Blackout to Have Small Impact on U.S. Insurers

August 21, 2003

Last week’s blackout that halted power throughout the Midwest, the northeastern U.S., and parts of Canada reportedly might only have a minimal impact on U.S. insurance companies, depending on the official cause of the power outages, according to Standard & Poor’s.

“If officials determine that the blackout was caused by a person’s mistake or a breakdown in equipment, insurance companies usually have no liability,” said Standard & Poor’s credit analyst John Iten. “If it is an ‘Act of God,’ then insurance companies could potentially be liable. But even then, the amount probably would not be enough to affect a rating or influence an outlook revision.”

Standard & Poor’s has not taken rating actions on any insurance companies due to the blackout.

Since the disruption only lasted about two days at the most in some areas, most business-interruption damage falls within a time deductible, which normally lasts up to 72 hours. According to the Insurance Information Institute, most commercial insurance policies exclude damage or impacts from power failures. Businesses typically have to elect coverage for losses that result from power loss; however, the percentage of business that pay for such coverage is very low.

There have been no reports yet of major damage to power company generating and transmission equipment. Of greater concern is the potential for claims against any utilities found to be responsible for the power failure.

The ratings on one utility, FirstEnergy Corp., were placed on CreditWatch with negative implications on Aug. 18, partly because of a concern that if the company were ultimately found to be partly responsible, the financial consequences could affect Standard & Poor’s ratings on the company. It is not clear at this point to what extent any losses would be recoverable by FirstEnergy or other utilities against their insurers.

For restaurants and supermarkets, food spoilage was a chief result of the power outages. However, early indications from companies rated by Standard & Poor’s suggest that product loss from spoilage will not lead to significant claims against their insurers.

For airlines, the duration of the service interruption was similar to that of a weather event such as a blizzard. Depending on the official cause of the outages, travelers who purchased travel insurance and whose trips were disrupted may be able to file claims.

Homeowner insurance was generally not affected, since most homeowners are not automatically covered by damage related to power outages. “Most standard homeowners policies exclude power outage as a covered cause of loss, unless it is covered on an all-perils basis or a named-peril basis, and therefore may not be automatically covered by damage related to the power outages,” said Standard & Poor’s credit analyst Siddhartha Ghosh.

For regional insurance companies that cover small businesses, liability estimates related to the blackout were reportedly too low to affect credit ratings.

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