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Contributed by Costantino P. Suriano and Marc Haas, Mound Cotton Wollan & Greengrass
“Give me the splendid silent Sun, with all his beams full-dazzling!”
- Walt Whitman
We all know and lament the natural phenomena (hurricanes, tsunamis, earthquakes, floods, and even volcanic eruptions) that have taken their toll on human life and treasure. (Insurers have paid more than $100 billion in claims so far in 2011.) Many times, but not always, the treasure can be restored, at least in part. The sad loss of life cannot.
What surprises many today is that the source of warmth and ofttimes healthy splendor—our Sun—may be the cause of future unhappiness even though it is 93 million miles from Earth.
Solar storms are not new, but will be more frequent in the near future. Our scientists and popular press tell us that, unlike hurricanes, tsunamis, earthquakes, floods, and volcanic eruptions, a single solar storm has the potential to cause damage across the entire globe, not just in an isolated region. Past solar storms have been responsible for damage to space-based assets, such as satellites, as well as to earthly objects, such as electrical power grids. The National Academy of Sciences has predicted that a single solar storm could have the economic impact of twenty Hurricane Katrinas.1
This article explains what solar storms are from a first-party lawyer’s point of view and how insurance carriers might be affected if a significant solar storm were truly to occur in the next few years.
Solar Storms: What Are They?
Solar storms are eruptions of energy and matter that escape from the Sun and occasionally head towards Earth.2They generally consist of three major components: solar flares, solar proton events (SPEs), and coronal mass ejections (CMEs), which, under the right circumstances, may react with the Earth’s magnetic field to produce a geomagnetic storm.3 Solar storms occur approximately once every decade and have the potential to cause widespread damage.4 Geomagnetic storms have been described as “low-probability, high-impact events.”5
Solar storm activity is often described in terms of “minimum and maximum periods of activity,” which generally follows an eleven-year cycle wherein minimum periods of activity are followed by maximum periods. Naturally, the maximum period of activity is when the threat of damage from solar storms is at its greatest. The public is told by experts that the Sun is currently coming out of its minimum period of activity and moving towards its maximum period. Although it seems to us that predicting solar storms is like picking the winning lotto numbers, some experts say that the next great solar storm will occur in 2013.6
The main tool for predicting solar storms is the study of sunspots. Sunspots are regions on the Sun’s surface that are cooler than the surrounding areas, thus appearing darker. They form as a result of “intense magnetic activity” and are generally the locations where solar storms begin.7 The more sunspots there are, the more likely it is that solar storms will occur.8 Knowing when and where sunspots will form is said to be the “key to predicting solar storms.”9 Astronomers at Stanford University have developed a technique for identifying sunspots that allows researchers to detect sunspots more than 37,000 miles below the Sun’s surface. (Don’t ask the lawyers how!) This new technique enables forecasters to locate sunspots one to two days before they appear on the Sun’s surface, providing improved space weather forecasting abilities.10
Early detection of solar storms might be important for us Earth dwellers in any (vain?) attempt to reduce the damage that might be caused by a great solar storm when it makes contact with the Earth. Without sounding like the proverbial “Cassandra,” and remembering the unfulfilled doomsday scenarios for the Y2K computer bug predictions, we must observe that a solar storm could cause widespread damage to industries such as communications, electrical power supply, and oil and gas. A report by the National Academy of Sciences concluded that a great solar storm could cause “$1-2 trillion in damages the first year and require four to ten years for recovery.”11 (That’s trillion with a “t.” Any actuary reading this may now reach for the aspirin!)
