Utilities Industry Session IND021

Transcription

1 Utilities Industry Session IND021 Speakers: Deborah Gaffney, Director, Risk Management, Southern Company Services, Inc. Richard LaPeter, Manager Risk/Insurance/Claims, Arizona Public Service Company Meghan Magruder, Partner, King & Spalding Patrick Maguire, Senior Vice President, McGriff, Seibels & Williams Alice Edwards, Managing Director, Pricewaterhouse Coopers

2 Learning Objectives At the end of this session, you will: Have heard about some industry hot topics: Space weather and grid resilience Net metering and associated risk considerations Opportunities to add value using OCIPs Specific utilities cybersecurity challenges Be up to date on the utilities insurance market Know new law on contracts & additional insured status

3 What is a solar storm? Natural electrical current systems in the upper atmosphere are enhanced to the point that they constitute a geomagnetic storm Solar activity can produce x-rays, high-energy particles and coronal mass ejections of plasma. Largest storms are solar coronal mass ejections (CMEs) Billion tons of plasma, with embedded magnetic field, arrives at Earth, causing geomagnetic storm Can take as little as 18 hours to reach earth Has it happened before? Carrington Event 1859 telegraph networks failed, operators were shocked, telegraph paper caught on fire Power blackout 1958 Canadian blackout & transformer loss 1989 collapsed the Hydro-Quebec power grid Halloween storms 2003 Space Weather Prediction Center swpc.noaa.gov

4 A Near Miss

5 Consequences Magnetic activity & induced electric currents can disrupt: Satellites / GPS Communication networks Power grids power surges could destroy transformers Similar event to Carrington could cause $2 trillion 20x Hurricane Katrina And could affect million people with durations up to 1-2 years Sources: Science@Nasa; Lloyds of London

6 Space Weather Impacts - Power

7 What s the risk?

8 Possible solutions?

9 MW Rooftop Solar: Net Metering Issue Total combined output (MW) of 30,000 rooftop solar units versus system load. 6, ,315 7, Rooftop Output 5000 System Load Hour Ending At noon, when customer demand is still increasing, rooftop solar peaks and begins to decline. By 5 PM, when customer demand peaked, rooftop units had declined to only 38% of their power. At 7 PM, rooftop output dropped to zero, but customers still needed 6,900 MW of power.

10 Rooftop Solar: Risk Considerations Contractual Risk Transfer Utility s Insurance Ownership and maintenance of system/assets Form of agreements (homeowner/installer) Leases and/or ROW easements Homeowner rights and responsibilities Insurance requirements and indemnification Term of agreement (consistent with asset life?) Loss control risk assessments (pre/post install) Tracking asset locations and values Automatic coverage or as-scheduled? Operational program or stand-alone? Cat exposure, deductibles and retentions Claims and notice process

11 Construction Opportunities Construction projects Opportunities to utilize Owner Controlled Insurance Programs (OCIPS) to recognize savings Broad consistent coverage with high limits to protect the project Potential for cost savings as insurance is bought in bulk and claims managed by owner If you have an excellent safety program, the OCIP will allow your safety group to shine and see real project savings Sophisticated OCIP market and service providers can provide excellent services Eliminates uncertainty associated with contractor provided coverage Ash pond remediation explore environmental cover either with an OCIP project or standalone

12 Utility Market Report Property Market Conditions Overabundance of capacity New entrants Low loss activity Cheap reinsurance Consolidation among Insureds Potential Constraints No investment returns Major Nat CAT ($50Bn+) Major cyber event Consolidation among Insurers

13 Utility Market Report Property 2016 Market Projections Traditional and new capacity will promote competition Historic lead markets under pressure from new aggressive players Underwriters will be looking to maintain market share Focus on retaining premium over rate Rate reductions certainly expected for profitable and well managed accounts Underwriters continue to make reasonable profits on their general portfolios

14 Utility Market Report Property 2016 Expected Pricing Trends Expect rate reductions ranging from 5% to 15% for clean accounts Loss prone accounts are able to trade pricing for coverage improvements, increased limits and reduced deductibles Construction projects are an added bonus

15 Utility Market Report Casualty AEGIS Update 2015 Results Overall combined ratio of 81% is by far the best in the past 20 years Excess Liability trailing 3 years is favroable 93% GWP below plan due to competitiveness of market Investments -0.61%, 3.9% worse than planned Still no continuity credit for excess liability Pushing for inflationary increases (3-5%), while each account underwritten on its own merits New AEGIS Everest Alliance replaces previous arrangement with Liberty Mutual Everest are able to offer primary and excess workers compensation (statutory limits), GL ($2M), AL ($2M) and up to $10M for railroad protective liability AEGIS is % Q/S reinsurance participant Premiums help continuity credit with AEGIS Liberty still intending to keep clients and has not been walking away by any means

