Form BP 17 03: Utility Services - Direct Damage and Business Income/Extra Expense
1. What the Form Is
The BP 17 03, titled "Utility Services - Direct Damage and Business Income/Extra Expense," is an endorsement to the Businessowners Policy (BOP), specifically related to the BP 00 03 Businessowners Coverage Form. Its primary purpose is to provide coverage for losses that are typically excluded under a standard BOP when utility services are interrupted. This endorsement "buys back" coverage for direct physical loss or damage to the insured's property, as well as for the loss of business income and extra expenses incurred, when a covered peril causes damage to utility property located off the insured's premises, leading to an interruption of water, communication, or power supply. Essentially, it closes a common coverage gap for businesses reliant on these off-premises utilities.
2. Classes of Business It Applies To
This endorsement is crucial for businesses that would suffer significant financial loss or property damage if essential utility services were disrupted. Examples include:
- Restaurants and Food Retailers: A power outage due to a storm damaging a nearby transformer could lead to food spoilage in refrigerators and freezers, and an inability to serve customers. The BP 17 03 could cover the value of the spoiled food (Direct Damage) and the lost income from being unable to operate (Business Income).
- Manufacturing Plants: An interruption of water supply from a damaged water main could halt production processes. This endorsement would help cover the lost income and any extra expenses incurred to mitigate the shutdown.
- IT Businesses and Data Centers: A wildfire damaging a telecommunications station could cut off internet access, crippling operations. The BP 17 03 could cover the resulting business income loss.
- Retail Stores: A fire at a power substation causing a prolonged power outage could force a retail store to close, leading to lost sales.
- Service Businesses (e.g., Salons, Laundromats): A car wash unable to operate due to a water main break, or a day spa forced to close due to a power outage, would benefit from this coverage for lost income and ongoing expenses.
- Businesses reliant on refrigeration: Florists or ice cream parlors where product spoilage due to power loss is a significant risk.
3. Special Considerations
There are several important factors to consider when adding the BP 17 03 endorsement:
- Covered Perils Requirement: The damage to the utility property must be caused by a peril that is covered under the main property policy. For instance, if the policy excludes flood damage, and a flood damages the power station causing an outage, this endorsement would not provide coverage unless flood coverage was specifically added.
- Selection of Utilities: The insured must select which utility services they want to cover (water supply, communication supply, power supply). Coverage only applies if the interruption results from damage to the selected type of utility property. For communication and power supply, the insured may also need to specify whether overhead transmission lines are included or excluded.
- Limits of Insurance: The endorsement will have its own limit of insurance, which may be a specific dollar amount shown in the schedule or, if no limit is shown there, the limit shown in the declarations. This is separate from the main property or business income limits.
- Waiting Period: For Business Income and Extra Expense coverage, a waiting period (e.g., 24 hours) may apply before the period of restoration begins.
- Exclusion of Electronic Data: The direct damage portion of this endorsement typically does not cover loss or damage to electronic data. Businesses with significant electronic data exposure should consider separate cyber risk or electronic data processing policies.
- Power Surges: The endorsement may not cover loss or damage caused by a power surge if the surge would not have occurred but for an event causing a power failure. However, if a covered peril like a fire results from the power failure or surge, the ensuing loss from that fire would be covered.
- On-Premises Equipment: This endorsement is for interruption of services from an off-premises source. Damage to utility equipment located on the insured's premises that is used to supply a utility service from an off-premises source might also be subject to specific exclusions in the base policy, which this endorsement aims to address. However, equipment breakdown on the premises due to internal causes is typically covered by an Equipment Breakdown Protection endorsement, not BP 17 03.
Real-world example: A bakery relies on electricity for its ovens and refrigeration. A severe windstorm (a covered peril) knocks down a power line several blocks away (off-premises utility property). The bakery loses power for 48 hours. The BP 17 03, if power supply was selected, could cover the cost of spoiled ingredients (direct damage) and the lost profits from being unable to bake and sell goods (business income) after any applicable waiting period.
4. Key Information for Agents and Underwriters
- Risk Assessment: Underwriters should assess the insured's dependency on each utility service. Businesses in areas prone to natural disasters or with aging utility infrastructure may present a higher risk. The stability and reliability of local utility providers should also be considered.
- Pricing: Pricing will depend on the limits selected, the types of utilities covered (water, communication, power, including or excluding overhead lines), the business's industry, its location, and its claims history.
- Coverage Gaps: Agents should explain that a standard BOP (BP 00 03) typically excludes losses from off-premises utility service interruptions. The BP 17 03 is essential to fill this gap. It's also important to differentiate this coverage from Equipment Breakdown coverage, which addresses losses from the mechanical or electrical breakdown of the insured's own equipment.
- Underwriting Guidelines:
- Verify that the underlying Businessowners Coverage Form (BP 00 03) includes Business Income and/or Extra Expense coverage if the time element portion of BP 17 03 is desired.
- Clearly document the specific utility services selected by the insured in the schedule, including the choice for overhead transmission lines.
- Ensure the limits chosen are adequate to cover potential direct damage (e.g., spoilage) and the period of income loss the business might realistically face.
- Consider the proximity of the business to utility substations or critical infrastructure, as this could impact vulnerability.
- Relationship to BP 00 03: The BP 17 03 directly modifies the BP 00 03 Businessowners Coverage Form. The definitions, terms, and conditions of the BP 00 03 will apply unless specifically amended by the BP 17 03.
Agent Tip: When discussing this coverage, use real-world scenarios relevant to the client's industry to illustrate the potential financial impact of a utility outage and how this endorsement can provide crucial protection. For example, for a restaurant, emphasize not just the spoilage but the extended loss of income if they are unable to reopen quickly.