As the urgency to repair immediate physical damage to commercial property subsides, and businesses begin to get back to business as normal in the wake of Hurricanes Harvey, Irma, and Maria, we will undoubtedly see claims to recover lost revenue, or extra expenses incurred as a result of the storm. These claims arise under a general claim for business interruption coverage. Most companies could survive a brief power outage, but an extended interruption will likely affect the business’ operations and result in a loss of income, even if that business did not sustain physical loss or damage. Commercial property policies providing coverage for business interruption may provide specific coverage for such interruption based on loss of incoming utility services, pursuant to a service interruption provision. Service interruption might consist of any one, or combination of, the following:
1. Water Services, including pumping stations and water mains;
2. Communications Services, meaning property used to supply telephone, radio, microwave or television services. This also includes communication transmission lines, coaxial cables and microwave relays (other than satellites);
3. Power Services, meaning electricity, gas and steam. This includes utility generating plants, switching stations, substations, transformers and transmission lines.
Strong winds and rising water levels can affect an area long after the storm dissipates, leaving downed power lines, blown transformers or sewage back up resulting in lack of electricity and/or running water. For example, Puerto Rico’s recovery has been hampered by the lack of infrastructure and service.
Case law in Texas, Florida, and Puerto Rico is underdeveloped in this specific area. Case law addressing general principals of property insurance and business interruption may be used, however, to analyze service interruption claims. Namely, there must be a covered peril that causes the loss. Likewise, “service interruption” provisions typically fall under the umbrella of business interruption. Therefore, an analysis of how courts treat business interruption provisions, generally, as well as other jurisdictions, provide guidance.
The following guidelines should be used when analyzing whether a service interruption provision provides coverage:
1. A covered peril or cause of loss;
2. Resulting physical damage to off-premises utility property the interrupts the utility service;
3. Physical damage to the covered property on the insured’s premises OR a necessary interruption of the insured’s business operations because of the lack of utility services; and
4. With respect to business interruption, an actual financial loss.
The analysis in Prot. Mut. Ins. Co. v. Mitsubishi Silicon Am. Corp., 992 P.2d 479 (Or. Ct. App. 1999) illustrates how courts typically interpret service interruption provisions. In Mitsubishi¸ the insured operated a silicon wafer manufacturing plant in Salem, Oregon. The Salem area experienced a severe flood. In response to increased turbidity in its water, the City of Salem shut down its water treatment facility and requested that the insured voluntarily reduce its water consumption. Subsequently, the city of Salem closed its wastewater treatment facility because of the threat of imminent flooding at its plant, which forced the insured to cease most of its operations. The insured incurred a loss of business revenue as well as increased operating expenses.
The insured sustained two different types of loss: (1) lost business income and (2) extra expense. Both losses were a result of problems with the city’s water supply (utility service interruption) and both losses were the consequence of an area wide flood. However, the insured’s property was not itself flooded, nor was it directly damaged by flood waters. There was damage at the utility site.
The policy contained the following endorsement:
In consideration of additional premium, the Time Element [i.e. 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, both as defined in this Endorsement.
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Coverage is provided for loss resulting from interruption of the following specified 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 above to the following locations: As stated elsewhere in this Policy subject to the additional conditions of this Endorsement.[1]
Notably, the endorsement also contained a specific exclusion, narrowing the coverage by excluding flood:
This Endorsement does not insure against loss or damage caused by the interruption of incoming services caused by or resulting from any of the following regardless of any other cause or event contributing concurrently or in any other sequence to the loss:
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c. Flood, unless otherwise specifically provide elsewhere in the Policy with a Service Interruption Time Element Limit of Liability for Flood, but this exclusion does not apply to the Insured’s loss as defined in the Time element Coverage of this Policy resulting from fire, explosion, or sprinkler leakage caused by Flood at a supplier facility;[2]
The court determined that the policy did not cover the insured’s business interruption loss because the utility service interruption was caused by flood. While the Policy did contain a Flood Endorsement, the Court held that nothing in the Flood Endorsement extended coverage to service interruption:
In consideration of additional premium, and by deleting EXCLUSION No. 6 in GROUP A of Part C. EXCLUSIONS, this Policy is extended to cover physical loss or damage caused by or resulting from flood waters, waves, tide or tidal water, the rising, overflowing, or breaking of boundaries of natural or man-made bodies of water, or the spray from any of the foregoing. [3]
The Court held that this Flood Endorsement added coverage for property damage only, and did not extend coverage to interruption in business operations.[4]
As illustrated above, there are various factors to consider when analyzing whether there is coverage for service interruption claims in the business interruption context, the first of which being multi-peril events like a hurricane, which involve wind and flood claims. In that situation, there may be endorsements extending coverage for flood, but only to property damage, and not business interruption. It is important to distinguish whether included endorsements extend to business interruption claims. If they do not, coverage will depend on what causation rules the state follows, i.e. whether the state follows the concurrent causation doctrine (Texas), dominant efficient cause, first or last peril in chain, or if there is a covered peril anywhere in the sequence of events that leads to damage. It should also be noted whether the Policy includes an anti-concurrent causation clause and whether such a provision is enforceable under the laws of that state. Texas, for example enforces anti-concurrent causation provisions.
Given the recent hurricane-related events in Texas, Florida, and Puerto Rico, it is likely that insurers will see business interruption claims based on the cessation of utility services. Because claims caused by service interruption usually do not occur on the insured’s property, coverage will most likely only be afforded if there is a specific service/utility interruption endorsement, similar to the one above, included in the policy. But the cause of the service interruption is important to understand to ensure that no exclusions or limitations may apply to preclude coverage.
Service interruption provisions can vary significantly. While it is always necessary to begin an analysis with an examination of the plain meaning of the policy terms, it is also important to remember, that business interruption provisions are essentially designed to do for the business what the business would have done for itself had no loss occurred.[5] At the end of the day, service interruption coverage typically requires that the insured demonstrate it sustained a business loss caused by an interruption in utility services, resulting from a physical loss or damage from a covered peril.[6]
Posted by Raven Atchison
Posted by Raven Atchison
[1] Prot. Mut. Ins. Co., 992 P.2d at 483 (Or. Ct. App. 1999).
[2] Prot. Mut. Ins. Co., 992 P.2d at 484 (Or. Ct. App. 1999).
[3] Id.
[4] Id at 484-486.
[5] Prot. Mut. Ins. Co., 992 P.2d at 481 (Or. Ct. App. 1999) (citing A&S Corporation v. Centennial Insurance Company, 242 F. Supp. 584, 589 (N.D.Ill.1956).
[6] Prot. Mut. Ins. Co., 992 P.2d at 481 (Or. Ct. App. 1999).
