Utility contractors in California are finding it increasingly difficult to obtain liability insurance in the wake of recent wildfires, and available capacity has shrunk even in the excess and surplus lines marketplace, where hard-to-place risks typically find coverage, brokers say.
Record wildfire losses in 2017 and 2018, as well as California’s utility liability laws, are key underlying factors in an environment where double- or triple-digit rate increases and wildfire exclusions are the norm, experts say.
Under California’s law of “inverse condemnation,” if a utility’s facilities are determined to be the substantial cause of a wildfire, the utility could be liable for property damage and other associated costs even if there is no finding of negligence.
“Given the market’s preference to avoid coverage that could lend itself to wildfire losses … it’s getting difficult to find general liability coverage, period. Even with a wildfire exclusion, carriers are concerned they could get pulled into the claim,” said Jim Lynch, San Francisco-based vice president of California brokerage at Burns & Wilcox Ltd.
“Even in the E&S marketplace, it’s hard to get an audience at all with a carrier just given the contractor or vendor’s proximity to operations in the forest that could lead to a wildfire,” Mr. Lynch said.
“When we’re in the market to get wildfire solutions and capacity for buyers, at the onset we start with line underwriters. But the only time serious dialogue actually starts is when we’re speaking to a chief underwriting officer or chief executive officer,” said Stuart Rae, executive vice president at AmWINS Insurance Brokerage of California in Los Angeles.
“It’s like an uninsurable peril because of the conditions and the inverse condemnation law, and because of past performance,” Mr. Rae said.
“In an event where there’s an allegation or attribution that you had any presence beside the ignition source, you have to hire an attorney right away because you’re guilty until proven innocent,” he said.
Insurers and reinsurers have also been hit by property losses in recent wildfires, which is affecting the liability market, brokers say.
“Not only have insurers been hit on the property side from all the claims, but most are on the (liability) towers for the utilities themselves,” said Jack Reid, senior vice president at AmWINS Insurance Brokerage of California.
“That represents a big portion of the liability marketplace, so it’s tough to get them to write ancillary businesses to utilities like tree-trimmers because they’ve all been hit on the utilities’ (liability) towers.” Mr. Reid said.
Utility contractors including those that maintain transmission and distribution lines, installers, and tree-trimmers are feeling the effects of insurers’ diminished appetite for wildfire risks, brokers say.
“It’s been a snowball effect,” said Andrew Grim, Dallas-based construction practice group leader at wholesale and specialty insurance brokerage Brown & Riding Insurance Services Inc.
“Fewer and fewer insurers are deploying limits, and more and more are nonrenewing and exercising their rights within the statutory law of conditional nonrenewal due to underwriting changes and guidelines,” Mr. Grim said.
“You have to be very proactive in approaching renewals right now,” he said.
With dwindling capacity available, utilities contractors in California are also being hit with significant price increases on liability coverage, anywhere from the double-digit to triple-digit range, brokers say.
“The reinsurance market is probably around 20% up in any wildfire deal,” said Mr. Grim.
“In any California utilities contractor (placement), there’s facultative support being deployed on the domestic marketplace. With the reinsurance market up not just for wildfire but overall as an industry, you could start the line at 20% easily,” he said.
Reinsurance pricing for California wildfires could be up 30% to 70% heading into 2020 renewals, S&P Global Ratings Inc. said in a recent report. “Capacity will continue to be constrained as this market remains in disarray, which will fuel further rate increases,” S&P said. Lloyd’s of London is an E&S player in California but is reducing its capacity due to the loss experience, it said.
Many of the issues contractors are experiencing are a result of changes in the property insurance market, according to Kevin Collins, professional liability program manager and senior vice president at Victor O. Schinnerer & Co. Inc. based in Chevy Chase, Maryland.
While some wildfires are caused by lightning strikes or backfires, several of the top 10 fires in California “would lead into utility issues and relate directly to utility contractors, whether that’s a downed power line or a transformer that blows,” Mr. Collins said.
Property insurers use subrogation as a tool to try and recover from other parties that may be culpable to the loss in the event of a wildfire claim, he said.
“In situations where the wildfire is man-made or the result of others, whether it’s utility companies or others, the insurer has an avenue to subrogate against them,” he said.
Given the frequency of wildfires in recent years, “we’re seeing not only a continuation of subrogation but looking further down the line to other individuals that may have been part of the process, and that would include utility contractors,” he said.
