Sub-Zero Sucker Punch
During the cold weeks that follow the winter holidays, a low-pressure warm front moves quickly into the New England region, along with a high-pressure Arctic cold front. The two masses collide, causing heavy rains that turn to ice by the time they reach the ground.
Layers of ice blanket an area from Maine to Maryland and as far west as Ohio, making it look like a world made of pure crystal.
Northeasterners shrug and hunker down for a few days of wild weather. A thinner layer of ice reaches west to St. Louis and south to Charlotte. Southeasterners grumble about the polar vortex interfering with their routine.
By the second day, trees fall and rooftops groan under the weight of nearly 3 inches of ice. Dozens of transmission towers buckle and collapse. Local power lines fall, pulling utility poles down across roadways.
Utility companies shift into crisis mode to assess the damage, which has plunged some homes and businesses into darkness. Utility crews from Georgia and Tennessee are dispatched to help get repair work underway, which is slowed by treacherous road conditions.
The worst, though, is yet to come.
Three days after the first storm hits, a second storm arrives, about 500 miles south. It wallops the Southeast and moves on up the Eastern seaboard, dropping another 2-plus inches of ice over two days. Heavy ice puts a death grip on everything from Memphis to Atlanta and on up through Washington, D.C.
The aging utility infrastructure can’t withstand the ice and winds. The fact that at least half of the Southeast’s utility workers had been deployed north makes matters worse — far worse. Four million customers in Georgia and Alabama alone are without power.
Hartsfield-Jackson International Airport in Atlanta is virtually paralyzed, stranding travelers and causing massive delays across the country. Gas stations shut down because pumps are inoperable.
Retailers with backup generators press on as long as they can, but shelves empty quickly of food and other essential goods. Some stores operate on a cash-only basis because payment systems are down.
On the East Coast, more than 50 million people and 3 million businesses are without power. More than 200 transmission towers are badly damaged. Water supply across the entire East Coast is at risk, as treatment plants and pumping stations begin to lose backup power. Cell network circuits become congested, causing delays and weak signals. Some networks fail altogether.
Despite icy roads, millions leave their homes, seeking warmth and shelter. Some die from carbon monoxide poisoning or from blazes caused by open fires in their homes, attempting to keep warm. Many fires burn unchecked, resulting in widespread property damage.
States of emergency are declared for affected major cities. The National Guard is brought in to help clear roads, escort people to emergency shelters, and help maintain civil order among the increasingly frightened and desperate public.
Trees continue to fall for weeks, making power recovery achingly slow. It takes three to four weeks to get to 90 percent recovery for urban centers. Some outlying areas go without power for as long as three months.
Businesses struggle to reopen due to damage and lack of workers, as many have not returned to the area from wherever they sought shelter, or can’t get through to certain areas due to safety hazards.
Hundreds die from hypothermia, starvation, fires, auto accidents and small, localized riots. Tens of thousands more suffer injuries or become seriously ill. The very young, elderly and the poor are hardest hit.
National Geographic’s harrowing docudrama American Blackout depicts the catastrophic repercussions of a 10-day blackout affecting the entire country.
No Escaping Loss
This scenario was created using the Blackout Risk Model, developed through a partnership of Hartford Steam Boiler and Verisk Climate, led by Robin Luo, vice president at HSB; Clifton Lancaster, senior risk analyst at HSB; and Kyle Beatty, president of Verisk Climate.
HSB and Verisk estimate that the frequency of each individual ice storm would be one in 150 years to 200 years. The two storms combined represent a frequency of one in 1,000 years or more.
This scenario loosely resembles a juxtaposition of two historic North American blackout events.
In January 1998, ice pummeled Ontario, Quebec and New Brunswick for six straight days, destroying 130 transmission towers and leaving more than 4 million people without power — some for up to a month.
The insured losses from that storm totaled $1.6 billion, according to the Insurance Bureau of Canada. The total economic costs were estimated between $5 billion and $7 billion.
The second event occurred in August 2013, when a simple circuit overload led to cascading blackouts throughout North America, leaving 50 million people in the United States and Canada without power for up to six days. The estimated total economic cost of the outage was between $6 billion and $8 billion.
Combining the duration, ice load and frigid temperatures of the 1998 event with the coverage footprint of the 2013 event would result in a catastrophe exponentially more devastating than any blackout in North American history.
Some experts downplay the amount of property damage typical for an ice storm, but others say the level of property damage wouldn’t be far behind Hurricane Katrina or Superstorm Sandy.
Because of the duration of the power outage and the extreme volume of ice involved, homes and businesses left abandoned would likely succumb to frozen and bursting pipes. Collapsing roofs would lead to additional damage.
Overtaxed emergency responders likely wouldn’t be able to prevent damage caused by the inevitable looting and civil unrest. Fires started by those desperate for warmth could easily burn out of control, consuming neighboring properties in the process, especially in urban centers.
