On Thursday, July 27, 2017, a construction company working on the new Bonner Bridge over Oregon Inlet drove a metal casing into the ground and cut the three power cables servicing Hatteras Island and Ocracoke Island. While the loss of power during the height of tourist season is being mitigated by standby generators, upwards of 10,000 tourists have been ordered to evacuate the islands. Estimates are it could take days or weeks to restore full power to the islands. The losses to the island economies will be substantial. Are these losses insured and, if so, how are they insured?
First of all, businesses and commercial entities can protect themselves against the interruption of utility services by two endorsements. Utility Services – Direct Damage, CP 04 17, protects the policyholder against the interruption of several sources of utility services, i.e., water supply, communications supply (with or without overhead transmissions lines), and power supply (with or without overhead transmission lines) which results in direct damage to covered property. Initially, there have been no reports of damage to insured property by the power interruption. The second endorsement, which could be more applicable to the present loss, is Utility Services – Time Element, CP 15 45. This endorsement extends the business interruption or loss of income coverage to the “suspension of operations.” Transmission lines other than overhead transmission lines are specifically defined to be power supply property.
However, the issue with commercial property coverage and both endorsements is the damage or loss must be caused by a “covered cause of loss”. Since the apparent cause of the interruption of power is the operations of a construction crew, there is no such specified cause of loss in the Basic or Broad Cause of Loss forms. The Special Cause of Loss form covers “direct physical loss unless the loss is excludes or limited” by the policy. Rather than looking for a covered cause of loss, the Special Cause of Loss form provides coverage of direct damage unless we can find a specific exclusion. One of the standard exclusions in the Special Cause of Loss form is Exclusion 3.c. (2) which eliminates coverage for “Faulty, inadequate or defective: …Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction.” This exclusion will probably remove coverage under the Commercial Property Form and the above referenced endorsements.
The next question is, if property coverage is not available, where else can we look for coverage. In this case, the apparent cause of the loss is the construction operations on the new Bonner Bridge. The damage to third parties resulting from construction operations engages the Commercial General Liability coverage form. Liability coverage is triggered by “bodily injury” and/or “property damage” caused by an “occurrence” during the policy period. Initially there are no reports of “bodily injury” and, so far, the only reports of damage are interruption of operations resulting in the evacuation of tourists. A review of the definition of “property damage” may be enlightening.
‘17. “Property damage” means:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
For the purposes of this insurance, electronic data is not tangible property.’
The first part of the definition deals with physical injury to tangible property and the resulting loss of use. This part of the definition would address the damage to the lines themselves and potentially the loss revenue to the power company who is unable to sell power to the islands. It is the second part of the definition that is most interesting in the present matter. Paragraph b. deals with the loss of use of tangible property that is not physically injured. In the present case, rental houses, hotel rooms, stores and restaurants are tangible property and they apparently have suffered not direct physical damage but have lost their usefulness. So at least initially, there appears to be losses that would fall under the definition of “property damage.”
We, at least, arguable have “property damage” occurring during the policy period and within the coverage territory. Are there any exclusions that could possibly apply to eliminate coverage? There is a “Your Work” exclusion, but it applies only to work that falls within the definition of “products-completed operations hazard.” Since this loss occurred during the construction operation, this exclusion would not apply. The other exclusion which is an issue in on-going work-related damage is the “Damage to Property” exclusion. This exclusion is commonly referred to as the “care, custody and control” exclusion.
‘j. Damage To Property
“Property damage” to:
(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations;’
This exclusion would be germane to the question as to whether there was coverage for the damage to the cables themselves or whether the cables were under the care, custody or control of the construction company. This could be argued both ways. One could argue that the cables were no being worked on either directly or indirectly by the construction company and therefore the cables were not in their care, custody or control. In this case there could be coverage for the damage to the cables. To the contrary, one could argue that the ground above the cables was in the care, custody and control of the construction company and therefore they were working indirectly on the cables. This line of argument would tend to exclude coverage for the damage to the cables. In any event, this question of coverage will be a very small part of the potential damages.
At least initially, this looks more like a liability claim for the construction company. There could still be an argument about whether the construction company was negligent. However, it is a long-recognized factor that people who dig in the ground have a heightened exposure to strike something which should not be struck. There could also be a heightened responsibility to know where they are digging and what is potentially beneath the site. It will be interesting to see how this loss plays out. But it is also a great opportunity to review coverages and endorsements with our clients.
Stuart Powell is IIANC’s Technical Consultant and is available as a resource to IIANC members when they have technical or coverage-related questions. Please email him at email@example.com if you need any assistance.