How California Lawmakers Got Wildfire Risk Management Right

California’s new wildfire liability bill emphasizes mitigation planning, and will allow compliant utilities to pass some costs on to customers.
By: | October 15, 2018 • 5 min read

With the support of major national and state property and casualty insurers, the California legislature passed a sweeping reform of utility company liability triggers at the end of August.

Governor Jerry Brown is expected to sign Senate Bill 901 even though he originally supported a different measure. By most accounts, SB-901 is a rare example of thorough inquiry and balanced legislation.

A Trend in Defining Liability

Because of, or perhaps despite, strong contending forces, the state Public Utility Commission (PUC) sought clarity on its authority to apportion liability when utilities are held responsible for losses, especially from wildfire. Utilities were seeking relief from inverse condemnation, the mandate that holds them strictly liable for damages.

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Utilities, including Pacific Gas & Electric (PG&E), are facing massive claims and possible criminal investigations from the 2017 wildfires, raising the specter of bankruptcy. Property owners and consumer groups, on the other hand, did not want for-profit power companies to be allowed to transfer their liabilities onto rate payers.

There are similar issues in the U.S. of publicly-traded companies seeking to manage their risks by shifting them away from shareholders and onto customers. In North Carolina, for example, utilities demand that rate payers submit to a credit check before starting new service or else post a heavy deposit. Credit-card issuers and many online vendors require customers to waive legal rights and submit to arbitration in disputes.

With major hurricanes again battering the southeastern U.S., the balance between public and private liability for resilience is at the fore. Six years after Hurricane Sandy, disputes are still raging in coastal communities of New Jersey, where owners of waterfront property are resisting state and local efforts to build dunes and other natural barriers.

Managing Growing Natural Hazards

Management of natural hazards was at the core of SB-901. While the legislation was crafted to address complex legal and financial issues, important provisions overhaul how woodlands are managed in an era of climate change.

In a letter to the state senate wildfire conference committee, six insurance associations supported SB-901: American Insurance Association (AIA), National Association of Mutual Insurance Companies, Pacific Association of Domestic Insurance Companies, Personal Insurance Federation of California and Property & Casualty Insurers Association (PCIA). They collectively represent more than 95 percent of the residential and commercial market in California.

“… vegetation management is critical to prevention. We have got to get the dead wood out.” — Katie Pettibone, VP, western region, AIA

“The fires throughout the state illustrate the importance of focusing on how to manage and reduce fuel in what appear to be longer and hotter fire seasons,” the letter stated. “We reiterate our members’ strong support for meaningful measures, like those in SB-901, to address this need.”

If SB-901 becomes law, “we hope forest management will improve,” said Mark Sektnan, vice president of state government relations at PCIA.

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“The big thing was PG&E trying to change its legal liability. Now … we can move forward with the subrogation cases already filed.”

The size and severity of last year’s fires brought the issues to a head: “For years, the most costly event was the Oakland fire of 1991, with losses of $2.9 billion,” Sektnan said.

“In just the last 18 months, we have broken the record for largest fire in geographic area three or four times. And the losses from the North Bay and Thomas fires together are about $12 billion, including the associated mudslides. The scope of those surprised everyone.”

The Thomas Fire of December 2017 burned more than 280,000 acres and is the largest since the California Department of Forestry and Fire Protection, known as Cal Fire, began compiling its list in 1932.

Two months earlier, the 14 blazes known as the North Bay Fires were the deadliest. They burned more than 213,000 acres and 5,700 structures, and killed 41 people, according to Cal Fire.

Katie Pettibone, vice president of the western region for AIA, emphasized the significance of natural hazards.

“The conference committee established that vegetation management is critical to prevention. We have got to get the dead wood out.”

In December 2017, the U.S. Forest Service announced an additional 27 million trees, mostly conifers, died throughout California since November 2016, bringing the total number of trees that have died due to drought and bark beetles to a historic 129 million on 8.9 million acres.

Katie Pettibone, vice president, western region, AIA

“Ultimately all the components of the bill will reduce risk for wildfires in California,” said Pettibone.

“The questions still remaining are about the PUC. It was clear in the conference committee hearings that the PUC does not have the manpower it needs. Utilities basically self-certify that they are complying with regulations. It also emerged that PG&E is woefully under-insured.

“There is a commission that will study the costs, and there may be a fund for catastrophic fires that are not the result of negligence. The issue is still what these companies are doing to manage their risks.

“In California the courts have determined long ago that privately-owned utilities are quasi-government entities. They have a monopoly and guaranteed rate of return.”

They also have some recourse to eminent domain and, thus, strict liability.

Pettibone added that under its new president, Michael Picker, the PUC questioned its ability to apportion liability for losses if a utility were even 1 percent responsible.

SB-901’s Potential

By most accounts, SB-901 addressed that, as well as the other major issues. In reporting on August 31 that the bill had passed, the San Francisco Chronicle wrote, “Although SB-901 should ease fears that PG&E’s potential $17 billion liability from the fires could push the company into bankruptcy, it does not give the utility everything it sought.”

