As business losses grow, new demand for utility coverage?

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When antiquated water pumps in Jackson, Mississippi, were shut down by flooding last August, cutting off water for most of the city, businesses that depend on clean water saw many of their customers and revenue disappear overnight.

And most of those businesses weren’t covered for the loss by their business interruption insurance policies.

When Jackson lost its water supply again in December, due in part to freezing temperatures and burst pipes, businesses suffered again. At a popular restaurant in the heart of the city’s central business district, only a handful of customers turned up for lunch on a weekday three days after Christmas. On the other side of town, a well-known bookstore had to inform customers that the toilets and water fountains were not working. City officials asked residents to help find broken water lines that were contributing to low pressure throughout the system.

Some 200 miles north of Jackson is Memphis, Tennessee, with a population of 630,000 and water pipes that are 100 years old in some areas. The city suffered major power outages just before Christmas, along with frozen pipes, low water pressure and a six-day boil water notice – the third time in two years, according to media reports and local business owners.

A similar story of water loss played out in Houston, Texas; Baltimore; Shreveport, Louisiana; Selma, Alabama. And while weather has been the latest trigger for system failures, experts say the shutdowns are ultimately the result of a decades-long lack of government investment in infrastructure maintenance.

Currently, the problems appear to be even greater in southern cities, where municipal tax bases have been eroded by years of flight to the suburbs. But cities across the country are now on the list of those facing major infrastructure problems that will soon translate into frequent losses and insurance claims for business owners.


“This is not a sign of things to come. It’s a sign of things that are here, right now,” said Joseph Schofer, professor emeritus of civil and environmental engineering at Northwestern University. “To me, the message is that there are 10 other cities that need help that haven’t come forward yet – but they will.”

Warning signs have been brewing for years. “It is likely that the nation will have to deal with more drinking water contamination incidents before public opinion prompts action,” University of California engineering professor David Sedlak wrote for the Pew Charitable Trusts in 2019.

The loss of drinking water can be life-threatening for some residents. It can also be devastating to commercial operations, such as restaurants, forcing them to close or truck in bottled water, ice and portable toilets to serve dwindling patrons.

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

The crisis facing America’s cities now could offer insurers, insurance agents and brokers grim new opportunities — and potential pitfalls — to help businesses with what could be frequent and costly headaches in the months and years ahead.


“If you can define it and you can agree on the peril to insure against and how to measure the damage, we’ll sell you insurance if it meets the requirements,” said Bryan Tilden, a former insurance broker, lecturer and expert.

He explained that despite the growing need for businesses to be aware of gaps in their coverage, insurance agents can be somewhat limited. Courts and regulators have sometimes frowned on agents asking or selling more. That can essentially make agents the “insurer of last resort,” potentially exposing them to lawsuits from underinsured policyholders, Tilden said. A safer approach is to reach out to potential clients through trade associations.

And vulnerable businesses must take it upon themselves to ensure they are fully insured, said a Memphis restaurant owner who felt the full force of an infrastructure failure but was largely protected by business interruption insurance.

“My advice is, read your insurance policy carefully,” said Shawn Danko, owner of the Kooky Canuck restaurant in Memphis, known for its 6-pound burgers.

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

Danko, who is also the incoming president of Hospitality TN, formerly known as the Tennessee Hospitality and Tourism Association, urged other business owners to research their coverage and add support as needed.

“If you have to cut, don’t let that be your insurance. You might think you’re saving money, but it’s not worth it if something happens,” he said. “Make sure your policy covers you, one way or another. If special approval is required, please add it. It’s your life at stake.”

Insurance agents in the Southeast said they have heard little from companies about changing their coverage in light of growing infrastructure threats. But Danko said many business owners may not be aware of the scope or limitations of their business interruption policy.

“I know there are some people who have coverage, but they’re not aware of it. They didn’t use it after it was frozen,” he said. “And their carrier never called and offered to help. The requests remained unsubmitted.”

Utility loss coverage can be nuanced. Businesses can purchase off-premises utility policies that cover freezing and burst pipes upstream in the municipal water system, agents explained. A tornado hitting a pump station would also likely be covered in many cases. But if a city’s water supply is damaged by flooding, as was the case in Jackson in August, it’s generally not covered without a special arrangement, sometimes known as a condition difference and a peril difference. It is something like an umbrella policy that includes insurance coverage for the company’s property.

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

City of Jackson’s OB Curtis Water Treatment Plant. (AP Photo/Steve Helber, File)

Some national restaurant chains require franchisees to buy comprehensive coverage with all the bells and whistles, but some don’t, he noted. Even if the business policy includes loss of utility service, the carrier can argue that a lack of utility system maintenance — not freezing — caused the collapse of the water supply, Tilden explained.

That appears to be exactly what happened in Jackson, the capital of Mississippi, after city officials said they could not afford major upgrades to a decades-old water system. Companies there reported that their losses were not covered.

“These cities that have neglected their water systems for so long; they have to do the maintenance or it’s not covered and everybody’s in trouble,” said Ron Travis, chief executive officer of Big I Tennessee, and Insurers of Tennessee, an association of insurance agents.

And insurance cannot cover every imaginable loss, insurance groups say.

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

Millions in federal funds have recently been allocated to address some of Jackson’s massive water problems. The $1.2 trillion infrastructure bill that Congress approved in November is designed to provide some relief to other cities with similar problems. But Schofer and others warned that this may not be enough and will not provide funding to maintain modernized water systems for years to come.

One possibility that companies and insurance agents should consider is the expanded use of parametric insurance, Tilden said. Parametric can provide a certain amount of compensation when agreed events, such as floods, weather or other disasters, occur. Parametric is not approved in all states and should not replace standard coverage, he noted.

But as an addition to business policy, “this is a classic example where parametric would have a nice application.”

Best photo: Jackson restaurant tap water. (AP Photo/Rogelio V. Solis, File)

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