January/February 2021 | Vol. 26 No. 1
by Kyle Seymour, S&C Electric, and Rich Stinson, President and CEO, Southwire
If you’ve recently asked an attorney to review your business disruption insurance policy to ascertain whether it covers a pandemic, you’re not alone. If the answer was a resounding, “maybe,” you’re not alone in that regard either.
Unfortunately, whether your insurer agrees with coverage is another issue entirely, and courts around the country (and the world) continue to sort it all out. The pandemic coverage fight is just the latest in a broader trend of liability insurance issues that have resulted from catastrophic losses occurring in the past few years, mostly due to weather events such as hurricanes, tornadoes, floods, and wildfires. Many companies have experienced a tightening market for general liability coverage with premiums accelerating or added coverage exclusions.
A particularly acute example of this phenomenon relates to liability coverage for electrical equipment manufacturers serving the California energy market. Wildfires there have caused deaths and substantial economic losses in recent years. Of the past 30 years, 24 have seen at least 1 million acres burned in wildfires. And all of the 10 years that have seen more than 8 million acres burned have occurred since 2004.
Though wildfires are not exclusively in California, the state represents the most wildfires and damage sustained by them over that time. A variety of issues can cause these fires in California, commonly including weather and wildlife. But under a legal doctrine known as “inverse condemnation,” when equipment on the power grid malfunctions or is otherwise deemed to have caused a wildfire, the state’s law attributes automatic liability to the electric utility that owns that equipment.
Source: National Interagency Fire Center
How often are California utilities stuck with a bill for damages resulting from wildfires caused by their equipment? A January 2019 Los Angeles Times article reported that equipment owned by the state’s three largest utilities—Pacific Gas and Electric, Southern California Edison, and San Diego Gas & Electric— ignited more than 2,000 fires in a 3.5-year period. Due to the liability it faced for the private property these fires destroyed, PG&E (the largest of the three) filed for bankruptcy in 2019.
Electrical equipment doesn’t cause all wildfires. Among those that do, not all of those fires destroy private property, fortunately. But when they do, financial liability for the responsible utility can quickly soar into the billions-of-dollars range. Even with the large investor-owned utilities in California, there is no guarantee that they will have funds or insurance coverage to compensate the plaintiffs (usually the property insurers). The magnitude of the losses involved drives plaintiffs and utility companies alike to seek remuneration from other parties, such as equipment suppliers.
Wildfire liability insurance has historically been available and cost-effective for equipment manufacturers. But given the increasing risk level and the sums of money currently at stake, this coverage is becoming more expensive and less available at each renewal period. When combined with other catastrophic losses, it points to a general concern about continuity and cost of liability insurance coverage that the electroindustry may well face in coming years.
With few jurisdictional (state) regulations limiting which exposures can and cannot be covered, new ideas often emerge from corporations in need. NEMA is investigating one such idea as part of its 2020–21 Industry Defense Strategic Initiative: General Liability Captive Insurance.
A captive insurer is an insurance company wholly owned, operated, and controlled by the company or companies it insures. As a response to a hardening insurance market (one where premiums for specific exposures are increasing, or the level of coverage for those exposures is decreasing or is no longer available), captives can offer a viable alternative. The owners/ insureds define the covered exposures and establish premium levels and payouts, all of which are tailored specifically to their respective tolerances for risk.
According to a recent Wall Street Journal article citing A.M. Best, the number of U.S.-based captives more than doubled from 2007 to 2019. Today, more than 3,100 captive insurers have been created to address hardening markets for liabilities ranging from workers compensation to product liability to errors and omissions.
And what of business disruption coverage for a pandemic? Michael Serricchio, Managing Director at Marsh Captive Solutions and a risk management expert, sees a growing demand. “When the pandemic started, we took a look at our captive base, and we found that over 30 captives had pandemic coverage in the captive already. We see pandemic in captives, and I think that number’s going to grow.”
The Industry Defense Strategic Initiative Task Force will convene a NEMA-wide call this spring. If you are interested in learning more about how such a mechanism can insure or re-insure your critical exposures, please contact Jonathan Stewart (email@example.com) for an invitation.
Like the traditional/commercial insurance market, the principles of economies of scale apply just as readily to captive insurance. To keep the price of premiums reasonable, traditional insurers must build sufficient reserves to cover would-be pay-outs. The same naturally holds for captives. But commercial insurers benefit dozens, if not hundreds of premium payers, to create these reserves. Likewise, to keep premiums at acceptable levels for the owners/insureds, a captive must also have a sufficient number of premium payers. Otherwise, the premiums will be too high and cost- prohibitive, or the coverage will be insufficient.
To date, the group of NEMA Members interested in a captive solution to provide coverage for general liability related exposures has been insufficient to make the economics work. This could be due primarily to two factors:
- lack of awareness among the NEMA membership, and
- a perception that the efforts within NEMA are limited only to wildfire risk.
I am hopeful that this article will, at least in part, address the first factor. Regarding the second, it is true that wildfire risk has been the driving issue. But, as mentioned above, we can establish captives to cover a range of liability exposures. Creating a single captive insurer to cover multiple exposures appears to be the most viable way forward if any exist. Risk managers among the NEMA Membership should consider captive insurance as an alternative risk transfer method in the face of a hardening market of traditional insurance. ei
Mr. Seymour recently retired from S&C Electric. Mr. Stinson has more than 30 years experience in the electric industry.