Winter storm losses in Texas drive ERCOT subrogation speculation

The size of the estimated winter storm insurance and reinsurance market loss from February’s severe Arctic freeze and the issues suffered by energy organisation the Electric Reliability Council of Texas, Inc. (ERCOT) has raised speculation over the chances of subrogation becoming a possibility for carriers.

Record freezing temperatures ended up driving significant issues across ERCOT’s power network and utilities in Texas, with the levels of demand for power unable to be met by any sources at the utilities disposal.

The result was millions of energy customers left without power and heating, which is expected to significantly exacerbate the insurance claims burden, particularly from freezing pipes and burst pipes in homes and businesses that were unable to be heated.

At one stage more than 4 million Texas homeowners were said to be without power during the freezing weather event and winter storms in February.

ERCOT has also been blamed for regional infrastructure not enabling it to tap into energy from neighbouring states, further exacerbating the situation.

Lawyer Larry Bowman, a Director at Kane Russell Coleman Logan PC said that it has already, “Received several subrogation assignments arising from claims involving burst water and sprinkler piping. Other claims involve damage due to lack of heat to inventories and other property.”

At this early stage it remains very uncertain whether subrogation will be possible from this winter storm event, but the lawyers believe there is a chance.

He explains, “The question presented is whether a subrogated property carrier has any recourse against those responsible for the brownout, either or both the electrical utility or the Electric Reliability Council of Texas, Inc (ERCOT).

“The question is timely and interesting. The answer is a big MAYBE at this time.”

Bowman said that a utility could be found liable if “rolling brownouts” (power cuts) were proven “intentional, grossly negligent or willful misconduct.”

Utilities could blame the severe and freezing weather as being an Act of God, the lawyers said, but while everyone was aware of the shortcomings of the Texas energy grid, the fact it has not been upgraded to be better prepared might show one avenue for subrogation it seems.

“The definitions of gross negligence and willful wanton conduct under Texas law include knowingly acting or failing to act in the face of a recognized extreme threat which could cause great harm,” Bowman stated.

Adding, “I would suggest that the facts of individual losses occurring during the brownouts be examined carefully because there may be a sound factual and legal basis to seek recovery from those responsible for turning off the electricity which caused the damages. ”

Referring to a severe weather event in 2011 that also had significant ramifications for Texas’ power grid, Bowman said, “The deep freeze of 2011 should have been instructive for those who design and construct buildings in Texas and losses arising from the loss of electricity, extreme and sustained low temperatures, involving frozen pipes, and water damage should be analyzed to see whether the design and construction means and methods were adequate and complied with building and design codes.”

Successful subrogation claims enable insurance or reinsurance carriers to recover some of their losses if a party can be deemed liable for causing them.

The most recent and high-profile subrogation related to a catastrophe loss event was the Californian wildfires, where utilities PG&E and SoCal Edison have paid billions back to subrogation rights holders, including insurers.

Those subrogation payments ultimately reduced losses for providers of reinsurance and retrocession, including ILS funds and even through reductions in losses for certain catastrophe bonds.

As a result, the potential for any subrogation in relation to the recent winter storms will be closely watched by the industry.

It is extremely likely that insurers pursue the Texas utilities and ERCOT for some kind of subrogation recovery, as a significant proportion of the claims appear likely to have occurred or been much inflated by the lack of power and power-grid related issues.

Where business interruption is concerned, the lack of power, energy and ultimately heat will also be a driver of many of those claims, which again insurers may seek to recover from those responsible for the energy infrastructure and utilities if they can.

Given the scale of the winter storm loss event and the expected hurricane-level of claims to come in Texas, this could take years it seems.

It’s also likely that, compared to the California wildfire scenario, any subrogation in Texas after the winter storm could take much longer to flow to reinsurance capital sources, given the average claim sizes will be much lower and so need to accumulate to reach levels where a recovery on reinsurance would be available, let alone retrocession.

ILS investment fund manager ILS Capital Management has said that it is watching the potential for subrogation to emerge closely, saying, “The role power outages played in perpetuating property damage opens the possibility of subrogation against ERCOT if it is found that they were grossly negligent in their planning to mitigate power outages during the event.

“It is too early to tell whether subrogation will be taken upon ERCOT; we will monitor the situation closely.”

It’s another interesting angle on the winter storm event, which looks set to take years to calculate the final ultimates and clear up claims totals for the insurance and reinsurance industry.

Also read:

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– Winter storm exposed cat bonds stage partial price recovery.

– US winter storm loss creep likely to be prolonged: Aon.

– Winter storm losses seen a driver for mid-year reinsurance firming: KBW.

– Winter storm at $12bn – $18bn only attritional to aggregate cat bonds: Plenum.

– USAA aggregate cat bonds in focus on winter storm impacts.

– Hurricane-level winter storm claims to drive billions of losses: Aon.

– Winter storm Uri loss could be “well in excess” of $10bn: AIR.

– Palomar expects reinsurance recoveries for winter storm Uri.

– Winter storm Uri insured loss seen up to $20bn: Fitch.

– Winter storm Uri an aggregate threat, but commercial loss may protect ILS: Twelve Capital.

– Winter storm to drive record losses, reevaluation of cat budgets: AM Best.

– KCC raises US winter storm insurance industry loss estimate to $18bn.