Tuesday, August 7, 2012

Leaving Business in the Dark

Risk managers should look for service interruption coverage as part of their insurance plans.

-Anne Freedman
July 24, 2012
Copyright 2012© LRP Publications
Risk & Insurance Online

…Last year, of course, the big news was the major power outage in Japan following earthquake, tsunami and nuclear reactor damage. But it's really those fairly frequent, low-key outages that can torment most organizations.

English: Logo of the U.S. Energy Information A...
English: Logo of the U.S. Energy Information Administration (Photo credit: Wikipedia)
In July and August, 2011, for example, more than 2.1 million U.S. electric customers lost 540 hours of power, according to the U.S. Energy Information Administration. Some outages lasted an hour or two; some lasted days.

Blackouts are typically caused by a "combination of several deficiencies" -- all beginning with high power demand or utilization, high power-plant utilization and defects due to aging material -- according to "Power Blackout Risks: Risk Management Options," which was … written by Bruch, Gerhard Schmid of Munich Re and Michael Kuhn and Martin Weymann of Swiss Re.

In the United States, the risk is highest along the East Coast -- because of its aging infrastructure, [said Michael Bruch, Munich-based head of research and development at Allianz Global Corporate and Specialty.]

Blackout. (Photo credit: Wikipedia)
For risk managers, the obvious recommendation is to have an emergency generator or some type of uninterrupted power supply on hand, said Duncan Ellis, U.S. Property Practice Leader for Marsh Inc., in New York.

Contingency plans should also include back-up work locations as well as "wind down procedures" for factories. That can prevent damage to equipment or products that are sensitive to heat or cold, and could be damaged by the power loss, Ellis said.

As for insurance coverage, Bruch said, "the trickiest thing with a blackout, oftentimes, is there is no physical damage" due to power grid designs. Because of that, "most of the losses linked to blackout business interruption are not covered within standard BI coverage," he said.

Electricity pylon - power outage
Electricity pylon - power outage (Photo credit: Wikipedia)
Check the wording of such policies, however, Ellis said, to ensure there is no mileage limitation between the facility and the power plant, and make sure it includes "transmission and distribution lines," so the business will be covered if ice storms, for example, bring down miles of power lines.

It's also important, Ellis said, that service-interruption insurance include all perils.
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