Substation Fire, Backup Failure and Business Interruption
A commercial property policy covers a Leeds data-centre operator for fire, storm and business interruption. The policy excludes 'loss, damage, liability or interruption caused by or arising from failure of, or interruption to, a public electricity supply'. A storm brings down a tree onto a nearby substation, starting a small fire and cutting power to the area for 48 hours. The data centre's backup generator fails because its fuel pump was not maintained. Servers overheat, £140,000 of hardware is damaged and £260,000 of client service credits become payable. The insurer declines the whole claim, relying on the utility exclusion. The broker argues that the storm is the proximate cause and that the fire at the substation is an insured peril. The insurer's claims manager asks for a coverage opinion before the complaint escalates.
1. Analyse whether the insurer is entitled to decline the hardware damage and the service-credit loss, applying proximate cause and the wording of the exclusion.
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Separate the two losses. The hardware damage is physical damage at the insured premises, but the immediate cause is the 48-hour power interruption after the backup generator failed. The storm and the substation fire are earlier events; the fire did not damage the data centre. The exclusion is wide because it uses 'caused by or arising from' interruption to a public electricity supply. On ordinary proximate-cause analysis, the utility interruption is the dominant and effective cause of the overheating; the storm is a remote cause. The service credits are business interruption and generally require insured physical damage at the premises; because the hardware damage is excluded, the BI is unlikely to be payable. Consider concurrent causation: if the storm could be shown to be an independent proximate cause operating with the excluded utility failure, the exclusion may need to be clear enough to defeat cover. It is not necessary to decide that here because the facts point strongly to the utility failure. Advise the insurer that decline is defensible, but check for any utility or denial-of-access extension and explain the decision in plain language.
2. What practical steps should the claims manager take before issuing the final coverage position, and what reserve would you set?
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Before finalising, obtain the policy schedule and endorsements, the engineer's report on the generator and servers, the substation incident log, and any maintenance records. Confirm whether the generator failure was a separate insured peril, such as accidental damage, or an uninsured maintenance failure. Check whether the policy has a deterioration-of-stock or utilities extension. Set the hardware and BI claims at nil if declining, but carry a reserve for defence and complaint costs and a contingent reserve for the service credits. Notify reinsurers if the claim is reserved. Communicate promptly, give reasons, and signpost the complaints process. If any part is covered, pay undisputed amounts without delay. Record the reasoning so that the insurer can defend a complaint or ombudsman referral.