As wildfires losses mount, will commercial insurers decline to cover utilities?

2023 marked yet another year of costly wildfires in various parts of the United States. In June, an investigation into the causes of the 2021 Marshall Fire — deemed the most destructive wildfire in Colorado history — had hundreds of litigants lining up to sue Xcel Energy for a dislodged power line that may have ignited part of the fire. Xcel executives disclosed that the company’s potential liability for the fire could exceed the limits of its insurance policies in a July earnings conference call.

Two months later, Hawaiian Electric indicated in an SEC filing that it was exploring the possibility of bankruptcy as part of “prudent scenario planning” to contend with litigation associated with the wildfires that devastated the island of Maui in August. So far, the company has not declared bankruptcy, though it has retained restructuring advisors, hired a new CFO with experience in utility bankruptcies, and contributed $75 million to a fund for victims of the fire who are willing to forgo litigation.

It’s not unheard of for a utility to declare bankruptcy in the wake of wildfire-related litigation — Pacific Gas & Electric being a prime example. But bankruptcy is not the only consequence of the rising tide of wildfire litigation. Insurance companies, PG&E spokesman Paul Doherty said, are also reconsidering how — and in some cases whether — they will extend liability coverage to utilities in wildfire-prone areas.

“At PG&E, we’ve experienced a varied response by insurance companies in the commercial markets,” Doherty said in an email. “From some carriers opting to no longer offer wildfire liability policies, to sub-limits of insurance for wildfire-related losses, to higher deductibles and increasing premium costs for policies covering wildfire risk.”

Insurance analysts say the growing risk of severe wildfires due to climate change, and a shifting legal landscape that increasingly holds utilities accountable for the damages caused by these conflagrations, has indeed changed the calculus that goes into a utility’s liability insurance policy. But they’re split on what that means for the long-term. Some analysts believe that the growing need for wildfire-related liability insurance will spark ingenuity, bringing new insurance products to market.

Others, however, believe the government may need to intervene in order to quite literally keep the lights on in some parts of the U.S.

“I can’t say whether there will or won’t be insurance, or whether utilities will have problems with coverage,” Finity Consulting Principal Rade Musulin said. “But what I will say is many of the prerequisites for an insurance market that can deliver stable and affordable prices are not met in this space.”

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