Examining property losses as Boston’s Back Bay fire knocks out power
A fire that started in a large transformer owned by the local electrical utility led to a lengthy disruption of power in Boston’s Back Bay this week. While the damage at the building near a Hilton Hotel was not extensive, the loss of power shut down traffic signals and the electricity supply to area residences and businesses.
Many businesses were forced to close that evening and the following day as a result of the lack of electricity. Their lost profits and incremental expenses are unlikely to be insured by standard insurance policies. This is because policyholders may not carry Utility Interruption coverage, which is a coverage extension available within Property Insurance policies. If they do, it may be limited by the proximity of the damaged utility supply to their building and/or subject to a one or two-day waiting period before coverage would apply. Otherwise, such Utility Interruption coverage generally requires that a covered peril occur at the facilities of a utility service provider and directly result in the loss of specified services such as gas, water or power. Policies may further distinguish between Physical Damage and Business Interruption. Even though the radius of affected businesses is relatively small, the scenario that played out this week will likely not exceed an applicable waiting period since power for many was restored within 12-18 hours. This is a common obstacle with this coverage.
Businesses that keep products that are subject to spoilage are also at risk. Food purveyors, beverage stores, florists and similar businesses may have to dispose of stock due to spoilage arising out of lost power. Standard Property insurance policies in their base form may not cover loss due to changes in temperature and so many small businesses may be uninsured.
How then does a business react to the threat of such a disruption? The answer is to use sound overall risk management planning. In some cases the best solution may be the purchase of a back-up generator powered by diesel fuel or some non-electric source. Alternatively, a written plan that allows for the transfer of refrigerated goods to neighboring businesses with emergency transportation service may be the only protection. Finally, such plans should include protocols for notifying employees and providing guidance to mitigate confusion and further disruption.
In short, insurance is not always the answer for every risk. It is part of the solution but it needs to supplement an overall risk management plan.
William Gallagher Associates is a leading provider of insurance brokerage, risk management and employee benefits services to firms with complex risks and dynamic needs, within industries that include technology, life sciences, financial risks, health care, renewable energy & clean technology, and environmental services. WGA has offices in Boston, MA; New York, NY; Hartford, CT; Princeton, NJ; Columbia, MD; and Atlanta, GA.