Capacity Melts by as Much as 66 percent in the Face of Wildfires
By DAN REYNOLDS, senior editor of Risk & Insurance®
What's been described as an "insurance crisis" suffered by Southern California utilities has driven them to petition the California Public Utilities Commission for rate increases to cover drastically increased wildfire liability insurance premiums.
Sempra Energy-owned San Diego Gas & Electric Co. and Southern California Gas Co. have joined forces with Pacific Gas & Electric Co. and Southern California Edison Company to petition the CPUC to allow them to raise utility rates to establish what they call Wildfire Expense Balancing Accounts.
Under their application, the CPUC could decide as soon as next April whether to authorize the rate increases requested by the utilities.
"Due to the fire losses sustained in 2007 and an increasing awareness of inverse condemnation, reinsurers in 2009 have either refused to provide wildfire liability insurance or have severely limited the amount offered," Sempra Energy's risk manager Maury De Bont stated in testimony in front of the CPUC in August.
San Diego Gas & Electric, the utility owned by Sempra, has so far had to pay $740 million to insurers who held policies on property destroyed in the October, 2007 Witch and Rice fires. State investigators say the Witch fire was caused by sparks from colliding overhead conductors. The Rice fire was caused when a sycamore tree limb collapsed on a SDG&E conductor, according to fire investigators.
In those fires, in which two civilians died, more than 1,600 structures, including an estimated 1,141 homes were destroyed. The $740 million, which was covered by the utility's liability insurance, represents 57.5 percent of the $1.3 billion in claims incurred by home insurers, according to Sempra's filings with the Securities and Exchange Commission.
At its June 2009 liability insurance renewals, De Bont told the CPUC that SDG&E was able to obtain only one third of the wildfire liability coverage it had the year before, from $1.2 billion down to $399 million, and saw its liability insurance premium more than quadruple, from $13.6 million to $55.2 million. Additionally, SDG&E had to assume a 50 percent share of the first $60 million of its insurance coverage.
"Given SDG&E's exposure to wildfire liability and understanding that this exposure could exceed the insurance market's ability to provide protection, we attempted to buy all of the liability insurance that was reasonably available in the world's insurance market," said De Bont, according to a written copy of his remarks supplied to Risk & Insurance® by the CPUC.
According to a copy of De Bont's insurance program, the $740 million settlement agreed to by SDG&E would have burned through most of eight layers of the 2008-2009 liability program of SDG&E and its sister company, the Southern California Gas Co.
That program, at $13.6 million in premium, had 12 layers, with limits up to $1.17 billion. Through eight layers, the program had $745 million in coverage, thus the substantial portion of that a $740 million wildfire payout would have consumed.
June's renewals, according to documents filed by De Bont with the CPUC, essentially "split the market" with insurers offering the combined utilities $800 million of general liability coverage at a premium of $15.2 million and a separate tower of wildfire liability with a limit of $399 million and a premium of $40 million.
The number of insurers on the program also increased substantially. SDG&E went from 18 individual insurers in its 2008-2009 program to 28 insurers for general liability and 27 insurers for wildfire liability in its 2009-2010 program.
In the fourth layer of the 2009-2010 program, a $130 million layer, for example, there are six insurers. In the fourth layer of the 2008-2009 general liability program, a $150 million layer, there were two insurers. In the fifth layer of the 2009-2010 general liability program, a $180 million layer, there are seven insurers. In the fifth layer of the 2008-2009 program, a $160 million layer, there were four insurers.
In the 2009-2010 SDG&E and Southern California Gas wildfire liability tower, there are 24 insurers in the top four layers, offering $289 million in limits.
SDG&E seeks to raise $28 million through rate increases to cover its increased insurance costs.
The initial layers on the 2009-2010 program were provided by Associated Electric & Gas Insurance Services Ltd. and Energy Insurance Mutual, both of them mutuals owned by policyholders. The remainder of the 2009-2010 layers was put together from the domestic, London and Bermuda markets, according to De Bont.
The utilities' attempt to recover theirinsurance liability premium increase through rate increases is not without its opponents.
RATE INCREASES AT ISSUE
In a filing protesting the utility rate increase application, Ruth Hendricks, described as a business owner in SDG&E's service area, alleges that SDG&E was negligent in causing the Rice and Witch fires and should not be entitled to recover any of its insurance costs through rate increases.
"The PUC and Cal Fire, (The California Department of Forestry and Fire Protection) have both determined that SDG&E caused two of the major fires of 2007, the Witch Fire and the Rice Fire," write Hendricks' lawyers in her filing.
"SDG&E wants to shift the costs of its negligent, reckless, knowing misconduct to its ratepayers," the Hendricks filing states.
In the case of the Rice Fire, which burned 9,762 acres and destroyed 77 homes, Hendricks' attorneys allege that SDG&E had been given ample notice that a sycamore tree near a SDG&E power line should have been trimmed.
"The California Protection and Safety Division of the CPUC found that SDG&E's tree trimming contractor (Davey Tree) had inspected the tree which caused the fire and had determined that the tree should be trimmed within three months of the inspection," her attorneys write.
"SDG&E failed to trim the tree within the three-month time frame," which is in violation of the commission's statutes, Hendricks' filing states.
In the case of the Witch Fire, Hendricks' filing alleges that the utility failed to maintain a CPUC-mandated 24 inches of radial clearance between conductors.
"SDG&E's application for $28 million must be denied and the costs it incurred should be paid out of SDG&E equity. Perhaps the sting of loss will galvanize SDG&E to conform to the state laws and rules designed to prevent forest fires," Hendricks' attorneys write.
November 1, 2009
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