1. Forms
2. CP
3. CP-04-18

Form CP 04 18: Utility Services - Direct Damage

1. What the form is

The CP 04 18, Utility Services - Direct Damage endorsement is a crucial part of a commercial property policy. It provides coverage for direct physical loss or damage to the insured's covered property (building, business personal property, or personal property of others) that results from an interruption of utility services. The key is that this interruption must stem from direct physical loss or damage by a covered cause of loss (like a fire or windstorm) to specific utility property that is not on the insured's premises. The endorsement allows the insured to select coverage for interruptions of water supply, communication supply, or power supply services. It's important to note that this endorsement modifies the existing property coverage; it does not provide an additional limit of insurance unless a specific sub-limit for Utility Services is scheduled.

2. Classes of business it applies to

This endorsement is vital for businesses that are heavily reliant on uninterrupted utility services and could suffer direct property damage if those services fail. Examples include:

• Manufacturing plants: An unexpected shutdown of power or water could damage equipment or goods in process. For instance, if a plastics manufacturer loses power, the molten plastic in an extrusion machine could solidify and damage the equipment.
• Cold storage facilities/Food processing/Restaurants: Interruption of power leading to a lack of refrigeration can cause spoilage of perishable goods. For example, a restaurant could lose its entire stock of refrigerated and frozen food if a storm damages an off-premises transformer, cutting power for an extended period.
• Businesses dependent on communication services: While direct damage from communication failure is less common, consider a business whose security or fire suppression system relies on an external communication line. If that line is damaged off-premises, leading to a system failure and subsequent property damage (e.g., a fire that isn't suppressed), this endorsement could respond.
• Healthcare facilities: Hospitals and clinics rely on constant power for life support systems and refrigeration of medical supplies. Damage to off-premises power infrastructure could lead to critical equipment failure.
• Data centers: These facilities require continuous power and climate control. An interruption could lead to overheating and damage to sensitive electronic equipment.

Essentially, any business whose tangible property could be directly damaged by a sudden loss of power, water, or communications originating from off-site utility property should consider this coverage.

3. Special considerations

• Covered Cause of Loss: The damage to the off-premises utility property must be caused by a peril that is covered under the insured's own policy. For example, if an earthquake damages a power substation, but the insured's policy excludes earthquake, there would be no coverage under the CP 04 18 for the resulting power outage damage.
• Location of Utility Property: The endorsement specifically applies to utility property not on the described premises. Damage to utility equipment on the insured's own property would be considered under the main property coverage, not this endorsement.
• Overhead Transmission Lines: The endorsement allows the insured to specify whether coverage applies to damage to overhead power or communication transmission lines. This is a critical selection, as many carriers may not automatically include it.
• Electronic Data: The endorsement typically excludes loss or damage to electronic data, even if caused by a utility service interruption. Businesses with significant electronic data exposure should seek specific cyber or electronic data processing (EDP) coverage.
• Relationship to CP 00 10: The CP 04 18 modifies the Building and Personal Property Coverage Form (CP 00 10) or other commercial property coverage forms. It doesn't stand alone.
• Time Element vs. Direct Damage: It's crucial to distinguish this endorsement (CP 04 18 - Direct Damage) from the Utility Services - Time Element endorsement (CP 15 45). The CP 04 18 covers direct physical damage to property. The CP 15 45 covers loss of business income or extra expense due to a utility interruption. Businesses often need both.
• Waiting Period: While not explicitly stated in the direct damage form summary, be aware that the related time element coverages often have waiting periods (e.g., 72 hours) before coverage kicks in. It's important to review the specific policy language.

4. Key information for agents and underwriters

• Risk Assessment: Underwriters need to assess the insured's dependency on each type of utility service. What is the potential for direct property damage if service is lost? For example, a bakery with large freezers has a higher spoilage risk from a power outage than an office that primarily uses electricity for lighting and computers.
• Pricing: The premium for this endorsement will depend on the limits selected, the types of utility services covered (water, communication, power), and whether overhead lines are included. Higher limits and broader coverage will naturally result in higher premiums.
• Coverage Gaps: Agents should highlight potential gaps, such as the exclusion of electronic data and the need for separate Time Element coverage (CP 15 45). Also, ensure clarity on whether damage to overhead transmission lines is included, as this is a common point of exposure and can be a significant source of outages.
• Underwriting Guidelines:
  • Consider the reliability of local utility infrastructure. Areas prone to severe weather (hurricanes, ice storms) may present a higher risk.
  • Evaluate the insured's backup systems. Does the insured have generators or alternative water sources? While this doesn't negate the need for the endorsement, it can impact the probable maximum loss.
  • The definition of "utility services" is specific (e.g., water supply includes pumping stations and water mains; power supply includes generating plants, substations, transformers, and transmission lines). Ensure the potential cause of loss aligns with these definitions.
  • The endorsement clarifies that coverage applies to all lines transmitting power or communication, including "transmission lines" and "distribution lines."
• Limits: If a specific limit for Utility Services is shown in the schedule, this limit is part of, and does not increase, the overall Limit of Insurance for the Covered Property. If no separate limit is shown, the coverage is subject to the applicable limit on the Covered Property. Agents should discuss appropriate sub-limits with clients based on their potential exposure.
• Example Scenario for Underwriters: A food processing plant in a coastal area prone to hurricanes applies for coverage. Key underwriting questions would include: What is the value of perishable goods susceptible to spoilage from a power outage? Does the plant have backup generators, and what is their capacity and reliability? Has the local power grid experienced frequent or prolonged outages in the past? Is coverage for overhead transmission lines requested, and what is the condition/vulnerability of local overhead lines?