TVA Recovers $42M From Insurer in Coverage Arbitration

October 9, 2013

The Tennessee Valley Authority (TVA) recently received $42 million from Arch Insurance Bermuda, a division of Arch Reinsurance Ltd., to resolve a coverage arbitration arising out of a dredge cell failure at TVA’s Kingston power plant on December 22, 2008.

According to TVA’s counsel in the matter, Leon Kellner, a senior partner in the Insurance Recovery Group of Perkins Coie, resolution of coverage disputes with Bermuda insurers are usually subject to strict confidentiality provisions.

The resolution in this case is unique because there are no restrictions on disclosing the amount or the terms of the settlement.

“Everything should be transparent,” the former prosecutor said.

The $42 million payment from Arch resolves one of three arbitrations scheduled in London. TVA purchased catastrophe coverage from Bermuda-based insurers. The insurers require any coverage disputes to be heard in London by a tribunal made up of three arbitrators, one chosen by each party and the third selected by the other two arbitrators.

On December 22, 2008, the ash disposal facility at TVA’s Kingston power plant suddenly failed, resulting in the release of approximately 5.4 million cubic yards of fly ash into the Emory River, which is a tributary of the Tennessee River. Fly ash is the residue from the burning of coal used to generate electricity at the plant. The facility was constructed in phases after the plant began operations in the 1950s. TVA, under the oversight of Tennessee environmental authorities and the EPA, immediately began a massive cleanup effort that continues to this day. The total cost is estimated to exceed $1.1 billion of which more than $855 million has already been spent. While the surrounding area and the state’s waters suffered substantial damage, not a single person was injured.

The incident was the subject of state and federal investigations, including several congressional hearings, and was widely reported in the media. Arch had rescinded its $50 million insurance policy because it asserted that TVA had failed to provide complete information in applying for the insurance.

The insurer claimed in its rescission letter that TVA made a material misrepresentation on the application for insurance.

The payment represents a complete repudiation of Arch’s position. TVA accepted a 16 percent discount to permit its legal team to focus on two other pending arbitrations arising out of the same incident – one with ACE Bermuda Insurance Ltd. who sold TVA a policy with $150 million in limits and the other with Zurich Insurance Company which provided a policy with limits of $50 million.

“They claimed that this dredge cell was a dam and they asked us for a list of dams and it wasn’t included on that list,” Kellner said. “This was not a dam when we filled out the application and the question did not call for ash bonds like the Kingston facility.”

Kellner is currently in London for the second arbitration with ACE Bermuda Insurance Ltd. which began on September 30. The insurer rescinded on the same grounds as Arch.

“In my opinion we showed them that their claim was baseless,” Kellner said. He said he viewed the settlement as a capitulation.

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