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: Gregory DL Morris | October 15, 2018

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.

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.

“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.”

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 currently based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.