On July 30 and 31, more than 600 million people in India were affected by what several news outlets have reported is the largest power outage in history. Roughly half of India’s population was left without power during the outage, which also halted trains in several states and led to traffic congestion in many of India’s large cities. Power was eventually restored to portions of the affected area by late July 31, with full power restored on August 1.
An outage of this magnitude was unprecedented and left some businesses, their suppliers, and their commuting employees unprepared, but smaller-scale power outages are not uncommon. And though weakness in the Indian power grid appear to be a contributing factor to this outage, power failures affecting thousands or even millions of customers—sometimes lasting a week or more—can occur even in nations with more robust infrastructures.
For businesses, such outages can result in supply chain disruptions, the interruption of essential services (such as transportation, communications, and financial networks), employee productivity and safety issues, and/or loss of income and market share. For some industries, outages can also lead to the physical damage of products (e.g. food spoilage for restaurants). It is imperative that risk managers, together with operations managers, consider power outages and other service interruptions as part of their insurance and risk management plans.
Insurance Coverage: Is Physical Damage the Cause?
Far-reaching power outages are frequently the result of physical damage, often from natural hazards such as earthquakes, hurricanes/tropical storms, tornadoes, thunderstorms, and snow storms. As a recent example, nearly 4 million homes and businesses in the Midwestern and Mid-Atlantic United States were without power for several days following strong storms on June 30.
But blackouts—both large and small—are often not related to physical damage at all. Other factors—including high demand on power grids (particularly during peak summer months or heat waves), aging infrastructure, and human error on the part of power plant and grid management—can also lead to significant outages. A combination of these factors played a role in the August 2003 blackout the affected thousands of businesses and more than 50 million people in the United States and Canada.
From an insurance standpoint, this distinction is critical: a property all risk policy (including business interruption coverage) will be triggered only if the insured has suffered direct physical loss or damage as a result of a covered cause of loss.
Possible Insurance Coverage Extensions
There are exceptions, however—most notably the service interruption/off-premises power coverage extension that some organizations purchase. Generally, this coverage extends the business interruption and/or other time element protection already available under the policy to include the loss caused by the interruption of a utility’s power or services as a result of insured physical damage to the power utility’s property—provided the damage is caused by a peril not otherwise excluded under the policy.
(In other words: if an insured’s policy provides coverage for physical damage caused by an earthquake, this extension will also provide coverage to the insured if its utility’s power property is damaged by an earthquake.)
There are several policy conditions that may apply to this coverage. For example:
- The type of utility power or service—electricity, water, steam, etc.—may have to be listed or described on the policy.
- Coverage may be limited to utility premises only and may not extend to include transmission and distribution lines off-premises.
- The extension may contain a distance requirement where insured physical loss or damage to the utility’s property must occur within a specific distance of the insured’s premises affected; one mile and five miles are common.
- The scope or coverage may be limited to utilities which directly supply the insured or with which the insured has a contractual relationship. In such instances, it would have to be demonstrated that the utility in question suffered physical loss or damage by a peril not otherwise excluded under the policy for coverage to apply.
- A specific waiting period such as 24 or 48 hours is typical and must elapse before this coverage is triggered; certain classes of businesses may have longer waiting periods. In addition, a dollar deductible or average daily value deductible may also apply.
- A sublimit may apply.
- The service interruption coverage extension may not apply to contingent third party locations (e.g. suppliers and receivers).
Other exceptions or terms may apply for civil authority, ingress/egress, or other coverage extensions.
For multinationals impacted by power outages outside of their home countries, an important factor is whether any business interruption or contingent business interruption is admitted locally or as part of a global master policy. Local policies are often issued to “good local standards,” with language that does not necessarily match that of a global master policy.
Emerging supply chain insurance products are considerably broader than traditional business interruption and contingent business interruption, offering additional protection in the event of disruptions that are not related to physical damage. In addition to service interruptions, supply chain products can provide coverage n the event of strikes, riots, pandemics, and more, and can be tailored to address an insured’s unique supply chain exposures.
