This post first appeared on Risk Management Magazine. Read the original article.
In February, a massive winter storm slammed Texas and the
surrounding states with snow, ice and the lowest temperatures in decades,
leaving millions across the state stranded without power and running water.
Businesses endured a stunning range of resulting impacts, including property
damage, business interruption losses and even D&O issues.
The storm also exposed a number of vulnerabilities in the
state’s utility infrastructure. Facing unusually high demand for electricity
and heating during the storm, power grids failed, and the Electric Reliability Council
of Texas (ERCOT) ordered rolling blackouts with little advance notice or
information about when power would be restored. Unlike most states, which have
interconnected power grids that can withstand state-specific outages, Texas has
an independent grid that provides 90% of thestate’s power.
The power outages disrupted water treatment operations,
while freezing temperatures caused pipes to burst, leaving many businesses and
homes flooded or without potable water. To prevent pipes from breaking, many
residents and businesses left their faucets running, which exacerbated the
water shortage and prompted the state government to advise residents to
discontinue the practice to preserve water supply for fire departments and
health care facilities.
According to USA Today, the city of Austin recorded
325 million gallons leaking out of its water system in one day—more than three
times the daily normal usage. “Right now we’ve got approximately the same
number, if not more, frozen pipe claims in Texas than we had across the country
all of last year,” said State Farm spokesperson Chris Pilcic. The Insurance
Council of Texas predicted, “We expect the claims for frozen, busted pipes to
be unlike any event the state has experienced.”
The storm also crippled transportation across Texas,
interrupting supply chains for many industries, including the state’s large
automotive sector. For example, Forbes reportedthe auto industry
faced a serious shortage of semiconductors because the storms halted operations
at several Austin-based suppliers. The state’s airports also shut down, and
rail shipping and trucking were seriously delayed, due not only to power
outages, but also backed-up shipping traffic and weather-related accidents.
These accidents will also likely prompt an increase in commercial auto claims.
Overall, insurance industry experts anticipate that damage
from the storm may prove more costly than Hurricane Harvey, which devastated
Texas and Louisiana in 2017. For all the destruction Harvey caused, the hurricane’s
impact was largely limited to coastal areas, while February’s storm covered 80%
of Texas, according to the Weather Channel. The damage “may lead to record
first-quarter property catastrophe losses for the insurance industry,” AM Best
predicted, and “the heaviest volume of claims will be in the homeowners,
commercial property and auto insurance lines of business.” Fitch Ratings
estimated that losses from the storm will total $10 to $20 billion. “As a point
of reference, U.S. industry first-quarter catastrophe losses have averaged $4.6
billion over the prior 10 years, with a high of $7.6 billion in 2017,” Fitch
reported.
Lawsuits and D&O Issues
In the weeks after the blackouts, six ERCOT board members
announced their resignations, including the board’s chairman and vice chairman.
Additionally, DeAnn Walker, chair of the state’s Public Utility
Commission—which oversees ERCOT—resigned in early March, and ERCOT fired CEO
Bill Magness over his role in the outages.
As of this writing, nearly 60 people had died across the
state from storm-related causes, including carbon monoxide poisoning and
hypothermia. At least one of these deaths—that of 11-year-old Cristian Pavon,
who froze to death in his mobile home outside Houston—prompted a lawsuit
against ERCOT and power company Entergy Texas. The suit alleges that the
companies’ failure to be honest with customers about how long their power would
be out constituted gross negligence.
Texas power company Griddy also faced lawsuits over
exorbitant power bills for usage through the crisis. According to ERCOT, the
state’s energy demand hit seasonal record highs of 69,150 megawatts during the
storm. Customers who opted to pay wholesale prices for their electricity—where
bills are determined by supply and demand rather than fixed prices—saw an
increase of up to 10,000% in their power bills. A class action lawsuit accusing
Griddy of price gouging, was filed on behalf of impacted customers, seeking
more than $1 billion in damages.