Past Solar Storms
In 1859, the largest solar storm known to date—the “Carrington Event”—struck Earth. Skies all over the planet illuminated with red, green, and purple auroras so bright that people could read newspapers outside before the Sun had risen. In addition to the light show that was produced, the solar storm caused considerable damage to telegraph systems worldwide. Sparks were seen discharging from telegraph machines, shocking telegraph operators and setting telegraph paper on fire. Even after the batteries powering the telegraph machines were disconnected, the aurora-induced electric currents traveling through the telegraph wires continued to allow the machines to send messages.12 Although, looking back, the damage caused by the Carrington Event was relatively minimal, a similar-sized storm today would be far more disruptive and could cause the world’s high-tech infrastructure to “grind to a halt.”13
In 1989, a solar storm struck Canada. While not nearly as strong as the Carrington Event, the 1989 event provides a frame of reference for the type of damage solar storms could cause today. Geomagnetically induced currents (GICs) flew through power lines in Quebec. The GICs destabilized the voltage of the power grid, causing spikes to erupt all over. In order to save as many transformers and as much other electrical equipment as possible, the power industries took protective measures and the entire power grid was taken down. Within ninety seconds of striking, the entire transmission grid was out of service.14 The collapsed power grid left approximately six million people without electricity on a very cold night.15
Risk to Electrical Grids
The functioning of society is critically dependent upon the availability of electricity. The interconnectedness of power grids in North America, however, makes them more vulnerable to solar storms than just about any other industry. Currently, there are three integrated electrical power systems in the Continental United States—the Eastern Interconnection, the Western Interconnection, and the Texas Interconnection. The dividing line between the Eastern and Western systems is roughly a line between Montana and North Dakota continuing southward. The Eastern Connection, the largest of the three interconnections, serves roughly 70 percent of the electrical load and population of the United States.16 Thus, whole regions could go dark as a result of a sufficiently large solar storm. The failure of the power system for any substantial period of time would likely have catastrophic economic results.
If a solar storm were to reach the United States, the power lines that make up the electrical transmission grid likely would act as antennae for the ionospheric or auroral currents produced by the solar storm. This could cause GICs to travel through the power lines, eventually reaching, and likely burning out or damaging, transformers. According to space physicist Daniel N. Baker, who chaired the National Research Council panel on Severe Space Weather Events, and NASA director of Planetary Sciences James L. Green, such burnouts could leave large areas of the United States “without electricity for months or years, as power companies struggle to purchase and replace damaged hardware.”17 (Months or years; got that, Mr. Actuary!)
Transformer failure likely will be problematic primarily because of the lack of manufacturing capacity for extra-high-voltage transformers. We have seen the consequences of rolling blackouts to Japanese industry as that country has dealt with the March 11, 2011 earthquake and tsunami. The direct property damage and time element (business interruption and contingent business interruption) Japan-related claims are staggering. Can anything like that happen in the U.S. from a solar storm?
Risk to Telecommunications
As noted, solar storms have been observed affecting the telecommunications industry for over 150 years. There are numerous documented incidents involving solar storms causing damage to telephone, telegraph, and radio equipment. Satellites are not immune to the potential effects of solar storms. Today, more than ever, we rely on advanced telecommunications equipment on a daily basis. Newer forms of cables (e.g., coaxial cables and fiber optic cables) require repeater amplifiers to compensate for the loss of signal strength over distance. The amplifiers, which are powered by a direct current supplied from terminal stations at either end of the cable, are susceptible to solar storms. The induced voltage experienced during a solar storm may produce an overload of electricity on the cable system that could cause power failure knocking it off-line.18 (What, no Google Maps? How do I get there?)
Risk to Oil and Gas
Solar storms also pose some risk to the oil and gas industry. The main risk to this industry from solar storms may be corrosion of oil and gas pipelines. Oil and gas pipelines have a tendency to corrode at points where electrical current flows from the metal into the surrounding ground. The GICs sent into the pipelines by a solar storm may have the effect of producing additional voltages between the pipeline and the ground that could weaken the pipes’ corrosion protection, rendering it ineffective.19
Are Solar Storms the Next Y2K “Nothing Happened” Event?
The most costly natural disasters have all occurred in the last twenty years.20 Most such catastrophes were hurricane-related and have cost the property insurance business tens of billions of dollars in losses, resulting in litigation over numerous coverage issues. Assuming this is not another Y2K “dud,” solar storms, although not as common as hurricanes, could be just as costly if not more so, since they have the potential to cause damage worldwide, as opposed to “hitting” a specific geographic location.