But supply chain insurance products have their own limitations—most notably, that they are designed primarily to address catastrophic events, and thus carry much longer waiting periods (often 30 days or more) before coverage is triggered. As a result, more “routine” or short-term outages that may be covered under a standard business interruption policy will not be covered by supply chain insurance.
Risk Mitigation Steps—Before an Outage
Businesses can take a number of steps now to prepare for any potential future outages, prevent physical damage to property and equipment, address potential coverage and risk transfer issues, and better ensure the resiliency of their operations and supply chains.
For businesses concerned about the impact of an outage or other service interruption on their facilities, the first step is to qualify and quantify service interruption impacts—to understand precisely how your organization can be affected by an outage. Using this information, organizations should review existing risk mitigation and control programs, objectives, and procedures to ensure protection against potential damage to property, equipment, and the overall business.
Organizations should ensure that they:
- develop crisis preparedness plans—with emergency response and business continuity components—that specifically address power outages and which clearly identify roles and responsibilities, including communication with clients/customers, suppliers, employees, and others;
- determine the criticality of various facilities to ongoing operations and if alternative power, production, or service sites are available (own or outsourced);
- develop workplace safety and workforce management plans to accommodate the roles and needs of employees during a brief or extended outrage period—e.g. managing facility safety, leave policies, temporary or extended telecommuting / relocation;
- review the required shutdown/restart times of all equipment in all facilities and determine how such timing can be accommodated in relation to power outages or interruptions; and
- review security measures at all facilities—including increasing or decreasing human presence, limiting access to all or part of a facility, and whether sensitive or costly property and equipment need to be moved.
Review Policy Language
Risk managers should review all insurance policy language—including any local and global policies—before an outage occurs. They should work with their insurance advisors to determine if their organizations need to obtain service interruption extensions as part of their business interruption coverage; when obtaining such coverage, it is critical that risk managers pay careful attention to which perils are included and any language related to mileage limitations between insured locations and power plants and possible exclusions of transmission and distribution lines.
Risk managers should also investigate the efficacy of obtaining supply chain coverage or other emerging coverages for these types of situations.
Organizations with suppliers in outage-prone locations may also want to review what actions their suppliers have taken to mitigate such events and the applicability to their insurance policies in those locations and circumstances.
Responding to a Service Interruption
In the event of a disruption, organizations should move quickly to implement their crisis preparedness plans and protect facilities and equipment from potential damage related to an outage. If the disruption is at a supplier’s location, organizations should determine with the supplier how long the disruption will last and seek out alternatives as needed.
In the event of a loss, it is imperative to notify insurers as soon as possible and establish communication between employees, insurers, and claims professionals. In order to prepare for a potential claim filing, risk managers should identify and capture all costs for extra expenses incurred, whether to protect property from further damage or to continue normal business operations. These costs could include generator rental or operation, the cost to move workers to other facilities, or activate alternative suppliers.
Many insurance policies require that the insured give notice to the utility of the interruption. If this requirement exists, it is important that it is documented as part of any claim filing.
How Marsh Can Help
Marsh’s property risk, forensic accounting, business resiliency, and crisis management experts are available to assist clients with both pre- and post-event concerns. If you have business interests in outage-prone areas, would like assistance with property inspections or a review of your business resiliency planning, or have questions regarding your insurance coverage, please contact your local Marsh relationship manager or call:
- the Marsh Catastrophe Hotline at +1 866 252 7492; or
- Marsh Risk Consulting’s hotline at +1 212 345 9589 (+1 866 928 7475 within the U.S. and Canada).
Marsh’s local dedicated claims teams and client executives can also support clients in their business recovery in the event that they are affected by a hurricane or other disaster. The local teams are supported by our regional and international claims experts, including specialists in large or complex claims. To file a claim, contact your client executive or send an email to the appropriate address listed below:
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