Recent wildfires in California have resulted in a financial catastrophe that U.S. Interior Secretary Ryan Zinke estimated will cost billions of dollars. Now a lawsuit suggests that one of the state’s largest utilities may be responsible for starting the Camp Fire that killed 86 and displaced 50,000 from their homes in November because of a poorly maintained transmission tower.
That utility, Pacific Gas & Electric Company, faces legal costs and potentially bankruptcy. The tragedy and lawsuit illustrate why most companies need to reevaluate their current insurance coverage limits to protect their financial interests, said Susanne Waite, CRIS, CISC, Vice President, Senior Broker, Burns & Wilcox Brokerage, San Francisco, California. Specifically, it is a lesson in why organizations should consider higher General Liability (GL) limits and Excess Liability coverage.
“Anyone in business today should consider an Excess Liability policy,” Waite said. “At the very least consider asking if higher limits for your GL are available.”
Waite said standard GL policies cover $1 million for each occurrence, $2 million in the aggregate and $2 million for products and completed operations. However, inflation alone can outdate those numbers quickly.
“That standard has been around for about 20 years,” she said. “It should be higher. Everything costs more these days so if you have a lower GL limit, you might be underinsured.” Waite notes some carriers are now offering a $2 million limit per occurrence and $4 million in the aggregate.
Excess Liability key to protection
It becomes a question of how much risk a business is willing to retain themselves versus transfer through an insurance policy, and at what cost.
“Business owners should ask themselves, ‘What are the asset levels they are trying to protect and what the maximum probable loss that could take place is?’ That loss could be higher than most business owners may even realize,” Waite said.
Most businesses will want to consider a layered Excess Liability policy that could cover bodily injuries, property damage, third party damages, legal costs and more. For example, Waite once filled a $500 million Excess Liability request for a tree-trimming company that was working around electrical lines. That policy required the development of 26 layers of varying limits.
“Risk exposures for businesses can more readily be measured when known (but also allow for unknown situations that might occur),” Waite said. “Each business is individually underwritten and policies are designed to address most potential risks. These Excess Liability policies are tailored to meet client needs.”
Even smaller businesses have risks that can result in catastrophic damages. For instance, a fire that starts in a laundromat, such as the one that took place in New Jersey in July, could cause significant damage to nearby residential units, Waite said.
Small claims are more frequent than large catastrophic ones; therefore the costs per million of coverage reduces with the purchase of high limits, Waite said. Businesses desiring excess limits of coverage should work with their retail brokers to determine the most appropriate limits given their risk factors.
Damage from wildfires on the rise
Every year since 2000, an average of 73,200 wildfires have burned an average of 6.9 million acres, according to the National Interagency Fire Center. However, the average number of acres has generally increased in recent years, topping 10 million acres in both 2015 and 2017.
There seems to be little doubt as to the most common cause of such fires. Data release in February 2017 by the University of Colorado’s Earth Lab found that more than 1.2 million of 1.5 million wildfires in the university’s database from 2002-2012 were caused by humans. The same study estimated that it costs more than $2 billion each year for various agencies to fight wildfires across the country.
One of the researchers involved in the study indicated that lightning storms are a more common cause of wildfires in the summer, but humans are igniting many new fires throughout the year in various ways, effectively “tripling the length of the natural fire season”. Recently, an off-duty border patrol agent was charged with causing a fire in Arizona in 2017 when he shot off an explosive device during a gender-reveal party for his wife’s pregnancy; about 47,000 acres burned, causing about $8.2 million in damage. The patrol agent will pay $220,000 in restitution.
Both because of and in addition to the human factor, organizations operating in both rural and urban areas are at risk. In 2015, relatives of some of the 19 firefighters killed in an Arizona wildfire reached a settlement with the Arizona State Forestry Division, which victims’ families said left the firefighters to fend for themselves during the fire. And a group of local residents led a lawsuit against the Durango & Silverton Narrow Gauge Railroad in September, accusing it of starting a fire than burned nearly 55,000 acres in Colorado.
Policy costs vary based on risk factors
The cost of Excess Liability policies will vary depending on an organization’s risk factors, such as management’s level of experience, size of the organization, sales revenue, past insurance claim history, and the actual product or service provided, Waite said. “Service providers, property owners and retailers may have as much need for high liability limits as a contractor or manufacturer,” she said.
Even if it is not found to be liable for the Camp Fire in California, Pacific Gas & Electric will likely face massive legal costs; provided its insurance policies are written with “defense outside the limits,” those policies could cover unlimited amounts of legal costs stemming from this event, Waite said.
If Pacific Gas & Electric is found to be have been negligent, its insurance policies could cover various damages and court-ordered awards for many liabilities, she said. This could include the cost of lost structures and personal or business property, relocation for residents and business owners in and around the fire area, loss of business and personal income, and emotional distress.
Insurance carriers that provide coverage to Pacific Gas & Electric likely have or will initiate an independent investigation into the cause of the fire on behalf of the utility to determine if any negligence occurred, Waite said.
It could take years to settle any legal action that comes out of this fire, and chances are many parts of the U.S. will continue to battle wildfires in the years ahead. Whether from a risk of wildfires or other tragic accidents, companies need to at least consider their insurance options.
“Remember: it costs nothing to get a quote from a broker or wholesaler,” Waite said. “That’s what we’re here for. All it takes is a little time to chat with an expert to understand your options.”
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This information was provided by Burns & Wilcox, North America’s leading wholesale insurance broker and underwriting manager. Burns & Wilcox works exclusively with retail insurance brokers and agents to assist clients like you with their specialty insurance needs. Ask your insurance broker or agent to review your Commercial General Liability, Excess Liability or any other related policies, to ensure you have proper protection.