Very few policies, if any, currently specifically address coverage for damage caused by solar storms. Many of the same coverage issues commonly addressed in hurricane losses may also apply to solar storms, including those pertaining to the number of occurrences, business interruption and contingent business interruption analysis, and physical damage requirement analysis. With regard to the “physical damage” requirement, it bears noting that, unlike damage from hurricanes, solar storm damage could technically occur without actually causing any “physical damage.” That is because power grids often contain internal safety mechanisms that cause the power supply to be shut down before physical damage occurs. An insured could suffer extensive economic, but uncovered, losses as a result of the shutdown of power even though neither the power grids nor the insured actually suffered any “physical damage.”
The 2003 Blackout and Other Events
On August 14, 2003, the largest blackout in United States history struck parts of the Northeast and Midwest, as well as parts of Canada. The blackout affected an estimated fifty million people and resulted in the shutdown of approximately 265 power plants and more than 500 generating units. In Wakefern Food Corp. v. Liberty Mutual Fire Insurance Co.,21 the insureds, a group of supermarkets, suffered losses from food spoilage and loss of business caused by the blackouts. The insurer denied coverage because it said the policy only applied when the loss was caused by “physical damage” to off-premises electrical plants and equipment. The insurer contended that, although the power grids were physically incapable of supplying power, they suffered no “physical damage.”
The appellate court held that the “relevant physical damage” was to the power source itself, which collapsed during the blackout as a result of the protection measures that were in place at that time. It said that the Services Away Extension endorsement would be virtually worthless under the insurer’s construction because the power grids were created in such a way as to avoid physical damage as described by the insurer. The appellate court ruled that the temporary loss of power to the power grids or loss of function constituted “physical damage” and was covered under the terms of the policy.
In Ferraro v. North Country Insurance,22 the insured restaurant lost power in the 2003 blackout. The insured made a claim under its insurance policy for food spoilage and loss of business income damages. The insurer paid for the food spoilage losses owing to a lack of power to the refrigerators during the blackout, but rejected the insured’s claim for loss of income arising from the effect of the power outage on its ability to operate its restaurant.
The parties disputed the meaning of the word “damage.” The insurer argued that “damage” meant physical damage requiring repair or replacement. The insured argued that “damage” included the “impairment of usefulness” of the power companies’ generating and delivery of power to its customers.
The Ferraro court concluded that the term “damage” in the context of the Off Premises Power Clause was ambiguous and held in favor of the insured. The court’s holding was “based on the failure of the [insurer] to define ‘damage’ as ‘physical’ damage in the wording of the policy.” In addition, the court agreed with the insured on what the word “damage” meant and it was a “reasonable interpretation” when applied in the context of the endorsement.
The Ferraro court went on to state that “[i]f the [insurer] wanted to limit the application of the word ‘damage’ to that which was ‘physical’ and further ‘physical’ in the sense that a ‘replacement or repair’ was required before the ‘physical damage’ triggered coverage then . . . it should have stated such in the policy wording.”
In a case unrelated to the 2003 blackout, American Guaranty & Liability Insurance Co. v. Ingram Micro, Inc.,23the insured, a wholesale distributor of microcomputer products, used a worldwide computer network system to track its customers, products, and daily transactions, and all of its orders were processed through its computer network system. Ingram’s computer network system was rendered inoperable as a result of a power outage apparently caused by a ground fault in a fire alarm panel. The Ingram court held that “physical damage” cannot be restricted to “physical destruction or harm” to the computer network system, but includes “loss of access, loss of use, and loss of functionality.”