Contaminated water supplies would cause lasting problems that would take months to remedy. Lack of running water would create sanitation hazards.
Industries needing refrigeration, such as restaurants, supermarkets and pharmaceutical companies would suffer heavy losses. Manufacturing would also suffer due to a dependence on power and the difficulty and expense of temporarily relocating equipment.
Of course, that only scratches the surface of business income losses for companies up and down the East Coast, as well as key suppliers and customers across the country.
“Whether you’re impacted directly from the weather or indirectly, I don’t know how anyone escapes some sort of tragedy or economic loss from this,” said Wes Dupont, executive vice president and general counsel of Allied World Assurance Co. Holdings.
Even with power mostly restored in three to four weeks, there would be several more months of clean-up before normal operations resume. Some companies would have difficulty luring back clients that had switched suppliers in the interim.
Small businesses would no doubt be hard hit.
“Small to midsize companies, those that are not able to invest [in a standby power system] … they’re going to struggle,” said Mark Madar, director of risk management and regulatory compliance at CBIZ Risk & Advisory Services. “The companies that do not have a multi-location presence, especially your mom-and-pop types of businesses, they’re the ones who are going to take the hit here.”
But Lou Gritzo, FM Global’s vice president and research manager, said it would be a mistake to downplay the vulnerability of larger companies in this scenario.
“It’s the weakest link scenario,” said Gritzo. “The bigger effects are going to be these cascading failures where one or two pieces of the operation can’t recover and then the entire company experiences the consequences.
“That in turn affects other companies all over the country and all over the world. I think that’s where the biggest impact is going to be,” he said.
Mind the Gaps
For many companies, having a solid business interruption plan will make the difference in whether they make it through such a crisis. More than two in five (43 percent) businesses that experience a disaster and have no emergency plan don’t reopen, according to The Hartford. Of those that do reopen, only 29 percent are still operating two years later.
Even the most sophisticated disaster plan, however, will not shield companies from some degree of loss in an event of this magnitude. Unfortunately for some, the claims process is unlikely to be straightforward.
“The bigger effects are going to be these cascading failures where one or two pieces of the operation can’t recover and then the entire company experiences the consequences. That in turn affects other companies all over the country and all over the world.” —Lou Gritzo, vice president and research manager, FM Global
Blackouts can be a monkey wrench in the works. Companies may assume they’re covered for business losses in the event of a power outage because they have business interruption (BI) coverage — or time element coverage — on their property policies.
But in most cases, BI must be tied to physical damage to an insured’s assets. Several commercial property policies specifically exclude coverage resulting from a utility service interruption that originates away from the insured’s premises.
Standard BI coverage won’t be triggered for businesses that don’t suffer direct physical damage but were forced to close or relocate because of lack of employees or power, or orders from civil authorities to stay away due to safety hazards.
Some larger, sophisticated insurance buyers will have policies that include the necessary extensions needed to trigger the cover, but smaller firms may be left unprotected.
“I think [utility service interruption coverage] is spotty when it comes to small commercial businesses, who would need to ask for those extensions, as well as clients who are on standard boilerplate preprinted forms as opposed to a manuscripted form,” said Duncan Ellis, U.S. property practice leader for Marsh.
Another wording nuance to be aware of, he said, is that some language may provide for damage caused by a power outage, as in the case of a critical manufacturing load destroyed by loss of power in the middle of the process. But the BI side of the policy still may not have an extension for loss of income incurred after the outage.
Even for companies with the right coverage extensions, time durations vary. Some policies may not cover losses related to a service interruption that goes beyond a week or two. In general, many companies could find that their BI losses far exceed limits.
Insurers would see a high volume of contingent business interruption claims from those whose key customers or suppliers were compromised by the event. But the wording of CBI policies is similar to BI policies, and many insureds will find their coverage declaimed.
Companies with a regional base also may face push back from carriers on business income claims, said Mike LoGiudice, managing director of insurance and litigation support for CBIZ Valuation Group. “I might say, ‘I should have done [this amount of business] but for the property loss.’ ”
But the carriers may argue that regardless of damage, your customers would still be out of business themselves, so you wouldn’t have had any income. “They would take into effect the negative impact on your customers,” he said. “It would be a battle.”
Additional 2014 black swan stories:
When the 8.5 magnitude earthquake hits, sea water will devastate much of Los Angeles and San Francisco, and a million destroyed homes will create a failed mortgage and public sector revenue tsunami.
When a nuclear reactor melts down due to a powerful tornado, deadly contamination rains down on a metropolitan area.
7 Emerging Technology Risks
From Coast to Coast
The 3,920-ton Left Coast Lifter, originally built by Fluor Construction to help build the new Bay Bridge in San Francisco, will be integral in rebuilding the Tappan Zee Bridge by 2018.
The Lifter and the Statue of Liberty
When he got the news, Scot Burford could see it as clearly as if somebody handed him an 8 by 11 color photograph.