Texas Attorney General Ken Paxton is also suing Griddy “for
violating the Texas Deceptive Trade Practices Act through false, misleading,
and deceptive advertising and marketing practices,” noting that the company
“passed skyrocketing energy costs to customers with little to no warning,
resulting in consumers paying hundreds or even thousands of dollars each day
for electricity.”
Additionally, the U.S. House Oversight Committee announced
that it is investigating ERCOT’s actions during the storm. Rep. Ro Khanna
(D-CA), who chairs an environmental subcommittee, said that ERCOT has
repeatedly been “unprepared” for intense storms. After previous extreme weather
events in Texas, including a cold snap in February 2011, caused mass power
failures, investigators repeatedly recommended making the state’s energy infrastructure
more resistant to severe cold and wind, but these recommendations were largely
dismissed as too costly. Because state decision-makers did not heed these
warnings, “once the storm was upon them, the best they could do was limit the
damage,” said Rich Sorkin, chairman, CEO and cofounder of climate risk
analytics firm Jupiter Intelligence.
Insurance Concerns
While Texas businesses likely have insurance that will cover
some of their losses, they may face challenges when trying to recoup costs. “Threshold
issues include whether the losses are large enough to exceed deductibles for
property damage or waiting periods for business interruption coverage,”
according to Vince Morgan, partner at law firm Bracewell.
Regarding potential lawsuits against energy companies,
“D&O and CGL policies are obvious candidates, but there may be other
options as well,” he said. “As with the property claims, insureds should be
getting ahead of these issues and coverage counsel may be needed to help with
this part of the aftermath as well.”
Businesses should also not necessarily expect an easy
process when filing claims. “The carriers are facing big losses from this
storm, so insureds should expect pushback as carriers give careful scrutiny to
how they’re adjusting each claim individually as well as how things are working
in the aggregate,” Morgan said. “Documenting the losses to substantiate a claim
is going to be critical to establishing coverage for some of these issues.”
Companies should closely examine all the areas of their
business that the storm affected, including exorbitant power bills and any
costs from supply chain interruptions. “If those costs were incurred to
preserve and protect property, then those costs might be covered,” he said.
“One other key thing to look for: even if your company saw only minor impacts,
losses to customers or suppliers that flow through to your business could
trigger contingent business interruption coverage.”
It is also essential that any company that experienced
losses carefully review its coverage, “and not just rely on general
observations by insurers or others,” according to Jeffrey T. Criswell and
Michael H. Sampson of Leech Tishman. “Coverage grants and exclusions to
coverage—as well as other insurance policy terms, provisions, and conditions—may
vary from policy to policy.” Additionally, it is critical to provide timely
notice, since failure to do so can jeopardize the right to coverage.
Overall, Morgan said,
“If we learned anything from this event, it’s that a robust, well-designed risk
management program is crucial to preparing and recovering from these events.
Insureds also need to reexamine their coverage program to make sure it still
meets the needs they can anticipate.”
Planning Ahead
In 2019, the Office of the Texas State Climatologist
published a report studying extreme weather trends dating back to 1900 and
projecting Texas weather through 2036. While extreme cold and snow events may
actually become less likely in Texas moving forward, the study pointed to
trends indicating that the number of 100-degree days could almost double. Texas
could also see a sharp increase in the likelihood and intensity of rainfall and
urban flooding, as well as hurricanes and wildfires.
All of these factors have potentially dangerous consequences
for the Texas electrical grid and, in turn, businesses across the state. It is
imperative to have risk management programs in place, including robust
contingency plans and adequate insurance coverage for extreme weather and
blackouts.
“Out-of-date assumptions need to be updated. Severe events
are happening more frequently and with greater impact already, and continuing
to get worse at an accelerating rate. The science and data to update
assumptions is vastly further ahead of what most decision makers are choosing
to use today,” Sorkin said.
These accelerating changes mean that resilience measures are
a necessity and decision-makers need to be visibly accountable for specific
resilience commitments. Organizations need to determine if infrastructure is
expected to withstand events that occur once every two, 10, 100 or 1,000 years,
Sorkin said. Based on these calculations, businesses and government agencies
should be ready to invest as heavily as needed to update the necessary
infrastructure to prepare for the next storm or other extreme weather incident.