16 Utility Market Report Casualty EIM: Surplus continues to grow, $972MM (up from $890 in 13) Excess Liability combined ratio is 104% (up from 77% in 14) Looking for flat to inflationary increases and influenced by AEGIS pricing/terms Bermuda: Total capacity $975MM Market under pressure with declining exposures Pricing is stable and largely driven by underlying layers Willing to move to lower attachment points than in past Risk differentiation / quality of submission is critical Europe: More participation than in past as Lloyd s syndicates offer more competitive terms Dublin still active

17 Utility Market Report Casualty Underwriting focus remains the same:

18 Cyber One Company s Experience First, let s take a look at what we believed we had prior to the decision to purchase a stand-alone cyber insurance product: No cyber exclusions on our major insurance plans for: Property damage to our covered property Third party bodily injury or property damage Injury or death to our employees Claims made against fiduciaries or directors and officers Key insurance programs included coverage against terrorist acts with no cyber exclusion Public liability and excess liability policies provided failure to supply (e.g. blackout /brownout)

19 Cyber Insurance Initiative C-Suite expressed an interest (Q3, 2014) in purchasing cyber liability insurance before year end This helped to expedite the process- bound program December 2014 Explored various policy forms fast changing market of terms and conditions Focused on the Critical Asset Protection policy form at least $100m of limits of consistent terms on a broad form geared to utility industry CAP underwriting process preferred Internal Legal reviewed the CAP form and made some modifications to the form Cyber form had coverage options 1. Privacy only 2. Failure to Supply 3. Business Interruption 4. Dependent Business Interruption Received ball park estimates of premiums for each option (1-3) prior to underwriting which helped us to gauge how much all of this was going to cost

20 Underwriting Initiative Small team of individuals to help get the process rolling ERM, Power Delivery, Legal, Supply Chain, Risk Management, IT Identified areas/contacts that need to be involved CAP requires that an outside assessment be performed Review of system and processes Summary results and score supplied to underwriters; detail results shared with us CAP underwriters agreed to accept this process in lieu of detailed underwriting information Assessment SharePoint site Review of over 200 policies and procedures 3 days of interviews with 30 individuals Executives interested in the assessment

21 Coverage Features Full limits for privacy and security breach response related cost, including legal and PR expenses, notification, credit monitoring, forensics and call center services Coverage for fines, penalties, including industry fines (such as PCI) and regulatory fines (such as NERC CIP) Coverage for cyber-terrorism Two year prior acts coverage provided Punitive damages coverage when allowed by law most favorable venue Contractual liability coverage Defined policy terms for ICS, SCADA, EMS and other operational technology to clarify intent to cover infrastructure risk

22 Coverage Features Insured s cost to purchase replacement power from spot market Coverage for hacking events plus operational or administrative error Network asset protection Loss of digital assets (loss of data) Non-physical business interruption and extra expense Cyber extortion Coverage for third party liability arising from our failure to supply Optional Coverage (with additional premium and underwriting): Dependent business income loss

23 Aligning Insurance and Contractual Issues in Supplier Agreements

24 I will be highlighting for you the problems that can appear when there are indemnity agreements and additional insured endorsements relating to your contractual arrangements that are not aligned.

25 Overview of Key Legal Principles Contractual indemnities and CGL policies are separate contracts, but both can indemnify for defense and loss Contractual indemnity agreements are construed more narrowly while insurance policies are construed broadly Additional insureds are entitled to the benefit of broad, pro-policyholder rules of construction But, underlying agreements granting AI coverage may shape the existence, scope, and amount of AI coverage if carefully drafted

26 AI is entitled to broad coverage under named insured s policy By agreeing to grant AI status to a third party, the third party becomes an AI with a direct right to pursue claims under someone else s insurance policy

27 AI is entitled to broad coverage under named insured s policy AI entitled to same benefits under the policy as the named insured absent clear policy language limiting the scope of AI coverage: An additional insured may be entitled to seek coverage for its own negligence under the named insured s policy, even if the contractual indemnity and insurance requirements do not contemplate covering the indemnitee against its own negligence The named insured need not be a defendant in the underlying lawsuit for the AI to obtain coverage Significant risk for captive programs

28 Case Study 1: ISO 2013 Al Endorsement Under CG : If coverage to the additional insured is required by a contract or agreement, the most [the insurer] will pay on behalf of the additional insured is the amount of insurance: 1. required by the contract or agreement; or 2. available under the applicable Limits of Insurance shown in the Declarations; whichever is less. $10 million loss by ABC Corp. But the contract only required $2 million in primary coverage. Thus, only $2 million in coverage available to ABC Corp. for the $10 million loss despite XYZ Corp s $30 million program.