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SB-901 would allow the state’s investor-owned utilities to issue cost-recovery bonds, to be repaid by charges on customers’ bills, if the PUC determines the utility employed reasonable fire safety practices.

Estimates indicate power customers would pay an extra $5 per year for every $1 billion in bonds issued.

“We supported SB-901 for many reasons,” said Sektnan. “Those included forest management, mutual aid, prepositioning of equipment and hardening of the grid.”

He also noted that while utilities were only responsible for one out of 10 wildfires historically, the state fire authority had referred 11 of the 16 utility-caused fires in 2017 to district attorneys for investigation of possible violations of state law. &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at riskletters@lrp.com.

More from Risk & Insurance

More from Risk & Insurance

In the Fast-Paced World of Retail, This Risk Manager Strives to Mitigate Risks Proactively and Keep Senior Leaders Informed

Janine Kral works to identify and mitigate risks, building strong partnerships with leaders and ensuring they see her as support rather than a blocker. 
By: | October 29, 2018 • 4 min read

R&I: What was your first job?

My very first paid job was working on my uncle’s ranch in British Columbia in the summers. He had cattle, horses and grapes — an unusual combo. But my first real job out of college was as a multi-line claims adjuster at Liberty Mutual.

R&I: How did you come to work in risk management?

Right out of college I applied for a job that turned out to be a claims adjuster at Liberty Mutual. I accepted because they were offering six weeks of training in Southern California, and at the time that sounded really fun. I spent about three years at Liberty Mutual and then I spent a short period of time at a smaller regional insurance company that hired me to start a workers’ compensation claims administration program.

I was hired at Nordstrom as the Washington Region Risk Manager, which was my first job in risk management. When I started at Nordstrom, the risk management department had about five people, and over the years it has grown to about 75. I’ve been vice president for 11 years.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

I would say that technology has probably been the biggest change. When I started many years ago, it was all paper and no RMIS.

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R&I: What risks does the retail industry face that are unique?

We deal with a lot of people — employees and customers. With physical brick and mortar settings, there are the unique exposures with people moving in and out in a public environment. And of course, with ecommerce, we have a lot of customer and employee data, which creates cyber risk — which is not necessarily a unique risk in today’s environment.

R&I: Can you describe your approach to working with senior leaders and front-line staff alike to further risk management initiatives?

It starts with keeping the pulse of what’s happening with the business. Retail moves really fast. In order to identify and mitigate risks proactively, we identify top risk areas and topics, and then we ensure that we have strong partnerships with the leaders responsible for those areas. Trust is critical, ensuring that leaders see us as a support rather than a blocker.

R&I: What role does technology play in your company’s approach to risk management?

Janine Kral, claims adjuster, Nordstrom

We have an internal risk management information system that all of our locations report events into — every type of incident is reported, whether insured or uninsured. Most of these events are managed internally by risk management, and our guidelines require that prevention be analyzed on each one. Having all event data in one system allows us to use the data for trending and also helps us better predict what may happen in the future, and who we need to work with to mitigate risks.

R&I: What advice might you give to students or other aspiring risk managers?

My son is a sophomore in college, and I tell him and his friends all the time not to rule out insurance as a career opportunity. My advice is to cast a wide net and do your homework. Research all the different types of opportunities. Read a lot — articles, industry magazines, LinkedIn. Be proactive and reach out to people you find interesting and ask them about their careers. Don’t be shy and wait for people and opportunities to come to you. Ask questions. Build networks. Be curious and keep an open mind.

R&I: What are your goals for the next five to 10 years of your career?

I have always been passionate about continuous improvement. I want to continue to find ways to add value to my company and to this industry.

R&I: What is your favorite book or movie?

My favorite book is Shantaram by Gregory David Roberts. It’s a true story about a man who was in prison in Australia after being convicted of armed robbery, and he escaped to India. While in India, he passed himself off as a doctor in a slum. It’s a really interesting story, because this is a convicted criminal who ends up helping others. I am not always successful in getting others to read the book because it’s 1,000 pages and definitely a commitment.

R&I: What’s the best restaurant you’ve ever eaten at?

Fiorella’s in Newton, Massachusetts. Great Italian food and a great overall experience.

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R&I: What is your favorite drink?

“Sister Carol.” I have no idea what is in it, and I can only get it at a local bar in Seattle. It’s green but it’s delicious.

R&I: What is the riskiest activity you ever engaged in?

Skydiving. Not tandem and without any sort of communication from the ground. Scary standing on a wing of a plane, but very peaceful once the chute opened, slowly floating down by myself.

R&I: If the world has a modern hero, who is it and why?

I can’t think of one individual person. For me, the real heroes are people who have a positive attitude in the face of adversity. People who are resilient no matter what life brings them.

R&I: What about this work do you find the most fulfilling or rewarding?

It’s rewarding to help solve problems and help people. I am proud of the support that my team provides others. &




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at kdwyer@lrp.com.