Utilities contractors challenged in finding wildfire coverage

Utilities contractors working in wildfire-prone areas across a growing number of U.S. states are finding it difficult to obtain liability coverage, and it is critical that they take steps to manage these exposures, brokers say.

Contractors, especially those performing vegetation management or transmission and distribution line work, have seen rapidly accelerating insurance rates or a lack of available coverage, forcing some of them to decline work, brokers say.

California historically has seen the largest share of wildfire losses, but large severity wildfire events are spreading across the country, Aon PLC said in a recent report. As the trend of drier, warmer summer conditions continues, there are fears that wildfire losses will occur across Midwestern and Southern states including Texas and Florida, and even in Eastern states, according to the report.

In 2020, five wildfires in Western states each accounted for damages of over $1 billion, said Jim Gloriod, St. Louis-based CEO of the construction services group at Aon PLC. California continues to present its own unique challenges because it has the “inverse condemnation doctrine,” he said.

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 costs even if there is no finding of negligence. While every state has doctrines of inverse condemnation, California has been the only state to interpret this doctrine to apply to utility-related fires.

Future litigation is a concern as the potential exists for contractors that perform work on behalf of utilities to be pulled into lawsuits that could lead to large indemnification losses, Aon said in its report. Utilities also attempt to pull in any contractor that has performed work onsite where a fire began, regardless of fault, leading to material defense costs, Aon said.

“There is a concern from the underwriting community that liability for these fires will expand and exposure will expand into other states,” Mr. Gloriod said.

The lack of interest from the marketplace to cover wildfire risks, in general, has “spread like a wildfire” beyond California and throughout the country, said Andrew Grim, Dallas-based senior vice president and construction specialist at wholesale and specialty insurance brokerage Brown & Riding Insurance Services Inc.

Even some of the largest insurers that used to be silent or more flexible in their coverage now have mandates to exclude wildfire in the excess layers, Mr. Grim said. For example, some insurers are not quoting without a full wildfire exclusion, regardless of the state, he said.

The hard market hasn’t helped and combined with contracted capacity and lack of underwriting appetite, it is increasingly difficult to build capacity for utility contractors’ wildfire risks, brokers say.

Mr. Grim said he has accounts that had $100 million of excess liability coverage for wildfire three years ago that now only have $5 million of full wildfire coverage. “On the next layer it goes to a hybrid exclusion like California only, for example,” he said.

Insurers that are willing to provide liability coverage to contractors for wildfire risks want to see strong risk management protocols in place, said Danette Beck, Valhalla, New York-based national construction practice leader at USI Insurance Services LLC.

“What are your vegetation management protocols? What is the protocol if it is a high wind day with dry air temperatures? What kind of protocols do you put in place in order to ensure the likelihood that a fire won’t be created by the work that you’re doing?” Ms. Beck said.

Contractors also need to review their contracts with utilities and make sure the cost of that insurance is going to be included as part of their bid for the work, she said.

Contractors can manage the wildfire exposure by carving it out, building a separate liability tower for dedicated wildfire coverage, the cost for which is passed through back to the utility company on a contract basis, Mr. Grim said. “Instead of the insured paying for it, (the utility) pays for it and you don’t pollute the limits to the corporate (liability) tower,” he said.

Aon is working diligently with contractor clients to try to limit their wildfire exposure from a contractual standpoint, Mr. Gloriod said. In addition to understanding how much wildfire coverage they are required under the contract with a utility to secure, and what the cost of that coverage is going to be, contractors need to do as much as possible to mitigate the risk, he said.

Aon is also exploring different and more creative ways to secure wildfire coverage, either through the capital markets or reinsurance, Mr. Gloriod said.

Increased underwriter scrutiny of wildfire risks is not new. The shift in the market in the past 24 to 36 months initially followed record wildfire losses experienced by the industry in 2017 and 2018.