Managing the nation's infrastructure risk sounds like a subject for a textbook. As an author of textbooks, I think this is probably what ought to be started. However, the connection between managing risk and claims adjusting is so close that at least a few hints can be covered in a short series, of which this is the first.
Risk refers to both direct and indirect loss (and the potential for loss). It is managed in two ways: First, there must be an established way to pay for both the prevention of loss and for any damages caused by loss. Second, and perhaps more importantly, the risk of loss must be controlled, either before loss occurs or after it has occurred. It is in the payment of any damages caused by loss, and the control of that damage, where the claims adjuster plays a crucial role.
There are very few infrastructure-related losses that are earth-shaking: the Chernobyl (Ukrainian/USSR) and Daiiachi Fukushima (Japan) nuclear power plant disasters in 1986 and 2011, respectively; the Bhopal, India, insecticide plant poisonous gas leak; the Exxon Valdez and BP oil spills. Such events are rare, and while adjusters were eventually involved in those, it was not on behalf of your everyday "good hands" neighbor insurance company.
Rather, it was for a largely self-insured corporation or governmental agency and their excess insurers. It is instead in the peripheral daily events that adjusters are more likely to find themselves on the post-loss finance and control aspects of risk management—the damaged cargo, the indirect loss because of lack of delivery, the fire at a related facility, the highway accident involving a power company vehicle, or the injured employee.
Life's Attachment to Electricity
"Power plants, both steam and nuclear, have many potential environmental concerns," suggests Karl Zimmel, manager of risk management services at UNS Energy Corp., in a recent National Underwriter article. "Asbestos, which in the mid-1990s was excluded from most general-liability policies, still exists in older-generation power facilities and electricity-distribution lines." Further, the electrical grid is vulnerable to cyber attacks that could easily shut down an electrical grid, yet some experts suggest the industry is lagging in cyber-security systems, reports Richard Lardner of the Associated Press in a report regarding a new executive order that "would direct U.S. spy agencies to share the latest intelligence about cyber threats with companies operating electric grids, water plants, railroads, and other vital industries to help protect them from electronic attacks…."
Having just returned from an extended driving tour of the Northeast—14 states in 24 days, plus a Canadian province—it was plain to see how vulnerable we are to a loss of the power grid. The last time I was in New York, in 2003, the power went out for several days. The outage was blamed on a tree in Ohio, but that sounded a bit fishy at the time. This time my wife and I got through New York end to end with no power outages, but we also got a great lesson in what one state is doing that other states may need to emulate.
New York has coal-burning power plants, of course, and we saw one Norfolk Southern unit train of coal headed east that was at least a mile and a half long. They also have at least one nuclear facility, which environmentalists claim was built in a very hazardous location, on the coast. Remember what caused the loss at Fukushima? Tsunami water flooded the auxiliary diesel-powered pumps located in the basement that were supposed to cool the nuclear rods.
New York has hundreds of windmills churning out electricity on ridge after ridge of their mountains. They have lots of solar-energy panels, and according to PBS's Nova, some enterprising company is collecting the garbage in Peekskill and burning it to produce clean electricity. Another firm is chopping up plastic waste and heating it to make a nanoproduct that, when placed between aluminum plates, produces electricity.
It is also worth noting that New York has the world's largest hydro-electric facility in a unique place called Niagara Falls. We visited and saw the power generating systems and tunnels that channel water from the upper Niagara River to the plant's 1,900-acre reservoir and the myriad high-tension power lines radiating outward from the plant. Across the river the Canadians have a similar plant, also powered by the Niagara, which is the flow of water from the Great Lakes down that relatively narrow river.
Bragging Rights
At night as much as 75 percent of the water in the river can be diverted to power the generators. The New York Power Authority (NYPA) brags that it is "leading the way" to the state's clean-energy future. Clean energy. Remember that? It was one of the issues of debate in the recent presidential campaigns. Both sides agreed it was a good idea—but one side seemed more focused on fossil fuels than green energy, such as wind, solar, and hydro-electric. According to the NYPA, "[it] is the nation's largest state public power organization, with a proven record of innovative strategies that meet [the state's] energy needs while stimulating its economy and preserving its environment." So what happened to cause that power outage in 2003?
It is interesting to note that when the Niagara power plants were first planned, there were several major issues to resolve. Thomas Edison was a proponent of direct current (DC), but direct current cannot be transferred very far by wire. An odd little immigrant named Nikola Tesla argued against Edison, and in 1895 the Niagara power plant was designed to produce alternating current (AC) which could be sent for many miles in any direction. AC has been America's major power current ever since. But that first plant, built on the cliff next to the Falls, was ineffective and ugly, and the state retained Robert Moses to find a better location for the power plant. He found it further down the river gorge, on property owned by the Tuscarora Indian Nation. Their land was sacred, and they wanted no part of the power plant on it. But Moses, who also redesigned much of New York City and ran a World's Fair, took the Tuscaroras all the way to the U.S. Supreme Court and acquired their land under the rule of eminent domain.
