As the nation’s energy grid ages, insurers may increasingly need to cover the cost of plant repairs and service interruptions.
Liberty Mutual is now facing counter litigation for its denial of New Martinsville, West Virginia’s claim for damages stemming from a long-term service disruption at the city’s hydroelectric plant. Last month, the city filed a $20-million lawsuit in the US District Court in Wheeling seeking to overturn the insurer’s failure to pay for the losses under its “all risks” policy covering the plant.
Liberty Mutual’s policy provided business interruption coverage, yet when the city filed a claim with the insurer, Liberty Mutual denied it, arguing the loss was due to one or more “excluded perils” stipulated in the policy. The suit asserts that Liberty’s justification for the denial is insufficient and will not hold up in a court of law.
While most standard insurance policies cover “basic perils,” uncommon or costly hazards are not. Liberty Mutual must prove in court that an excluded peril caused the damage and any losses that resulted from it.
“A Loud Sound”
On July 10, 2014, an alarmingly loud noise caused by a metal break alerted plant operators that something had gone wrong, followed immediately by excessive vibration in one of the units. When the city investigated, it found several nuts and bolts connecting the rubber hub to the turbine shaft were broken or unattached, in addition to other damages.
The city then undertook costly repairs, which kept the unit out of operation for around 30 months. The lengthy interruption, the lawsuit claims, deprived the city of significant potential electricity sales that the unit would have otherwise produced.
Aging Energy Infrastructure
Creaking transportation infrastructure in the US has garnered much attention in recent years, with regular news reports of rail breakdowns and bridge closures, causing lengthy commuter delays and traffic jams. The American Society of Civil Engineers recently gave the nation’s infrastructure an overall score of D+, with grades ranging from a high of B for rails and a low of D for roads. The nation’s energy grid didn’t fare much better, receiving a ASCE grade of D+.
In its report, ASCE states that the US power grid currently operates at full capacity. Having been constructed in the 1950s and 1960s, most of the nation’s half-century-old electric transmission and distribution lines can no longer handle today’s heightened energy demands.
Consequently, energy infrastructure will soon need to be replaced. “Without greater attention to aging equipment, capacity bottlenecks, and increased demand, as well as increasing storm and climate impacts, Americans will likely experience longer and more frequent power interruptions,” the ASCE report predicts. In 2015, ASCE counted 3,571 outages across the US, lasting an average of 49 minutes.
ASCE pointed to some positive developments, notably, increased investment in energy infrastructure to boost long-term capacity and sustainability. And in 2015, natural gas and renewable sources accounted for 40% of additional power generation.
All this is to say that this West Virginia lawsuit could be the first of many disputes between the utility industry and the carrers who’ve agreed to insure them against infrastructural damage. As these plants age and bear more energy loads, replacing fraying equipment becomes all the more urgent, but as the damage and degradation accumulates, it also becomes more costly and difficult. Energy operators may increasingly turn to insurers to recoup those costs when a plant’s systems break down, resulting in extended downtimes and loss of revenue. Plant operators may demand their insurers cover all potential perils in the future.