When Sandy switched off the electricity to hundreds of New Jersey businesses this fall, the storm illuminated the value of “service interruption” insurance: coverage for the lost profits and extra expenses businesses suffer when their local utility gets knocked out of commission.
Insurance experts said this coverage is more common at large companies than small. But they predicted many businesses will give it another look following a succession of weather-related electricity disruptions: Hurricane Irene in August 2011, the freak Halloween snowstorm two months later, then Sandy.
Insurance agent Glenn Tippy, president of Gerrity, Baker & Williams Inc., in Mount Olive, said one of his clients is a manufacturer who lost power during Sandy, but had to keep operating to deliver on a major contract. This business rented a generator, hired an electrician to make some repairs and had the employees working overtime, which all told cost about $15,000. The firm's service interruption policy will cover those expenses, Tippy said. This business spends several hundred dollars a year for $15,000 in service interruption coverage—a small chunk of the firm's total annual business insurance premiums of $13,000.
Attorney Donald W. Kiel of K&L Gates in Newark said service interruption coverage typically covers a variety of utility services, such as electric power, water or sewer "and a good insurance broker that has a client who depends on electricity or water will tell the client to buy this coverage." Costs vary by the size of the business and the amount of coverage and "some companies don't have the funds to invest in this coverage," Kiel said.
He pointed out that the past three major storms "each resulted in significant power failures, and companies that are reliant on services from outside providers would be well guided to buy coverage," and also bargain with insurers "to get an ample amount of coverage." Kiel said these policies may have a waiting period, which is like a deductible: if the waiting period is three days and the service interruption lasts five, only two days of business losses are covered. The business has to notify the insurer immediately of a service interruption and provide documentation that the interruption resulted from an accidental event on the utility's end.
Ken Kobylowski, acting commissioner of the state Department of Banking and Insurance, said Sandy will likely increase demand for various types of business interruption insurance, including service interruption. He said with Sandy, "large numbers of customers were out of electric power for a long stretch of time, and that is clearly going to eat into their business profits, so they really need to take a very hard look at how they can insure themselves for that potential loss."
The experience of three major storms in a 15-month period may inspire more businesses to decide to buy service interruption coverage. "If there is a demand for it, (insurers) will provide it and they will charge a premium" that reflects the risk, said Laurence M. McHeffey, an attorney at McElroy, Deutsch, Mulvaney & Carpenter. These premiums vary by company size, complexity and level of coverage "but I've seen premiums on policies that don't seem ridiculously expensive." Another Irene or Sandy "may not occur for another 100 years or it may happen next hurricane season—you never know," he said.
Business insurance premiums began rising last year following seven years of decline, and some are predicting rates will continue to increase. Tippy said when premiums were falling, he was able to get more coverage for his clients while also lowering their premiums. For example, one of his clients saw annual premiums decline from about $300,000 to about $200,000.
Loretta Worters, vice president of the insurance industry trade group the Insurance Information Institute, said, "Typically after a disaster, businesses buy more insurance coverage for a year or two, then they drop it again. They figure 'it's not going to happen to me; I don't need this anymore.'"
A business may decide insurance "is not an important factor in their business plan. But what if you are put out of business because you don't have the coverage to protect you?" Worters said.
New Jersey State Climatologist David A. Robinson said each of the three recent weather disasters was unusually severe, and "Sandy was the most impactful natural disaster on record in New Jersey, when it comes to power disruption." Robinson said he is persuaded by forecasting models that "suggest that with a warmer atmosphere, a warmer sea surface and a more energized climate system, we may be more prone to extremes like this."
But he said there is no way to predict how often weather disasters will strike in the future, or whether they will routinely inflict widespread power outages.
"One would think that nature has done some pruning in the last 15 months, and there are fewer trees ready to fall on power lines."
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