Jury’s Out on Whether Outage Losses Are Insured

California’s energy crisis threatens businesses of all sizes--and may tempt some to wonder whether they can pass its costs along to their insurers.

In the long run they might just succeed, given time and enough treasure to take the insurance industry to court.

But in the short run--and especially in the practical world of small and mid-size businesses--the temptation to try would waste time better spent finding ways to manage the crisis, according to Diana Reitz, associate editor of Fire, Casualty and Surety Bulletins published by the National Underwriter Co.

Insurers see the electricity outages of the California energy crisis as planned events, not accidents, and don’t consider the losses resulting from them insurable, Reitz said. They blame the crisis not on some haphazard event but on energy deregulation passed by the state Legislature in the mid-1990s. In addition, the state’s utilities know in advance where the outages will strike and even strive to give businesses some warning.

There is nothing accidental about the costs to businesses at all, Reitz said, and insurers want no part of those costs.

“An accident must be sudden, unexpected and unanticipated,” Reitz said, “and it must cause physical or financial loss.” Thus, fire insurance covers damage to a building caused by fire, and business-income insurance covers a loss of income incidental to a fire or to some other disaster. Similarly, boiler and machinery insurance covers the breakdown of production equipment on the factory floor. But in all cases the insurance pays only for losses caused by accidental means.

Even so, Reitz added, it remains unclear just what insurers mean by the word “accident.”

American industry mounted a serious challenge to the common insurer definition of the word in the 1980s and early 1990s in a series of lawsuits over the costs of cleaning up the nation’s most polluted industrial and military sites under the Superfund law. In some of those cases, industry carried the day by attacking defenses very much like those now offered by insurers against claims associated with the energy crisis.

Industry asked a simple question in those lawsuits: In whose eyes must an accident be sudden, unexpected and unanticipated? It answered, “in the eyes of the policyholder,” and it carried the day often enough to establish the idea that an accident need not occur suddenly and all at once to remain an insurable event. Pollution, for example, could occur accidentally even if it happened gradually and over time, unbeknownst to the polluter.

Industry won some suits and lost some, and as you might guess, insurers made sure to protect themselves against future pollution claims by excluding all such coverage unless otherwise specified.

They did not, however, alter their fundamental notion of the accidental event, which lies at the heart of every property-casualty insurance policy, including the ordinary coverages bought by countless California businesses now beset by the brownouts and blackouts of the energy crisis.

To be sure, the crisis causes less-severe losses--hours of down time on the production floor, for example--but the idea is the same. And the question is: How do the losses caused by the crisis not qualify as accidental in the eyes of the policyholder, given their unexpected and unanticipated nature and the fact that they occur as close to suddenly as you can get?

“I wouldn’t be surprised if somebody tried the question,” Reitz said, “and they might win. What was sudden and accidental in a slow pollution leak? Some of those cases said the suddenness arose on the date when the policyholder became aware of it.”

Whatever the outcome, it would probably come too late to help many small and mid-size businesses, she added. The better idea is to manage the crisis. A factory, for example, might schedule work shifts in off hours or install stand-by generators to keep its computers working. A grocer or restaurant might store perishables in refrigerated trucks, and an ice cream maker might remind everybody to keep the freezer doors shut.

“If the outages are only an hour to an hour and a half, what’s the damage?” she asked. “If I know the blackouts occur in the daytime, I shift production to nighttime. If I’m a retail store, maybe I get my old manual systems back in order.

“Going into summer, if things are going to get worse, some long-range planning will have to be done. Maybe we’ll have to step back and ask, ‘If this were a hundred years ago and we didn’t have power, what would we be doing?’ ”

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Recent Financing and Insurance columns are available at http://161.35.110.226/finin. Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.