CP 04 17 Utility Services – Direct Damage Endorsement

The standard ISO cause of loss forms exclude loss due to utility service disruption of communication, power or water. This ISO endorsement returns the cause of loss to the policy. The disruption may be due to damage to off-site facilities or power lines as selected by the insured. This does not cover consequential loss due to spoilage.

·  Utility Service(s) Covered

The specific type of utility covered must be selected. This can vary by location and also be covered property. The options are:

  • 1. Water Supply Property
  • 2A. Communication Supply Property (including overhead transmission lines)
  • 2B. Communication Supply Property (not including overhead transmission lines)
  • 3A. Power Supply Property (including overhead transmission lines)
  • 3B. Power Supply Property (not including overhead transmission lines)

The insured may select one or more utility services providers listed above (1, 2, and 3). If it selects only communication supply (because telephone service is more important than electrical power), there is no coverage if a storm damages off-premises electrical power lines (but does not damage the underground telephone lines).

Similarly, if power supply (not including overhead transmission lines) is checked, there is no coverage if a falling tree damages only a power line and the rest of the system (including transformers, substations, and the switching plant) is not damaged.

·  Utility Services Limit of Insurance

If there is not a limit, the limit of insurance available for the type of property at the premises and building listed is the limit available for this endorsement. If a limit is entered, it is a sub-limit, not an additional limit of insurance. Using a sub-limit may be appropriate because the premium is based on the limit of insurance.

Coverage Analysis

A. Coverage

The coverage this endorsement provides is interesting and must be examined more closely. Coverage is for loss of (or damage to) covered property due to an interruption of service. There are no exclusions with respect to the type of loss or damage covered. The only requirements are that the covered property (listed as Bldg, BPP, or both) must be damaged and the damage must result from an interruption of power. As with all coverages, there is a restriction that relates to the how the utility interruption occurs. The utility service must be interrupted because it sustained direct damage by a covered cause of loss.

As a result, it appears that as long as the proximate cause of loss that results in direct physical damage to the utility service is a covered cause of loss, coverage applies to any such resulting loss or damage to the insured's covered property that can be traced directly to the interruption in service.

Spoilage is a good example. The causes of loss forms exclude loss caused by (or that results from) extremes in temperature. However, this endorsement provides coverage if spoilage results directly from the interruption in service (as long as the property is listed correctly).

The same is true of electrical arcing. If the utility provider's service is interrupted because it sustains direct physical damage from a covered cause of loss, coverage applies to the loss of (or damage to) covered property from the interruption of service that is normally excluded. In another situation, it appears that this endorsement's coverage applies if artificially generated electrical current (including arcing) is the direct result of the interruption of service. This is because there are no specific exclusions.

The key to this endorsement providing effective coverage is making the proper entries on the schedule. The schedule indicates what is covered (and what is not covered) and should not be completed without considering and evaluating all possible scenarios.

B. Exception

The only exception that applies to the insured's covered property involves loss or damage to electronic data. This includes such data becoming corrupted. There is no coverage for destruction, corruption, or any other type of loss or damage to electronic data. As a result, coverage does not apply if the insured does not back up its computer data, even when this endorsement is attached. The insured should consider a separate electronic data processing (EDP) policy to provide coverage for this situation

Coverage Example: Farley's Freezer has one location with two buildings. Building 1 has storage with older, walk-in freezers. Building 2 also provides storage, including a large stand-alone freezer. Farley purchases CP 04 17 - Utility Services-Direct Damage, selects power utility (including overhead transmission lines) for Building 1 for personal property coverage with Causes of Loss-Special Form to apply.

Strong winds down an overhead power line and a power outage causes property in both buildings to spoil. It also damages equipment in the older freezers in Building 1 when power is restored.

The walk-in freezers in Building 1 are not covered because they are permanently built in and attached to the building and are building property. Farley did not select coverage on building property. The spoilage damage to food (being personal property) is covered. Coverage does not apply to food in Building 2 at all because Farley did not select coverage on that building.

More of the loss would have been covered if Farley had purchased coverage to apply to both building and personal property in both buildings.

Limits of Insurance

The last element to review is how the limit is applied.

Purchasing CP 04 17 - Utility Services-Direct Damage does not provide any additional amounts of coverage. It simply eliminates a gap in coverage on the existing covered property. If the building limit on the declarations is $100,000 and this endorsement provides a $25,000 limit, the insured cannot collect $100,000 for a fire that occurs and an additional $25,000 if a utility service interruption occurs at the same time. The most the insured receives is $100,000 for the combination of fire and utility services.