29 Case Study 1: ISO 2013 Al Endorsement If your CGL form includes this endorsement this situation could happen to you. There are over 30 ISO AI endorsements, you can always request changes, but the forms increasingly limit the scope of additional insured coverage. The corollary is that if you are seeking AI coverage, you need to make sure to get appropriate language. May help company get more value.

30 Case Study 2: Oil in the Gulf This is the very real case involving the BP disaster. Transocean owned the Deepwater Horizon drilling unit. Deepwater was doing exploratory drilling and in April 2010, an onboard explosion caused the Deepwater Horizon to sink after burning for 2 days. An oil spill occurred underwater.

31 Case Study 2: Oil in the Gulf In the indemnity provision in the BP Transocean Drilling Contract, Transocean agreed to indemnify BP for pollution above the water s surface, while BP was responsible for pollution below the water s surface. The oil spill occurred underwater. Undisputed that BP had no right to indemnity from Transocean for underwater pollution. BP did not seek contractual indemnification from Transocean. But also undisputed that BP was an additional insured, at least to some extent, under Transocean s policies.

32 Case Study 2: Oil in the Gulf Insurance Provision in Drilling Contract [BP], its subsidiaries and affiliated companies, coowners, and joint venturers, if any, and their employees, officers and agents shall be named as additional insureds in each of [Transocean s] policies, except Worker s Compensation for liabilities assumed by [Transocean] under the terms of this Contract. AI Provision in Transocean s Policies The term Insured shall include:... (c) any person to whom the Insured is obliged by any oral or written Insured Contract... entered into before any relevant Occurrence, to provide insurance such as is afforded by this Policy.

33 Case Study 2: Oil in the Gulf Transocean s Insurance Program: Primary: $50 million of general liability Excess: $700 million consisting of 4 excess policies The policies do not incorporate the limitations on AI coverage arguably set forth in the drilling contract. Is BP an additional insured?

34 Case Study 2: Oil in the Gulf As risk managers you may have never seen this contract even though it references insurance requirements. There are billions of dollars in claims pending against both BP and Transocean as a result of the explosion and oil spill.

35 Case Study 2: Oil in the Gulf This case did not include 2013 endorsement limiting AI to contract. But this case law is important if you have large SIR or captive arrangement and want to limit AI available. So for example, if you are where your contractual indemnity is narrowed so don t pay for negligent acts of vendor, for example, with broad duty to defend in CGL you may not be able to avoid erosion of your limits.

36 Key takeaways from BP- Transocean AI Dispute: It is possible for a named insured to purchase a greater amount of coverage for an AI than an underlying agreement requires The scope of an indemnity agreement may not be congruent with a CGL insurance agreement The policy language determines the extent to which the underlying agreement can limit the scope of AI coverage In re Deepwater Horizon, No , --- S.W.3d ----, 2015 WL , at *7 (Tex. Feb. 13, 2015).

37 Tips for Limiting AI Coverage The 2013 ISO amendments to blanket AI endorsements make it easier: (1) to limit the grant of AI coverage consistent with coverage consistent with liability and exposure assumed in the insurance requirement provisions in the underlying contract; (2) to align the AI coverage with the parties intentions as reflected in the contractual indemnity provision.

38 Tips for Limiting AI Coverage 2013 ISO Endorsement CG : The insurance afforded to such additional insured only applies to the extent permitted by law. If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you [the insured] are required by the contract or agreement to provide for such additional insured. If coverage to the additional insured is required by a contract or agreement, the most [the insurer] will pay on behalf of the additional insured is the amount of insurance: 1. required by the contract or agreement; or 2. available under the applicable Limits of Insurance shown in the Declarations; whichever is less.

39 Tips for Limiting AI Coverage To limit captive exposure, insurance requirements should clearly 1. specify type of insurance granted 2. cap limits to avoid uncapped indemnity

40 When Broadening Additional Insured Coverage Do not rely on a certificate of insurance Ask for copy of a copy of the AI endorsement Ask for enhancements to AI endorsements, which generally contain exclusions