss of profits. It also should reimburse policyholders for expenses that continue despite the cessation of income, such as salaries, taxes, rent, professional fees, certain utility charges and insurance premiums. BI insurance is intended to do financially for the policyholder just what the business would have done had the interruption not occurred.

While specific policies differ, BI insurance generally provides coverage when there is: (1) loss; (2) resulting from business interruption; (3) caused by direct physical loss of, or damage to, property or loss of use of insured property; (4) caused by a covered peril.

Although property policies sometimes exclude BI coverage for power interruptions, coverage may be bought back with a “service interruption” provision.

These provisions specifically cover loss caused by an interruption of service to the policyholder’s premises when there is direct physical loss or damage to the service provider’s property. The Court of Appeals of North Carolina recently affirmed an award to a policyholder and against an insurance company for losses incurred as a result of a loss of electricity due to hurricane flooding, under just such a policy.

In addition, applicable insurance often provides coverage for “Extra Expenses,” defined as:

The excess of the total cost during the policy period of restoration of the damaged property chargeable to the operation of the insured’s business over and above the total cost that would normally have been incurred to conduct the business during the same period had no loss occurred.

This provides coverage for all necessary emergency expenses incurred, over and above ordinary fixed operating costs, to continue as nearly as possible the normal conduct of the policyholder’s business. Among other things, these expenses may include the cost of paying for emergency generators or alternative power sources, extra compensation to employees, additional rent at a temporary location, and other miscellaneous costs.

One critical point — policyholders entitled to insurance coverage might have to take steps to minimize their losses. Policies sometimes include express mitigation provisions. If your policy contains this condition, your recovery may be reduced if you do not reduce your losses.

What You Should Do if An Energy Interruption Causes You A Loss

1. Take Immediate Steps To Minimize Your Damages. As noted, your insurance policies might expressly condition your recovery on your taking steps to minimize your loss.

2. Locate and Read Your Policies. Getting your coverage depends on knowing your coverage. Many different types of property insurance policies contain coverage for your loss. Know your coverage and know who sold it to you.

3. Give Notice of Your Claim or Loss As Soon As Possible. Timely notice is a requirement under most insurance policies. Too frequently, policyholders forget to notify their insurance companies. If you have a loss, notify your insurance agent or broker and your insurance company as soon as possible.

4. When You Make A Claim, Don’t Take “No” for An Answer. Insurance companies routinely deny claims, even if they ultimately have no basis for doing so. Be persistent-the difference between coverage and non-coverage often is directly related to the determination and persistence of the policyholder. 

ABOUT THE AUTHORS

Rhonda D. Orin is the managing general partner of the DC office of Anderson Kill & Olick. Ms. Orin is a litigator who has extensive experience in representing policyholders in insurance coverage disputes across the country. Her caseload ranges from multi-million dollar environmental disputes to substantial disability claims on behalf of physicians, attorneys, other professionals and corporate executives. Ms. Orin can be reached at rorin@andersonkill.com or 202-218-0040.

Michele A. Gallagher is an attorney in the DC office of Anderson Kill & Olick. Ms. Gallagher’s practice focuses on insurance coverage counseling and litigation on behalf of policyholders across the country. Ms. Gallagher can be reached at mgallagher@andersonkill.com or 202-218-0046.

Mark Garbowski is a shareholder in the New York office of Anderson Kill & Olick, P.C. and Editor of the AKO Policyholder Advisor. Mr. Garbowski is a litigator who has extensive experience in representing policyholders in insurance coverage disputes. Mr. Garbowski can be reached at mgarbowski@andersonkill.com or 212-278-1169.

Anderson Kill & Olick is a national law firm with offices in New York, NY, Chicago, IL, Newark, NJ, Washington, D.C. and Greenwich, CT that regularly represents policyholders in insurance matters.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by Anderson Kill & Olick only upon engagement with respect to specific factual situations.

riskVue | The webzine for risk management professionals
October 2003