Today in Texas homes and businesses, the lights are on and clean water flows. But for one week in February, the entire state of Texas was brought to its knees by a massive winter storm creating such a demand for electricity that much of Texas went without power and water for days on end. The widespread loss of electricity caused mass devastation on a scale rivaling any natural disaster. The only thing certain now is that the road to recovery will be long and the specter of litigation even longer.
Those suffering losses following natural disasters invariably ask themselves, “Who will pay for this?”
There is no easy answer to that question, but insurance will play a key and deceptively complex role in any recovery. It should not only pay for property damage and lost profits, but also fund the defenses of those sued for causing harm and bolster certain industries, like the gas and electric power industry, against unique hazards. That is why as we collectively scramble to account for our losses, we must understand the many roles insurance may play. Only by doing so can Texans and Texas businesses hope to be made whole.
Unlike those losses typically associated with natural disasters, which arise directly from the force of nature itself (e.g., wind damage in a tornado), some losses arising out of the 2021 winter storm have less to do with the impact of the storm at any given location, and more to do with the effect and handling of a state-wide demand for power that outstripped the state’s generative capacity. This makes the 2021 event quite novel insofar as “natural” disasters go and has led to an unusually large breadth of losses both in terms of geographic reach (i.e., much of Texas) and type.
The losses suffered are significant and far-reaching. In terms of bodily injury, we are still hearing of fatalities that occurred due to hypothermia and personal injuries caused by lack of medical care or medication. And with respect to property damage, losses range from water damage due to burst pipes to equipment and structural damage caused by ice and tree limbs. Many businesses also suffered an entire week (or more) of lost profits thanks to rolling blackouts, lack of clean water, and/or lack of access to their properties. These individuals and businesses have begun asking who may be responsible for their losses.
Insurance and Natural Disasters Go Hand in Hand.
It is no surprise that we have seen an enormous influx of insurance claims arising out of the storm. With respect to property and business losses, the first line of defense is the standard property policy.
Commercial property policies principally insure against damage to the insured’s own property, but they may also afford coverage for business interruption (lost revenue due to disruptions in one’s operations), contingent business interruptions (lost revenue due to interruptions in the supply/customer chain), service interruption (losses caused by utility disruptions), so-called “extra expenses” (expenses incurred to resume operations), and transit losses (loss of property in transit).
Property policies may also afford coverage for losses caused by government actions. The potential applicability of property policies is broad, but every policy is different. For instance, those seeking to recover for business interruption may find that their policies have anywhere from a 24-hour to a 60-day waiting period, only after which coverage kicks in.
As for liability policies, there are options available to protect companies from claims asserted against them. The front-line defense in the third-party context is the commercial general liability (CGL) policy. CGL policies insure against the perils normally associated with owning a business. For example, if a power company’s downed powerline burned down a house, a CGL policy may cover the ensuing claim.
Frequently complementing CGL policies are specific policies geared toward the insured’s business that fill in any coverage gaps. For example, an engineering firm should have a professional liability (or errors and omissions) policy that specifically insures against design defects.
Another type of third-party insurance likely to be receiving much attention given the numerous lawsuits against the Electric Reliability Council of Texas (ERCOT), local utilities and others is the directors and officers liability (D&O) policy. D&O policies protect company management (and often the company itself) when it is sued for wrongful acts arising out of management-related misconduct.
They may even cover investigations by government agencies. For example, Texas Attorney General Ken Paxton announced various investigations and sued electric retailer Griddy, alleging Griddy misled its customer using deceptive business practices, resulting in certain customers being billed tens of thousands of dollars for electricity during the state-wide shortage under variable rate electricity plans. Griddy’s and those investigated entities’ D&O policies may afford them a defense.
Property damage, personal injury and wrongful death lawsuits have proliferated in the weeks that followed the storm. In these cases, the defendants have typically been ERCOT, PUC, utility companies, generators, and the like. Given the extensive media coverage and political attention, the fact that these entities have been primary targets is no surprise, although the plaintiffs’ road to recovery will be difficult.
Observers expect the defendant pool to grow in the coming months to include other entities, like landlords, who may be accused of creating unsafe conditions, and contractors, who may be accused of faulty design or construction efforts giving rise to generation or transmission problems. Regardless of the ultimate merit of these various suits, liability policies of all sorts will be called upon to defend and pay settlements and judgments.
While not yet in litigation, we will inevitably also see a wave of insurance coverage lawsuits in which policyholders fight for all types of coverage — including coverage for property losses, business interruption, and liability coverage. As with all waves of coverage litigation following a natural disaster, there is typically a calm before the storm as insurance companies attempt to formulate a uniform coverage position. Thus, at this early stage, it is important not to confuse temporary tranquility with clear skies on the insurance front.
The floodgates are open. Right now, plaintiffs fill the courts with claims against government officials, ERCOT and power companies. At the same time, policyholders are filing claims with their insurance companies in record number all across the state. For policyholders who have suffered a loss during the 2021 winter storm, the worst thing to do is adopt a wait-and-see approach. They must work quickly to document their losses, understand their claims and the insurance and other available funds, and make those claims as quickly as possible to stay one step ahead of the avalanche.
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