On January 30, the Left Coast Lifter, a massive crane originally built by Fluor Construction to help build the new Bay Bridge in San Francisco, steamed past the Statue of Liberty. Excited observers, who saw the crane entering New York Harbor, dubbed it the “The Hudson River Hoister,” honoring its new role in rebuilding the Tappan Zee Bridge over the Hudson River.
Powered by two stout-hearted tug boats, the Lauren Foss and the Iver Foss, it took more than five weeks for the huge crane to complete the 6,000 mile ocean journey from San Francisco to New York via the Panama Canal.
Scot took a deep breath and reflected on all the work needed to plan every aspect of the crane’s complicated journey.
A risk engineer at Liberty International Underwriters (LIU), Burford worked with a specialized team of marine insurance and risk management professionals which included John Phillips, LIU’s Hull Product Line Leader, Sean Dollahon, an LIU Marine underwriter, and Rick Falcinelli, LIU’s Marine Risk Engineering Manager, to complete a detailed analysis of the crane’s proposed route. Based on a multitude of factors, the LIU team confirmed the safety of the route, produced clear guidelines for the tug captains that included weather restrictions, predetermined ports of refuge in the case of bad weather as well as specifying the ballast conditions and rigging of tow gear on the tugs.
Of equal importance, the deep expertise and extensive experience of the LIU team ensured that the most knowledgeable local surveyors and tugboat captains with the best safety records were selected for the project. After all, the most careful of plans will only be as effective as the people who execute them.
The tremendous size of the Left Coast Lifter presented some unique challenges in preparing for its voyage.
The original intention was to dry tow the crane by loading and securing it on a semi-submersible vessel. However, the lack of an American-flagged vessel that could accommodate the Left Coast Lifter created many logistical complexities and it was decided that the crane would be towed on its own barge.
At first, the LIU team was concerned since the barge was not intended for ocean travel and therefore lacked towing skegs and other structural components typically found on oceangoing barges.
But a detailed review of the plan with the client and contractors gave the LIU team confidence. In this instance, the sheer weight and size of the crane provided sufficient stability, and with the addition of a second tug on the barge’s stern, the LIU team, with its knowledge of barges and tugs, was confident the configuration was seaworthy and the barge would travel in a straight line. The team approved the plan and the crane began its successful voyage.
As impressive as the crane and its voyage were, it was just one piece in hundreds that needed to be underwritten and put in place for the Tappan Zee Bridge project to come off.
The rebuilding of the Tappan Zee Bridge, due to be completed in 2018, is the largest bridge construction project in the modern history of New York. The bridge is 3.1 miles long and will cost more than $3 billion to construct. The twin-span, cable-stayed bridge will be anchored to four mid-river towers.
When veteran contractors American Bridge, Fluor Corp., Granite Construction Northeast and Traylor Bros. formed a joint venture and won the contract to rebuild the Tappan Zee, one of the first things the consortium needed to do was find an insurance partner with the right coverages and technical expertise.
The Marsh broker, Ali Rizvi, Senior Vice President, working with the consortium, was well known to the LIU underwriting and engineering teams. In addition, Burford and the broker had worked on many projects in the past and had a strong relationship. These existing relationships were vital in facilitating efficient communication and data gathering, particularly given the scope and complexity of a project like the Tappan Zee.
And the scope of the project was indeed immense – more than 200 vessels, coming from all over the United States, would be moving construction equipment up the Hudson River.
An integrated team of LIU underwriters and risk engineers (including Burford, Phillips, Dollahon and Falcinelli) got to work evaluating the risk and the proper controls that the project required. Given the global scope of the project, the team’s ability to tap into their tight-knit global network of fellow LIU marine underwriters and engineers with deep industry relationships and expertise was invaluable.
In addition to the large number of vessels, the underwriting process was further complicated by many aspects of the project still being finalized.
“Because the consortium had just won this account, they were still working on contracts and contractors to finalize the deal and were unsure as to where most of the equipment and materials would be coming from,” Burford said.
Despite the massive size of the project and large number of stakeholders, LIU quickly turned around a quote involving three lines of marine coverage, Marine Liability, Project Cargo and Marine Hull & Machinery.
How could LIU produce such a complicated quote in a short period of time? It comes down to integrating risk engineers into the underwriting process, possessing deep industry experience on a global scale and having strong relationships that facilitate communication and trust.
Photo Credit: New York State Thruway Authority
When completed in 2018, the Tappan Zee will be eight lanes, with four emergency pullover lanes. Commuters sailing across it in their sedans and SUVs might appreciate the view of the Hudson, but they might never grasp the complexity of insuring three marine lines, covering the movements of hundreds of marine vessels carrying very expensive cargo.
Not to mention ferrying a 3,920-ton crane from coast to coast without a hitch.
But that’s what insurance does, in its quiet profundity.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.