In Pentair, Inc. v. American Guaranty & Liability Insurance Co.,24 the insured sought to recover under its all-risk policy after an earthquake disabled a substation that provided electricity to the insured. Because of the power outage, the insured was unable to manufacture products that it was supplying to one of its subsidiaries. Two weeks later, after manufacturing resumed, the insured had its order shipped from Taiwan via airfreight in order to meet its customers’ needs, resulting in additional costs. The insurer refused to provide contingent time element coverage under its policy.
The court held that “the power substation [is] not a ‘supplier of goods and/or services’ to the insured within the plain meaning of [the policy wording].” The policy only covered losses resulting from damage to off-premises power stations “furnishing electricity . . . to Described Premises.” The substation at issue supplied power to the insured’s factory but “supplied no goods or services to [the insured], directly or indirectly.” In order for the insured to have been covered under the policy, the earthquake would have needed to cause damage to a substation that directly serviced the insured premises. The court concluded that the substation was not a supplier for purposes of coverage under the policy.
The court expressed its surprise when it found that there were no reported decisions “addressing whether a loss of power itself constitutes property damage.” The court noted that “[i]n this age of massive electric power grids, occasional catastrophic blackouts, and broad business interruption coverages, we would expect the subject of power outage losses to be explicitly addressed in cases construing all-risk policies, and perhaps in the policies themselves.”
The Pentair court issued a warning when it stated that “the parties to a large all-risk manuscript policy covering property and business interruption losses might sensibly decide to explicitly cover the foreseeable question of whether and to what extent the policy will cover losses caused by power failures resulting from covered perils such as an earthquake, rather than relying on a court to resolve this issue . . . .”
What Actions Can Insurers Take?
As is evident from the case law discussion, insurers should consider whether they are satisfied with the policy wording in their standard forms in the context of possible future solar storm claims. Insurers may wish to take a sharp pencil when they are presented with a broker’s manuscript form. Insurers should heed the warning issued by the Eighth Circuit in Pentair that “the parties to a large all-risk manuscript policy covering property and business interruption losses might sensibly decide to explicitly cover the foreseeable question of whether and to what extent the policy will cover losses caused by power failures resulting from covered perils . . . rather than relying on a court to resolve this issue.”
Consideration might be given to wording changes if current policy forms do not sufficiently define what constitutes “physical damage.” As the case law shows, at least some courts have concluded that the physical damage requirement in some all-risk policies may be satisfied as a result of the “triggering” of safety mechanisms in power grids that work to shut down power supplies before any “physical damage” actually occurs to insured property. Some courts seem to be saying this may be the case, even though the power grids themselves do not actually suffer any physical damage.
An insurer that intends to exclude damage from solar storms also should consider specifically excluding losses caused by the “triggering” of the internal safety mechanisms in power grids. By doing so, insurers will likely protect themselves from adverse decisions such as that in the Wakefern case.
If an insurer does not wish to completely exclude losses resulting from solar storms, the insurer may want to limit its liability for such losses by adding specific sub-limits for losses caused by solar storms. Sub-limits are an effective tool for insurers because they allow the insurer to know “worst case scenarios” at the time of policy issuance. This allows the insurer to charge the appropriate premium and avoid being hit with large losses that it did not anticipate covering when the policy was issued.
We do not know if solar storms will turn out to be nothing more than another Y2K “non-event.” Nevertheless, insurers should take a hard look at their policy language. As discussed, an insurer’s policy language will likely be key in determining whether a policy will cover losses caused by solar storms. The inclusion of specific definitions, exclusions, and sub-limits will go a long way to prevent your actuaries from headache!
We leave you with another poet’s words:
Till the Sun grows cold,
And the stars are old,
And the leaves of the Judgement Book unfold!
- Bayard Taylor
Costantino P. Suriano is a partner with Mound Cotton Wollan and Greengrass and has more than twenty-nine years of experience with first-party and third-party insurance coverage and litigation.
Marc E. Haas is an associate with Mound Cotton Wollan and Greengrass focusing primarily on first-party property insurance coverage and litigation.
This article was written by Costantino Suriano and Marc Haas. The views expressed do not necessarily represent the position of our firm or that of any of our firm’s clients.
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