Victoria's power outage: How does BI insurance play in?

More than 500,000 Victorians were impacted

Victoria's power outage: How does BI insurance play in?

Catastrophe & Flood

By Daniel Wood

Last month, more than half a million Victorians suffered a power outage following a major storm event. According to news reports, thousands of homes and businesses were still without power a week later and some are still without electricity today.

Many firms with business interruption (BI) insurance could be covered for income loss connected to this storm event.

BI losses greatest for supermarkets and restaurants

Gareth Horne (pictured above), partner with Clyde & Co, specialises in financial lines covers including BI. He told Insurance Business that the “quantum of loss” for insurers from claims connected to this power outage is still being calculated.

“What is likely, business interruption losses will be hardest felt in the hospitality industry, particularly cafes, restaurants and supermarkets,” said Horne. “Telecommunications providers may also report significant losses on the basis that mobile and fixed line services have been significantly affected across Victoria.”

How are BI covers triggered?

IB asked if this major electricity outage would be a claimable event under the definition of business interruption?

“Dependant on specific policy wordings, many business interruption policies broaden cover through a public utility clause,” said Horne. “This clause provides cover, among other things, for loss of income as a result of an interruption in the supply of electricity by a company or public authority producing, supplying or delivering electricity to the business premises.”

He said for cover to be triggered, the electricity interruption needs to be “sudden and unforeseen” and last for a minimum, defined period.

News reports say the power outage in Victoria was primarily a result of the tripping of the Loy Yang A power station and storm damage to transmission towers and power lines owned by the Victorian State Government.

“That being the case, businesses that are under cover of a policy that contains a public utility clause and has suffered loss, damage, interruption or temporary closure as a result, may find the electricity outage is within the scope of a public utility clause,” said Horne.

If a business’s BI related insurance does not contain a public utility clause, he said, coverage would be less likely “and may be limited to business interruption loss as a result of direct damage to the business premises caused by the storm event itself, rather than the ensuing power outage.”

Government compensation will impact BI payouts

In the storm event’s wake, the Federal and State governments announced that the Prolonged Power Outage Payments (PPOP) would be available to Victorians without power for seven days cumulatively. Those payments amount to nearly $3,000 per week for businesses.

Horne said this government compensation for impacted businesses will play into any claims payouts.

“Businesses with a payroll of less than $10 million qualify for payment under the subsidy for a period of up to three weeks,” said Horne. “Depending on the wording of each individual policy, insurers will likely treat the subsidy as income in an assessment of any claimed loss of income payable under the basis of settlement of their policy.”

BI covers: “Generally not contentious”

Compared to more complicated insurance areas, Horne said BI cover is actually relatively easy to determine.

“It is usually clear whether or not cover has been purchased or not, and whether an insured has been affected,” he said. “As a result, the availability of cover for claims of this nature are generally not contentious and therefore generally do not require legal assessment.”  

What exactly is BI cover?

Horne said BI cover usually forms part of a business insurance policy and provides cover for loss or reduced income and operating costs as a result of direct physical damage at the business premises caused by a covered insured event.

“What is considered an insured event is dependent on the policy wording provided by each insurer,” he said. “Typically, but not exhaustively, an insured event may include fire, earthquake, storm, lightning and flood.”’

Who has BI cover?

Horne suggested that BI insurance with coverage for public utility outages is a common offering from insurers, either as an inclusion or optional extension, to small and medium sized businesses across a very wide range of sectors. Firms in the education, real estate, retail and hospitality spaces can all have these BI covers.

Extended versions of BI cover, he said, are more likely in particular industries.

“Small to medium enterprises that rely on the temperature control of perishable stock - including supermarkets, cafés and restaurants,” said Horne, “or ‘always on services’ such as telecommunication providers, like mobile, fixed line and NBN services, may have purchased extended cover for electrical outages, though generally this would be heavily sub-limited.”

The coverage, he said, ultimately depends on an individual insurer’s policy wording.

Are you a broker who offers BI covers? If your customers were impacted by Victoria’s power outage last month and claimed under their BI policy please share what you can about their experience below.

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