In principle, only sudden and unforeseen damage is covered by your fire insurance (and, by extension, your business interruption insurance) in the event of a power cut. Since the power cuts are announced well in advance and confirmed a few hours beforehand, they are foreseeable events. A fire insurance provider will invoke this to refuse cover and not have to pay any compensation.
Consider the following: a power cut brings your production line to a stop. Given the loss of production, you have to send workers home and your company suffers a considerable loss of turnover. To make up the production backlog, you have to contract extra staff later on. Business interruption cover will come into play only when the cause of the damage that resulted in the reduced output is covered. As already noted, a power cut announced in advance is not covered.
The greatest risk of damage is when the electricity comes back on. Power surges can cause permanent damage to your electrical machines and components. The restart brings uncertainty with it, meaning this type of damage is indeed insurable through your fire insurance.
However, most business interruption insurance only covers a loss of turnover as a result of fire, not electricity. This is why you should take a good look at exactly what damage your policy covers.
Two aspects are important when it comes to liability:
- When the power fails, damage can occur during operations (e.g. no one can enter your company because the electric gate is blocked). A number of sectors are particularly vulnerable in the event of a power cut (e.g. security firms, telecommunication companies, the food industry, aviation, etc.).
- A company can also cause (contractual) damage to third parties because the production process comes to a standstill and it is unable to deliver on time or at all, resulting in financial damage to the client. To be able to refer to liability, there must be a party to whom the fault is attributable.
Depending on the extensions to your professional indemnity policy, coverage may be available for financial losses. As with your fire insurance, the cause must be a sudden and unforeseeable incident.
Since you know in advance when a power cut will occur, it is important that you take the necessary precautions in advance. You must be able to demonstrate that you took the necessary precautions to deal with such an event. We have listed the key issues for you below:
- Cooling systems: ensure the necessary emergency power generators are available. A power generator for an SME can easily cost EUR 20,000 or more. If you are considering such an investment, have your generator installed by a specialist in the interest of safety and for optimum efficiency.
- IT systems: ensure you have back-ups and systems that guarantee a constant mains voltage so that you can carry out a controlled shutdown of the server.
- Security of your buildings: are your buildings secured solely via electronic means using alarm systems? Make sure to identify the alternatives (e.g. temporarily contracting a security firm).
- Lighting for your buildings: ensure you have emergency lighting.
Access and evacuation routes: What happens if your barriers and electric doors fail? Work out the necessary prevention and action plans in good time.
- Production: if your company has multiple establishments in different regions, you may be able to move your production depending on the announced power cuts.
- Clients/suppliers: are your clients/suppliers in an affected area? Consult with them about whether deliveries can take place on the agreed date.
- Public relations: inform your clients/suppliers about the situation in Belgium, your province or your municipality. Prepare an e-mail in advance that you could send to all stakeholders.
- Contracts: check whether your contracts with clients and suppliers contain any penalty clauses if you are not able to meet your contractual obligations.
- Costs: what extra costs will your firm incur in the event of a black-out? What impact could a power cut have on your turnover? Examine whether you can limit or avoid these extra costs.
- Staff: what impact will the power cut have in terms of HR if your staff are unable to work for a certain period of time?
The standard fire and liability policies offer little cover in the event of an announced power cut. Alternative insurance solutions are generally expensive and have a very high excess.
The most important alternatives are:
- Through a (rent-a-)captive, you set up your own insurance company and, in the process, have to comply with all the tax obligations imposed on a financial institution of this kind. The costs associated with such a structure can easily amount to more than EUR 100,000.
- A supply chain policy combines the system of limits per client/supplier (as in the credit policy) with payment periods, as in a business interruption policy. This also involves a premium of more than EUR 100,000.
- With a little creativity, you can insure the chance of bad weather in a certain region through a weather policy. This policy can intervene for the losses that you incur. As with the (rent-a-)captive and supply chain policy, however, the premium can quickly rise to hundreds of thousands of euros.
- The inclusion of ‘unavailability of public utilities’ in your business interruption policy is not a solution at all: not only is the cover limited in terms of capital with a waiting period of 24 to 48 hours, but cover must be provided for material damage at the public utility supplier in question. This is not the case in the event of a power cut.
Conclusion: sound risk management is the best insurance.
At present, there is no reliable insurance solution for power cuts for SMEs. Larger companies can indeed cover their residual risks but the high cost of these insurance solutions means that for many companies it is cheaper to limit the risks through well-thought-out risk management.
If you have the ’emergency stop’ procedures of your electrical installations checked in good time, you can safeguard production as much as possible.
If you have already invested in a captive, you can opt for self-insurance or an alternative risk transfer.
Your account manager is ready to speak to you about the right strategy for your company to adopt.