PG&E’s equipment caused Kincade wildfire, $600m+ hit possible

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Transmission equipment owned and operated by Pacific Gas and Electricity (PG&E) has been deemed to be the cause of the 2019 Kincade wildfire in Sonoma County California, which could put the company and its insurers on the hook for over $600 million of costs.

Wildfire industry lossesPG&E, the wildfire stricken California focused electrical utility operator, had previously disclosed that if it was found that its equipment was the cause of the Kincade wildfire it could face more than $600 million of costs.

Now, the California Department of Forestry and Fire (Cal Fire) said late last week that it was PG&E transmission lines situated to the northeast of Geyserville, California, that caused the fire to begin.

Cal Fire said that it has sent its findings on to the Sonoma County district attorney for proceedings to begin.

The Kincade wildfire of October 2019 burned for around thirteen days across more than 120 square miles of California wine country.

The fire burned 77,758 acres, destroying at least 374 structures, consisting of 174 residential structures, 11 commercial structures and 189 other structures, and damaging a further 60 structures, consisting of 35 residential structures, one commercial structure and 24 other structures.

It wasn’t the largest California wildfire of recent years by a long way, but the amount of high value properties it destroyed have been estimated at well into the hundreds of millions of dollars, which could leave insurance and reinsurance capital on the hook for a share.

PG&E’s estimate for $600 million plus of costs is at the lower-end of its estimates, the utility had previously said.

PG&E responded to Cal Fire’s pronouncement saying that it has not at this time seen the investigative report or the evidence collected and that this would be reviewed once made available to the electrical utility.

After the fire, PG&E had alerted authorities to the fact a transmission level outage occurred within the region and a fire had started near a specific transmission tower of PG&E’s, which led to officials from Cal Fire taping off the area around the base of the tower and other Cal Fire personnel reported a broken jumper on the same tower to a utility staff member.

Then back in May, the company disclosed, “PG&E Corporation and the Utility believe it is reasonably possible that they will incur a loss in connection with the 2019 Kincade fire.”

Saying, “If PG&E Corporation and the Utility were to incur a loss in respect of the 2019 Kincade fire, PG&E Corporation and the Utility estimate that the amount of such loss could exceed $600 million (before available insurance),” with this figure of $600 million said to be right at the lower-end of “reasonably possible losses”.

The $600 million or more estimate also did not include potential fines, punitive damages, compensation to state or federal agencies, evacuation costs or other amounts that PG&E said it could not estimate.

As a result, the potential is there for a far greater than $600 million cost to PG&E, a reasonable proportion could be covered by its 2019 insurance program, with potential impacts for some reinsurance capital as well.

For the period when the Kincade wildfire occurred, PG&E had a $430 million liability insurance tower for wildfire events, after an initial self-insured retention of $10 million per occurrence, for the period from August 1st 2019 through July 31st 2020.

PG&E also had a further $1 billion in liability insurance coverage for non-wildfire events that ran across the date of ignition of the Kincade fire.

With PG&E’s equipment now deemed to be the cause of the Kincade fire, it seems likely the $430 million of wildfire liability insurance limit will all be paid out and recovered by the utility, marking another year where the entire wildfire liability tower is wiped out and the insurance and reinsurance companies backing it lose their total limits deployed to support PG&E.

There’s still some way to go before PG&E can make a claim though, as it could contest the finding of Cal Fire and it may face other civil cases in the meantime related to the Kincade fire. Of course, that could also inflate its loss and the potential for it to claim on its other liability coverage tower as well.

As a reminder, PG&E recently made its payments to insurance, reinsurance and other entities holding subrogation claims rights, amounting to an $11 billion settlement, which has now begun to flow through the market to the benefit of some insurance and reinsurance firms. Some ILS funds expect to benefit from recoveries under this as well.

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