The power was still off in Texas last month when rating agencies began predicting that the weather-related catastrophe would cause unprecedented losses for insurance companies.
On February 19, rating agency A.M. Best forecast that insurance companies “could suffer record first-quarter catastrophe losses after the historic Texas winter storm, which crippled the state’s electrical grid and caused extensive property damage including collapsed roofs and broken pipes,” Reuters reported. The storm, Best predicted, could become the costliest winter weather event in Texas history.
For policyholders, the message is clear. They should locate their insurance policies and give notice to all possibly relevant companies that they have suffered losses, both known and still to be determined.
They should do it now. Most insurance policies require prompt notice of loss. Late notice can result in forfeiture of coverage in the worst case, and cause needless coverage fights in less extreme cases.
Property insurance policies are the obvious starting place. These policies provide coverage for property damage and time element losses. Time element losses include losses that businesses suffer when their operations are shut down due to damage to property.
A shutdown of electrical power is a type of damage that is covered by many property insurance policies. What type of coverage is available, and how much, is controlled by the specific terms and conditions of each policy.
For years, property policies included no specific exclusion or coverage provision for utility service interruption losses. Courts accordingly found coverage when a covered peril, like a windstorm, caused a power outage that caused policyholders to suffer business losses. See e.g., Fed. Ins. Co. v. Bock, 382 S.W.2d 305 (Tex. Ct. App. 1964) (finding coverage for food spoilage that occurred following a windstorm that caused the failure of power supplying the insured’s refrigeration facilities).
Other coverages that may apply can include coverage for loss of or prohibition of access to a property, including for tenants, the inability to operate machinery or computers and the loss of computer data.
Today, many property insurance policies include specific provisions regarding coverage for utility service interruptions. Those provisions typically center around the reason why the power failed and whether it failed on or away from the policyholder’s premises.
Some policies, for example, include specific utility service interruption coverage in circumstances where the power failure was caused by physical loss or damage at the utility service provider’s premises. Others may exclude coverage in that circumstance, and limit coverage to circumstances where the power failure was specific to the policyholder’s premises.
In some policies, utility service interruption coverage is subject to a waiting period, so the service interruption must exceed a specific number of hours or days. Other policies include coverage for spoilage caused by a power outage.
When power failures arise in the context of storms, insurance companies are quick to argue that coverage is precluded by limitations involving flood, rain and other forms of water damage. A typical argument would be that the loss of power was caused by a flood, which was excluded or strictly sub-limited under the policy, and therefore is not subject to coverage.
All such provisions have the potential to raise complex questions of law and fact that will need to be resolved, with the benefit of precedent, before a determination can be made as to the existence of coverage.
Given those complexities, while notice must be given promptly, that first notice shouldn’t be too specific. In the immediate aftermath, the cause of loss can simply be listed as the storm itself or “the effects of” the storm. Unconsidered attributions as to the cause of loss may trigger policy exclusions. An insured can provide more detail later, after careful analysis of all policies and a more complete assessment of the loss.
Those complex coverage determinations cannot be made today. They accordingly should play no role in whether or not a policyholder should be giving notice, now, of its losses and potential claim. Every policyholder should be doing so.