Coverage restrictions expected to limit nuclear claims

Military helicopters and fire trucks have been dousing the No. 4 reactor at the Fukushima Daiichi nuclear power complex in an effort to cool the overheating facility./ REUTERS/TOKYO ELECTRIC POWER

SENDAI, Japan—As the nuclear radiation crisis in Japan worsened last week, the prospect of significant economic damages grew. Coverage restrictions, however, likely will mean that insured losses will be limited.

Japanese nuclear power facilities, such as the Fukushima nuclear power complex that was severely damaged by the March 11 earthquake and tsunami, are covered by an insurance pool for nuclear risks, but a sublimit for losses resulting from offshore quakes likely will mean that the Japanese government will pay most of the damage costs, experts say.

Meanwhile, if a similar incident were to happen in the United States, a blend of private coverage and government indemnity also would respond.

Japan's nuclear regulatory agency on Friday upgraded its severity rating of the crisis at the Fukushima complex to that equivalent to the 1979 partial core meltdown that occurred at Three Mile Island near Harrisburg, Pa. Japan's Nuclear and Industrial Safety Agency also raised the concern level to five from the previous four on a seven-level international scale for evaluating nuclear accidents, citing “serious damage” to radioactive fuel at the complex's reactors. Chernobyl, the 1986 incident in the former Soviet Union that is considered the world's worst nuclear accident, ranked a seven on that scale.

Under Japan's 1961 Law on Compensation for Nuclear Damage, which was amended in 2010, power plant operators' liability for accidents such as those after the earthquake and tsunami is limited to 120 billion yen (about $1.5 billion), with the Japanese government assuming responsibility for any third-party damage or bodily injury claims beyond that amount.

To meet the requirements of the law, Japanese nuclear power plant operators buy property and liability insurance from the Japan Atomic Energy Insurance Pool. JAEIP provides nuclear property, nuclear liability, general liability and terrorism coverage to nuclear power plant operators. However, JAEIP does not sell the utilities coverage for earthquake damage, tsunami damage or business interruption, leaving the Japanese government responsible for those costs.

As a result, international markets do not expect significant insurance losses from the incident.

In a statement, Zurich-based Swiss Reinsurance Co. said property policies exclude nuclear contamination.

“Overall, there is unlikely to be a significant impact on the property/casualty insurance industry as a result” of nuclear plant damage and possible radiation leaks, Swiss Re said in the statement.

Lloyd's of London insurer Chaucer Holdings P.L.C. said last week that its nuclear syndicate 1176 is on a panel of insurers that provide coverage to Tokyo Electric Power Co., which owns two of the three reactors affected by the earthquake and tsunami, though it does not cover property damage or business interruption risks for either reactor.

Chaucer provides property coverage for a third affected plant, Onagawa, which is owned by Tohuku Electric Power Co., but the coverage excludes earthquake and tsunami damage. Therefore, Chaucer said, it does not expect syndicate 1176 to suffer major losses from the earthquake.

If a nuclear incident similar to that occurring in Japan were to happen in the United States, the U.S. Price-Anderson Act limits liability for nuclear power plant operators to $12.6 billion.

Price-Anderson, first passed in 1957 and renewed several times since then, also authorizes the Nuclear Regulatory Commission or the Department of Energy to indemnify nuclear facilities for damages that exceed any required financial protection.

In addition to liability coverage, the NRC requires U.S. nuclear power facilities to purchase at least $1.06 billion in property insurance.

Laws in Japan and the United States also channel liability of suppliers, such as General Electric Co., the manufacturer of the Fukushima reactors, to facility operators.

Meanwhile, U.S. nuclear power plant operators buy liability coverage from Glastonbury, Conn.-based American Nuclear Insurers and property insurance from Wilmington, Del.-based Nuclear Energy Insurance Ltd.

ANI, a joint underwriting association comprised of stock and mutual insurers, covers 104 U.S. nuclear reactors at 65 sites throughout the United States, which has the most nuclear reactors of any nation.

ANI liability coverage is written in two layers, according to company spokesmen. The Facility Form Policy provides $375 million in coverage, while the Secondary Financial Protection Program adds coverage up to maximum liability limits set by Price-Anderson.

For property coverage, U.S. nuclear power facilities participate in NEIL, a mutual insurer that was formed in Bermuda after Three Mile Island in 1979. In 1988, the company moved its operations from Bermuda to Wilmington, Del.

For example, Raleigh, N.C.-based Progress Energy Corp. has coverage from NEIL for its Crystal River, Fla., plant that has been shut down since 2009 when a portion of the building housing the reactor was damaged. No radiation leaks were reported at the site, which is scheduled to reopen in April, according to a company spokeswoman. Progress Energy's NEIL coverage provides up to $4.5 million per week in indemnification to the utility after meeting a $10 million, 12-week deductible, she said.

Although NEIL does not provide any direct property insurance to the Japanese nuclear power industry, for many years it has provided reinsurance capacity to support coverage underwritten by JAEIP, according to a statement on NEIL's website.

NEIL provides facultative reinsurance pertaining to JAEIP's nuclear property and terrorism risks, and reinsures JAEIP's liability risks via a quota share treaty. However, the property and liability policies issued by JAEIP specifically exclude “earthquake volcanic eruption or tsunami,” thereby limiting the exposure of the Japanese insurance pool and NEIL.

But there are implications for NEIL flowing from these recent events, it noted in its statement. For example, JAEIP is one of the larger reinsurers participating in NEIL's ceded $1.25 billion reinsurance treaty.

Sarah Veysey contributed to this report.