I am a news junkie – the type who’s interested in everything, but nothing at all. A few weeks ago, I was listening to the white noise of the usual talking heads, but the news station showed an interesting filler story that connected many dots in my overly informed brain. The reporter was proud to present a story about NASA’s latest and greatest technology to photograph solar flares and study the effects of these naturally occurring events, which can cause serious power and satellite disruptions, on the Earth’s electromagnetic field.
I was mesmerized with the pictures and proud of our species’ curiosity and capacity to understand the mystery of space, but the story did not resonate until I studied an insurance industry’s white paper titled “Emerging Opportunities in Business Interruption Coverages for Insurance Agents and Brokers.” It is clear that after the multiple catastrophic losses in 2011, the insurance industry is concerned with the future of perils and the need to update underwriting guidelines and forms to keep up with the times. The white paper highlighted a coverage concern for “space weather” events that interfere with global positioning systems (GPS) and how these events can disrupt a supply-chain operation. There is more to space than we normally care to understand, but our quest to reach the next frontier has now forced insurance nerds, like me (and underwriters), to ponder on the relationship of “space weather” and “property insurance.”
Solar flares are not uncommon – they create the beautiful Northern Lights between the months of August and November. Historically, “space weather” forecasters believed that the sun followed an 11-year-cycle of strong solar flare activity that interfered with the Earth’s magnetic field. In March 1989, they recorded a burst that knocked out power for millions of people in Canada. The largest flare on record occurred in April of 2001, but the flare was not directed at Earth. The second and third largest were recorded in 2003, and those were directed at Earth.
Our lives and businesses are extremely dependent on energy and technology – a long term outage can cost millions. How many days can a golf course wait without power and irrigation systems before the greens turn brown and the enthusiasts find greener grass somewhere else? How long does it take for food to rot in a supermarket after a power outage? How does a “just-in-time” enterprise like FedEx keep track of a package without GPS?
Businesses that are heavily dependent on utility services know that Service or Utility Interruption Coverage is a “must-buy” endorsement, – but what are they really purchasing? Are they protected against “space weather” events? It depends, but some case law may help businesses, agents and underwriters understand the protections of Service or Utility Interruption Endorsements typically found in ISO Forms CP 15 45 04 02 – Utility Services Time Element and CP 04 17 04 02 – Utility Services Direct Damage.
In Wakefern Food Corp (Shop Rite) v. Liberty Mutual Fire Ins. Co., 406 N.J. Super 524 (Sup. Ct. N.J. 2009) the court interpreted a standard Utility Service Interruption form in the context of a 4-day power outage, not caused by space weather, but a cascade power grid failure that affected millions in North America.
Wakefern, a conglomerate group of supermarkets that owns the ShopRite chain suffered income losses due to food spoilage during the blackout. Having paid a $5.5 million premium for insurance, covering (among other things) damage due to the loss of electric power, Wakefern turned to its insurer, Liberty Mutual, to pay for their losses. Liberty Mutual denied coverage under Wakefern’s Utility Service form claiming that the massive power outage did not cause “physical damage” at the “described location” – the supermarket.
The term “physical damage” was not defined in the endorsement or in the underlying policy. Wakefern lost its battle in trial court, but after a 7-year litigation war, it won the case on appeal under a “loss of functionality” theory of damage. The appellate court interpreted the policy as follows:
We conclude that the undefined term “physical damage” was ambiguous and that the trial court construed the term too narrowly, in a manner favoring the insurer and inconsistent with the reasonable expectations of the insured. In the context of this case, the electrical grid was “physically damaged” because, due to a physical incident or series of incidents, the grid and its component generators and transmission lines were physically incapable of performing their essential function of providing electricity. There is also undisputed evidence that the grid is an interconnected system and that, at least in some areas, the power could not be turned back on until assorted individual pieces of damaged equipment were replaced. However, we do not rest our decision on that evidence. Rather, we look at the larger picture concerning the loss of function of the system as a whole.
We recognize that, to some extent, the blackout was caused by a combination of fortuitous events, together with the operation of safety features built into the system to insure that the essential elements of the grid would not be severely damaged. However, in concluding that the “physical damage” is ambiguous, we consider the context, including the identity of the parties. See Voorhees v. Preferred Mut. Ins. Co., 128 N.J. 165, 176 (1992). These were not two electric utilities contracting about the technical aspects of the grid. Rather, the parties are an insurance company, in the business of covering risks, and a group of supermarkets that paid for what they believed was protection against a very serious risk – the loss of electric power to refrigerate their food. The average policy holder in plaintiffs’ position would not be expected to understand the arcane functioning of the power grid, or the narrowly-parsed definition of “physical damage” which the insurer urges us to adopt. See Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 247 (1979). In this context, we conclude that if Liberty intended that its policy would provide no coverage for an electrical blackout, it was obligated to define its policy exclusion more clearly.
If a policy does not define the term “physical loss or damage” in either its basic or endorsed provisions, it is possible that “space weather” events and their effects on our power grids and global positioning satellites will be covered under a “loss of functionality” theory. The industry is closely looking at space perils to reform their policies to exclude these perils and offer new products that attempt to capture these outer space risks. In the meantime, agents, risk managers and businesses heavily dependent on service utilities should evaluate policies in the context of outer space events and prepare a contingency plan to avoid losing it all at the expense of the sun’s flares.