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Texas Cold Crisis: Insurance Options for Severe Weather Disruption

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On February 15, a massive and unseasonal storm with frigid temperatures spiked the demand for power and outpaced the supply, severing power to 26 million Texans. Unpredictable weather patterns present risks for business owners, but also create an opportunity to improve their risk mitigation strategies to address future uncertainties. 

Power outages are not caused by storms alone. Heat waves, hurricanes and wildfires can also create power outages—and outages are more common than business leaders may think. S&C’s 2018 Commercial and Industrial Power Reliability Report found that one in four businesses experience at least one power outage per month. The Department of Energy estimates that these outages cost companies $150 million per year. Although companies may face spoilage-related losses, data centers often experience the most severe consequences. When a data center goes down, it can impact a business’s most vital proprietary assets. According to a Ponemon Institute study, the cost of an unplanned data center outage is $5,600 per minute with an average recovery time of 119 minutes resulting in a loss over $690,000.

The cost for businesses goes beyond damage. Litigation tends to run rampant, and with the recent Texas power outages, businesses are already facing lawsuits. The family of an 11-year-old boy who died of hypothermia is suing energy company Entergy and grid operator Electric Reliability Company of Texas. Multiple wrongful death lawsuits are predicted from incidents including carbon monoxide poisonings, house fires and shelter closings.

A range of insurance options can help businesses protect themselves from complex, evolving and completely unpredictable risks such as natural disasters and climate change.

Property insurance protects the building and physical assets like equipment, supplies, inventory, fixtures and computers. However, property insurance may not provide all the coverage needed. Exclusions like floods, sink holes, earthquakes, terror incidents, and chemical, nuclear, biological and environmental events are likely not covered. An unexpected policy exclusion can be devastating and result in a claim being denied, leaving business owners and leaders feeling helpless and infuriated.

Business interruption insurance is helpful but may not be enough. Typically, when damage obstructs business operations, it is covered by property insurance, and business interruption insurance covers losses from interruption. However, a natural disaster can create a perfect storm, so to speak. For example, if an establishment is forced to close due to lack of power, there can be a denial of claims. Business owners may be able to have property repaired, but cannot recoup the lost revenue through insurance.

Another option for businesses is to choose captive insurance and own their own insurance company. This establishes a more robust approach to risk management, and enables the business or business owner to own a profitable second business. This can help lower commercial insurance costs, build up assets and loss reserves, enhance critically needed cash flow and liquidity, and help prevent losses from hollowing out the total business entity. Importantly, successful captive insurance companies are filled with liquid assets that back the reserves for potential future losses, owned by the business or business owner. Liquid assets are often more desirable than durable assets that depreciate and may be difficult to sell. Finally, a captive insurance company is a regulated entity.

A captive primarily insures its parent company or related companies, so the parent company can purchase insurance from its wholly owned captive. Such purchases may replace all, or a portion, of its commercial insurance. Additionally, risks that are unable to be insured, are cost prohibitive, or are underinsured in the commercial insurance market can be placed in the captive insurance company. The captive can also insure gaps in third-party commercial insurance policies.

Benefits of Captives in Natural Disasters

While businesses with claims for property insurance or business interruption coverage are denied, a business with a captive insurance company would not face exclusions that leave them vulnerable. Since a captive insurance policy can be written to be broad and robust, it has more triggers than third-party commercial insurance, sos an event may covered where business interruption might not provide coverage.

Captive insurance also serves as a valuable financial strategy. When captives build up loss reserves, backed by corresponding assets, those assets are available for dealing with a catastrophic event. When a business has to restart or relocate their operations, assets are readily available to help it navigate the challenges and pursue big changes. The business owner can use the asset buildup in successfully managed captive insurance companies to help grow the business by funding acquisitions, growth strategies and enhanced risk mitigation strategies via a dividend from the captive insurance company to the business owner.

Before another crisis strikes, businesses should review insurance policies, determine whether current policies offer adequate coverage, and determine if a captive will help them face the next worst-case scenario.

Cyber Blackout Could Cost Insurers $71 Billion, Lloyd’s Reports

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A cyberattack targeting the U.S. power grid would have widespread economic implications, resulting in insurance claims of between $21.4 billion and $71.1 billion in a worst case scenario, according to a report by Lloyd’s.

Lloyd’s and the University of Cambridge’s Centre for Risk Studies recently released “Business Blackout,” which examines the insurance implications of a major cyberattack using the U.S. power grid as an example. In the scenario outlined, malware is used to infect control rooms for generating electricity in areas of the Northeastern U.S. The malware goes undetected and locates 50 generators that it can control, forcing them to overload and burn out. The scenario, described as “improbable but technologically possible,” leaves 15 states in darkness, meaning that 93 million people are without power.

Economic impacts include direct damage to assets and infrastructure, decline in sales revenue to electricity supply companies, loss of sales revenue for businesses and disruption to the supply chain. The total impact to the U.S. economy is estimated at $243 billion, rising to more than $1 trillion in the most extreme version of the scenario.

Claimant types fell into six categories:

Power generation companies

• Property damage to their generators.

• Business interruption from being unable to sell electricity as a result of property damage.

• Incident response costs and fines from regulators for failing to provide power.

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Defendant companies

• Companies sued by power generation businesses to recover a proportion of losses incurred under defendants’ liability insurance.

Companies that lose power – companies that suffer losses as a result of the blackout.

• Property losses (principally to perishable cold store contents).

• Business interruption from power loss (with suppliers extension).

• Failure to protect workforces or causing pollution as a result of the loss of power.

Companies indirectly affected – a separate category of companies that are outside the power outage but are impacted by supply chain disruption emanating from the blackout region.

• Contingent business interruption and critical vendor coverage.

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• Share price devaluation as a result of having inadequate contingency plans may generate claims under their directors’ and officers’ liability insurance.

Homeowners

• Property damage, principally resulting from fridge and freezer contents defrosting, covered by contents insurance.

Specialty

• Claims possible under various specialty covers, most importantly event cancellation.

 Other key findings of the report include:

• Responding to these challenges will require innovation by insurers. The pace of innovation will likely be linked to the rate at which some of the uncertainties revealed in this report can be reduced.

• Cyberattack represents a peril that could trigger losses across multiple sectors of the economy.

• A key requirement for an insurance response to cyber risks will be to enhance the quality of data available and to continue the development of probabilistic modelling.

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• The sharing of cyberattack data is a complex issue, but it could be an important element for enabling the insurance solutions required for this key emerging risk.