It is nearly five years since the winter storms caused blackouts across Texas, when over four million customers lost power as the ERCOT power grid nearly failed. And while the Texas grid weathered the most recent winter storm, what’s clear is that demand and weather conditions continue to put immense strain on the nation’s electric grid.
Utility companies typically purchase specialized insurance programs designed to protect against risks to: industrial operations, critical infrastructure, public service obligations, and catastrophic weather exposure. Such programs often include not only property and business interruption coverage, but also transmission and distribution insurance and other catastrophic loss coverages. How the insurance industry responds to a grid under pressure depends, in significant part, on complex questions about coverage, risk allocation, and financial exposure.
The Storm and Its Impact on Power Grids
Texas is not the only state feeling a strain on its electrical infrastructure. As The New York Times recently reported, in advance of the winter storms late last month, managers of electric grids warned that freezing temperatures, ice, and snow could lead to widespread power outages across the U.S. While grid operators implemented contingency measures including the postponement of maintenance and activation of line crews, these extreme weather conditions stressed both transmission infrastructure (power lines) and generating capacity (power plants). Utilities are having a difficult time keeping up, with some regional energy markets raising concerns about impending energy shortfalls (with or without weather complications). The peak utility demand is no longer limited to the summer months but includes the winter when cold temperatures drive the demand for heating appliances. Couple that demand with freezing conditions that weigh down tree branches and power lines—there’s no doubt about it, the grid is being tested.
There Are Multiple Types of Storm Losses
Storm damage to the electric grid can trigger a variety of insurance coverages depending on the impact to equipment, property, and the surrounding community. Potentially implicated coverages for the utility business include:
- Property damage losses – towers, substations, lines, and poles.
- Business interruption losses – lost revenue when customers go without power.
- Demand surge costs – higher materials and repair costs during and after the storm.
But utility companies are not alone in seeking insurance when they are feeling the pain. Power grid failure often leads to losses for manufacturers, data centers, and supply chains distant from where the distribution started. And some utility companies are only in the transmission business, buying their power from generating companies. These companies may have service interruption or contingent business interruption claims, and coverage may be available even when their property did not suffer direct physical damage but instead had operations that were interrupted when power was disrupted or lost:
- Service interruption – when business operations are disrupted because of damage to its utility provider (i.e., damage to the utility provider’s property).
- Contingent business interruption – when a business suffers loss as a result of damage to another company’s property in the supply or distribution chain (i.e., damage at the third party’s location).
These claims historically generate disputes about causation, scope of available coverage, and limits given that coverage may be subject to a sublimit that does not adequately protect against an incurred loss. Assessing what coverage may be available requires evaluation of the overall business and sources of the impact that caused the interruption.
Coverage Triggers Have a Significant Impact on Recovery
Utility companies often carry business interruption policies triggered by direct physical loss or damage. Consider an ice storm that knocks out distribution lines. Unlike a temporary power fluctuation or surge, “knocking out” lines usually involves physical destruction, whether that be broken poles, severed wires, or damaged transformers. In such instances, repair crews are often required to replace equipment, which cannot be immediately performed. Coverage for such events is arguably more straightforward. That is because standard property policies cover physical loss of or damage to property that is insured and Insurers routinely take the position that structural alteration to property (something that you can see with the naked eye) triggers coverage. Insurers’ acceptance of coverage, of course, would require that the distribution lines be covered property within the geographic limitation of the policy, and not otherwise excluded.
But how insurers interpret coverage for losses where visible structural alteration to property is not present—say, voltage fluctuations or ice loading that does not instantly break a line—is more often disputed. This is true particularly when grid instability takes place across multiple jurisdictions or with such frequency that the events are no longer deemed fortuitous in the eyes of insurers. Events surrounding such “reliability risks” may be the next wave of insurance claims, where causation will be at issue. But where events cause measurable physical degradation of electrical components that rendered the system unsafe or unreliable to operate, even when there is no visible damage, coverage should be triggered.
Risk Mitigation Is Essential
While interruption to the grid may be localized, there are instances where the impact spans counties, the state, and across state lines. This may lead to several claims being filed simultaneously across regions under the same insurance program, presenting questions about the number of “triggering” occurrences and the available coverage amounts under a policy (i.e., applicable per occurrence versus aggregate or other types of SIRs/deductibles, and “per occurrence” versus aggregate or other types of limits of liability). That is, are three localized outages from one storm a single occurrence or three? The answer to that question may determine whether policy limits are available once or multiple times, and whether the insured must absorb one or more deductibles.
Pre-event loss prevention may be the most viable path forward to secure adequate coverage and a way to reduce premiums. Some insurers offer risk engineering credits for utilities that invest in “grid hardening”—such as tree trimming, undergrounding lines, and advanced forecasting systems. And insurance programs are typically designed on a quota share basis, with risk being spread across multiple insurers across various lines of coverage.
Conclusion
Despite investment in upgrading, reinforcing and strengthening grid infrastructure to withstand severe weather events, stress on the system continues to result in outages. Insurance provides a critical risk management tool to manage what has become more frequent and longer interruptions to the network. Coverage may be available to respond and protect your business assets.
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