The Infrastructure Crisis: As Business Losses Mount, New Demand for Utility Coverage?

When aging water pumps in Jackson, Mississippi, were shut down by floodwaters last August, knocking out water service to most of the city, companies that depend on clean water saw many of their customers and their revenue disappear overnight.

Most of those businesses were not covered for the loss by their business interruption insurance policies.

When Jackson lost water service again in December, due in part to freezing temperatures and burst pipes, businesses suffered again. At a popular restaurant in the heart of the downtown business district, only a handful of customers trickled in for a weekday lunch three days after Christmas. Across town, a famous bookstore had to inform customers that restrooms and water fountains were not working.

City officials asked residents to help find broken water mains that were contributing to low pressure throughout the system.

Some 200 miles to the north of Jackson is Memphis, Tennessee, with 630,000 residents and water pipes that are 100 years old in some areas. The city endured rolling power blackouts just before Christmas, along with frozen pipes, low water pressure and a six-day boil-water notice — for the third time in two years, according to news reports and local business owners.

Similar water-loss stories have played out in Houston; Baltimore; Shreveport, Louisiana; and Selma, Alabama.

While weather events have been the latest triggers for the system failures, experts say the shutdowns are ultimately the result of a decades-long lack of government investment in infrastructure maintenance.

At the moment, the problems appear to be worse in Southern cities, where municipal tax bases have been eroded by years of flight to the suburbs. But cities nationwide are now on the list of those facing massive infrastructure problems that will soon translate to 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, emeritus professor of civil and environmental engineering at Northwestern University. “To me, the message is that there are 10 other cities that need help and haven’t popped up yet — but they will.”

The warning signs have been building for years.

“It is likely that the nation will have to weather more high-profile drinking water contamination incidents before public opinion forces action,” University of California engineering Professor David Sedlak wrote for the Pew Charitable Trusts in 2019.

A loss of potable water can be life-threatening for some residents. It can also be devastating for commercial operations, such as restaurants, forcing them to close down or to truck in bottled water, ice and portable restrooms to serve a dwindling number of patrons.

While frozen pipes may often be covered by commercial insurance policies, a loss of water service from flooding, from a loss of power or from a lack of maintenance usually is not — unless policies include special endorsements. And policyholders are not always knowledgeable enough in insurance matters to request the needed coverage, experts said.

The crisis facing American cities may now present insurers, insurance agents and brokers with grim new opportunities — and potential pitfalls — in assisting businesses with what could be a frequent and expensive headache in the months and years to come.

“If you can define it and can agree on a peril to be insured against, and a way to measure damages, we’ll sell you insurance, if it meets the requisites,” said Bryan Tilden, a former broker, a lecturer and an expert witness on insurance coverage issues.

He explained that, despite the growing need to make businesses aware of gaps in their coverage, insurance agents may be somewhat constrained. Courts and regulators have sometimes frowned on solicitation or upselling by agents. That can, in essence, 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 need to take it upon themselves to ensure they’re 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, do your due diligence and read your insurance policy,” said Shawn Danko, owner of the Kooky Canuck restaurants in Memphis, known for their 6-pound hamburgers.

In early 2021, Memphis suffered a widespread loss of water service after a severe deep freeze gripped the area.

Danko’s restaurants lost out on revenue for eight days — a $30,000 loss. But it was a covered peril and his carrier paid promptly on the claim, he said.

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

“If you have to make cuts, don’t let it be your insurance coverage. You might think you’re saving money but it’s not worth it if something happens,” he said. “Make sure your policy covers you, in one way or another. If it takes a special endorsement, add it. It’s your livelihood that’s at stake.”

Insurance agents in the Southeast said they’ve heard little from businesses about amending their coverage in the face of growing infrastructure threats. But Danko said many company owners may not be aware of the extent or the limits of their business interruption policies.

“I know there are some people who have coverage but they don’t realize it. They didn’t utilize it after the freeze,” he said. “And their carrier never called and offered to help. Claims went unfiled.”

Utility-loss coverage can be nuanced. Businesses can purchase off-premises utility policies that cover freezing and breaking of pipes upstream in the municipality’s water system, agents have explained. A tornado strike on the pumping station also would be likely covered in many cases.

But if the city water system is damaged by flooding, as was the case in Jackson in August 2022, that’s not generally covered without a special arrangement, sometimes known as difference-in-conditions and difference-in-perils. It’s something like an umbrella policy that wraps around the business’ property insurance coverage.

“But these are highly sophisticated techniques,” Tilden said. The average restaurateur may not know to buy that type of instrument.

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

That is exactly what appears to have happened in Jackson, the capital of Mississippi, after city officials said they’ve been unable to afford significant upgrades to the decades-old water system. Businesses there have reported that their losses have not been covered.

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

And insurance can’t cover every conceivable loss, insurance groups have said.

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

Millions in federal funding were recently set aside to tackle some of Jackson’s enormous water problems. The $1.2 trillion infrastructure bill approved by Congress in November is designed to provide some assistance for other cities with similar problems.

But Schofer and others have warned it may not be enough and won’t provide funds to maintain upgraded water systems in the years ahead.

One possibility for businesses and insurance agents to consider is the expanded use of parametric insurance, Tilden said. Parametric can provide a set amount of indemnity when agreed-on events occur, such as flooding, weather events or other disasters. Parametric is not authorized in all states, and it should not replace standard coverage, he noted.

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