As business losses mount, the need for new utility coverage?

When aging water pumps in Jackson, Mississippi, were shut down by flooding last August, cutting off much of the city’s water service, companies that depend on clean water saw many customers lose revenue overnight.

And most businesses are not covered for losses by their business interruption insurance policies.

When Jackson lost water service again in December, due in part to the cold snap and a pipe leak, businesses were hit again. At a popular restaurant in the heart of the capital’s business district, just three days after Christmas, only a few customers enter for a weekday lunch. Across town, a popular bookstore had to inform customers that restrooms and water fountains were out. City officials are asking residents to help with broken water mains that are contributing to low pressure in the system.

About 200 miles north of Jackson, Memphis, Tennessee, has 630,000 residents and 100-year-old water pipes in some areas. The city faced a pre-Christmas power outage with frozen pipes, low water pressure and a six-day boil water advisory — the third delay in two years, according to news reports and local business owners.

A similar story of water loss played out in Houston, Texas. Baltimore; Shreveport, Louisiana; Selma, Alabama, and weather events are the latest triggers for the system’s failures, and experts say the shutdowns are ultimately due to decades of government underinvestment and a lack of infrastructure maintenance.

The problem now appears to be worsening as municipal tax infrastructure is being eroded by years of takeovers in southern cities. But cities nationwide have recently been on the list of massive infrastructure problems that have led to frequent bankruptcies and insurance claims for businesses.

“It’s not a sign of things to come. It’s a sign of things now,” said Joseph Schoffer, a professor of civil and environmental engineering at Northwestern University.

The warning signs have been building for years. “The nation may have to deal with more serious drinking water contamination events before public opinion can act,” University of California engineering professor David Sedlak wrote for the Pew Philanthropic Trust in 2019.

The loss of drinking water could be life-threatening for some residents. It can also wreak havoc on businesses like restaurants, forcing them to close or stock up on bottled water, ice and portable toilets to serve a dwindling number of customers.

And while frozen pipes can often be covered by commercial insurance policies, the loss of water service due to flooding, power outages or lack of maintenance usually isn’t—unless policies include specific coverages. And policyholders aren’t always knowledgeable enough about insurance issues to request the necessary coverage, experts said.

The crisis facing America’s cities now could present scary new opportunities and potential problems for insurers, insurance agents and brokers to help businesses face frequent and costly headaches in the months and years ahead.

Brian Tilden, a former broker, teacher and professor, says, “If you can define and agree on a way to measure a claim, we can sell you insurance if it meets the criteria.” Expert witness on insurance coverage matters.

Although there is a growing need for businesses to be aware of coverage gaps, insurance agents explained that they may be limited to some extent. Courts and regulators are sometimes irritated by the demands or frustrations of agents. That, in effect, could make agents the “insurer of last resort,” exposing them to lawsuits from uninsured policyholders, Tilden said. A safer approach is to find clients through trade associations.

And vulnerable businesses should take it upon themselves to make sure they’re fully insured, said a Memphis restaurant owner who felt the full force of infrastructure damage but was mostly covered by business interruption insurance.

“My advice is to do your due diligence and read your insurance policy,” says Shawn Danko, owner of Cookie Canuck Restaurants in Memphis, which has a 6-pound hamburger.

In the year In early 2021, extensive water service was lost after a deep freeze hit the Memphis area. Danko’s restaurants lost revenue for eight days – a loss of $30,000. But it was a covered accident and his carrier paid immediately on the claim, he said.

Danko, chairman of Hospitality TN, formerly known as the Tennessee Hospitality and Tourism Association, urged other business owners to review their coverage and add coverage as needed.

“If you have to downsize, don’t let it be your insurance coverage. You might think you’re saving money, but if something happens, it’s worthless. “Make sure your policy covers you one way or another. If it takes special support, add it. Your livelihood is at stake.

Insurance agents in the Southeast say they haven’t heard much from businesses about upgrading their coverage in the face of growing infrastructure threats. But Danko said many company owners may not know the extent or limitations of their business interruption policies.

“I know there are some people who have the cover but they don’t realize it. They didn’t use it after it cooled down,” he said. “And their carrier never called to help. Claims not filed.

Utility-loss coverage may be reduced. The agencies explained that businesses can purchase off-premises utility policies that cover freezing and breaking pipes in the municipal water system. Storm surge at the pump station can be covered in many cases. But if a city’s water system is damaged by a flood, as was the case in Jackson in August, that generally isn’t covered without special arrangements, sometimes known as contingency and variance-perils. Something like an umbrella policy covers the property insurance coverage of the business.

“But these are very sophisticated techniques,” Tilden said. The average restaurateur may not know how to purchase that type of equipment.

Some national restaurant chains require franchisees to buy extensive coverage with all the bells and whistles, but some don’t, he said. And even if the business policy covers utility losses, the carrier could argue that a lack of municipal maintenance — not freezing — caused the water service to break, Tilden explained.

That’s exactly what happened in Mississippi’s capital, Jackson, after city officials said they failed to make major improvements to a decades-old water system. Businesses there said their losses were not covered.

“These are cities that have neglected their water systems for too long,” said Big 1 Tennessee CEO Ron Travis and the Tennessee Insurers Association of Insurance Agents.

And insurance may not cover all conceivable losses, insurance groups said.

“I think they’re good coverage to recommend and have in place, but not all utility losses are covered,” said Chris Boggs, vice president of agency development, research and education for the Independent Insurance Agents and Brokers of America.

Millions in federal funding have recently been made available to address some of Jackson’s massive water problems. The $1.2 trillion infrastructure bill passed by Congress in November is designed to provide some relief to other cities with similar problems. But Shofer and others warn that it may not be enough, and they won’t fund the maintenance of improved water systems in the coming years.

One option for businesses and insurance agents to consider is the use of parametric insurance, Tilden said. Parametric may provide a limited amount of compensation in the event of an agreed-upon event such as flooding, weather events or other perils. Parametric is not allowed in all states, and should not replace standard coverage, he said.

But beyond trade policy, he says, “this is a classic example of where parametrics can have beautiful utility.

Top Photo: Water at Jackson Restaurant (AP Photo/Rogelio V. Solis, File)

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