Utility Damage Claims: Understanding the Loss of Use Application

Since I introduced the loss of use theory to the telecommunications industry for use in utility damage claims, I have been asked many questions about applying and collecting loss of use damage dollars. It is important to know why loss of use damages were established and how they were meant to be applied to facility damage claims. Here, I have attempted to clarify the foundation of the damage claim application of loss of use damages in general, in the utility industry and specifically in the telecommunications industry.
It is essential to understand that the application for loss of use damages was introduced to the utility industry in the early 1990s as a response to the lack of priority given to utility damage claims by damagers and their representing insurance companies.

Prior to that introduction, damage claims were viewed as minor and any settlements on repair expenses seldom exceeded 50 percent, even with clear liability on the part of the damager. The burden was placed on the utility owner to not only make the critical repairs but to also pay for them. It was apparent that the lack of concern on the part of the insurance company was based on the certainty that the repair expenses for these damage events were considered low dollar and that the utility owners would not spend additional dollars to pursue the recovery repair costs from their insured.

To counter this situation, the utility industry applied the loss of use theory and incorporated loss of use expense dollars in their damage claims. It was anticipated that utilizing loss of use would increase the potential to collect 100 percent of the damage repair expenses from the appropriate damaging party. Since that time, loss of use has been successful in recovering full damage repair expenses and in heightening the priority of utility damages within the insurance and construction industries.   

With the success of the inclusion of loss of use on utility damage claims to promote awareness, as well as equitable recoveries, there has also been controversy and perceived misuse of the loss of use application. This perceived misuse has at times been referred to as the “Dark Side of Loss of Use.”

There are extremes that may be considered within the law but are actually unreasonable in reality. An occurrence of where the application of loss of use may be considered by some in the industry to be unreasonable is in the comparison of the actual damage repair expense to the billed loss of use dollar amount, on a billed claim. As an example, when a telecommunication damage claim has a total repair expense of $40,000 and the loss of use is $20,000, it could be considered reasonable. However, if the same claim has a loss of use of $1 million, it could then be considered unreasonable. It may sound incredible that an amount of loss of use can be so high, but similar loss of use amounts have been calculated and billed on facility damage claims.  

Three Components

To better understand the methodology behind the loss of use calculations, you must start with a basic explanation of how it is applied. There are three fundamental components to the proper application of loss of use dollars to the damage claim. Each of these components is critical to a successful damage claim collection effort.

The first component is the “Establishment of Negligence” on the part of the damager. The owner of the damaged property must have conclusive proof that the damager’s negligence was the cause of the damage to the facility or property. An investigation must be done at the damage site and should include photos, written statements and all critical documentation. One noteworthy example of conclusive proof in the utility industry would be the lack of a valid state one-call dig ticket. Doing a complete investigation and establishing who the negligent party is can also eliminate billing an innocent participant and the retort of a counter claim. It can not be stressed enough that the damager’s proven negligence is the first order of business on a damage claim. Without establishing clear negligence it would be inappropriate to include loss of use damages.

The second component is “Calculating the Loss of Use Amount” to be included on the bill to the damager. In most loss of use legal documents, loss of use can be established by finding out the fair rental value of a similar property.

In the telecom industry, the loss of use value of a large physical facility or cable damaged or severed is calculated on the physical facility’s or cable’s capacity for an industry standard service. This industry standard service is the least expensive service offered and approved by the Federal Communications Commission (FCC). The capacity is then multiplied times the FCC rate and then multiplied by the time to repair. It is important to note at this point that each utility owner can calculate their loss of use differently by employing one time charges, utilizing technology that increases capacity, employ divisions that minimize the time element to reflect the actual repair time vs. the actual required rental period, etc.

These differences in calculating can either minimize or maximize the final loss of use dollar amount. As a result, some in the industry make the argument that technology should not be used to maximize the capacity, because it represents what is being transmitted over the facility and not the value of the actual facility. In addition, the inclusion of one time or non-recurring installation charges, which can be argued that they have already been paid by the utility owner’s customers, can also increase the amount.
To summarize, discretion is paramount at this point. It is the sole responsibility of the owner and their representatives administering the claim to bill a fair and reasonable amount of loss of use.

The third component of the loss of use application is the “Defense and Collection” of the direct damages, fees and loss of use expenses billed. This could be the most manageable of the three components if the first two components are completed professionally and with integrity. If the proof of the damager’s negligence is conclusive, then the damager’s liability for the expenses can be established and defended without contention.

If the loss of use is a fair and reasonable calculated amount, then the chances of collecting 100 percent of the repair expenses are real and the defense of the right to bill and collect loss of use dollars can be upheld. There are many legal documents that discuss and support the loss of use theory and the owner’s right to pursue loss of use compensation. In addition, if the first two components are again completed professionally and with integrity, the chances of incurring addition legal expenses will be minimized or unnecessary and the property owner’s budget can truly be made whole without extra claim defense expenses or manpower requirements.

Conclusion

If the three components of loss of use — i.e. “Establishment of Negligence,” “Calculating the Loss of Use Amount” and “Defense and Collection” — are administered correctly and reasonably, then the most economical claim collection can be achieved for the owner of the damaged property. It is not necessary in most claims to incur additional and costly legal expenses to defend a damage claim if the amount billed is accurate and calculated fairly. This, in essence, would be staying away from the “Dark Side of Loss of Use.”
It is essential to remember that the loss of use theory has been around for quite some time. To illustrate, a ferry line owner in New York sued for loss of use damages in 1872 and won. The tort law is very definitive in an owner’s rights for recovery when his property is damaged though negligence. Within the telecommunication industry, the loss of use theory has been effective in increasing the number of 100 percent repair expense (direct damages) recoveries when it is applied professionally and justly. This, in reality, can be considered the “Bright Side of Loss of Use.”

John Visi is vice president of Claims Management Resources, where he provides damage recovery field training and ongoing damage claim support for clients and interfacing with potential new clients.