The U.S. is divided into three electrical grids: one for 11 Western states, a separate one for Texas, and the rest of the nation (except Alaska and Hawaii) in the Eastern grid. If one section of the grid goes down, then supposedly power is switched from other parts of the grid to take up the slack. Supposedly. Well, it didn't happen a few years ago when a San Diego power grid outage also blanked out Arizona, and it didn't work in that New York loss in 2003. Further, when the grid is controlled by a bunch of thieves like those at Enron (remember them, sitting in Houston chuckling about the old lady's power bill in California?), the likelihood of more widespread outages is real. The grid is also vulnerable to sabotage, and any enemy could shut down the grid by cyber warfare.
Clean vs. Unclean Energy
Proponents of the coal, oil, and gas industry have a valid point in stating that the nation cannot survive without them. As the politicians argued in the 2012 presidential campaign, America can no longer remain dependent on foreign oil; we must produce our own and become self-sufficient. Remember that mile-and-a-half-long unit train of coal headed for some New York power plant we saw on our journey? We could only guess where it had originated. It might have been a West Virginia coal mine or the Powder River coalfields of Wyoming, with a journey two-thirds of the way across the nation. Another debate is over "fracking," but the danger there is water pollution from chemicals.
There are only a few minor exceptions to the fact that coal-powered electric plants pollute the air. A handful of power companies have installed "scrubbers" to remove toxic gases, CO² and particular matter from their smokestacks; the rest pump it out by the ton. Consider what would happen, however, if coal plants were made illegal: coal mines would close, costing hundreds of thousands of jobs; railroads would lose their biggest source of income and go bankrupt. Switching to somewhat cleaner oil or gas would require construction of lengthy pipelines and increase our reliance on foreign oil and gas—a major issue regarding the pipeline from Alberta to Texas. (Sometimes I wonder why it would not be better to just build a new refinery in North Dakota and skip the need for a pipeline.) The coal-power industry is a major part of the nation's economy. For the foreseeable future, Americans will have to coexist with it, but through our state and federal governments we can push to require more smokestack scrubbers.
Risk-Financing the Power-Related Industries
Duke, Progress Energy, Consolidated Electric, Pacific Gas & Electric, and similar large power companies generally self-fund much of their risk, with excess insurance for the rare catastrophic loss that may occur. Likewise, the railroads and barge lines that haul coal, the pipelines that transport oil and gas, the oil refining companies, and other large corporations usually self-fund much of their risk or join insurance pools such as discussed in the May 2011 column regarding the Price-Anderson Act of 1957 or the Nuclear Energy Liability Ins. Assn. or Mutual Atomic Energy Liability Underwriters.
Such is not the case with all power-related businesses, however. Small municipal or local co-op electricity producers often insure most of their risks, and a large array of policies might apply at any such facility. These would range from Equipment Breakdown (formerly Boiler & Machinery) forms on its diesel generators, turbines, and dynamos to Business Income coverages applicable to a breakdown in fuel supply, fires, or other direct or indirect damages. But a power company is not just the power plant. There are miles—often hundreds of miles—of high-tension line towers; millions of power poles and lines running both over and under streets to homes and businesses; hundreds of trucks and other vehicles that respond when needed to power outages from storms or auto accidents that knock down power poles; hundreds of thousands of employees at risk of injury and illness that must be insured; hundreds of local offices where customers can sign up for service or pay their bill; and a myriad of other insurable situations.
It would be the rare professional multiline adjuster who does not encounter a claim involving some aspect of the electrical power industry. Consider how many reservoirs offer recreational opportunities along with power: Lake Mead on the Boulder Dam, Lake Powell on the Glen Canyon Dam (there is also a coal-fired power facility at Page using coal from the Black Mesa mines on the nearby Navajo Reservation, hauled by an electric railroad between the mine and the plant), Grand Coulee Lake on the Colville Indian Reservation in Washington, the many reservoirs on Tennessee Valley Authority or Georgia Power hydroelectric dams, and so forth.
Controlling Risk
The best risk control is loss prevention, a key part of any power company's responsibility. But adjusters become involved in post-loss control as well, arranging salvage sale on damaged cargo or equipment, paying outage or business-income claims that may have been contracted with the company, handing vehicular accidents and workers' compensation claims and subrogating, and many similar types of loss control.
Power companies have struggled to keep up with the growing need for electricity—and have been largely successful in doing so. TV ads often promote conservation of power, making homes or businesses more power-efficient. Consider, for example, that the New York Times reported that Internet data centers that store and process everything from Facebook and Google searches use 30 billion watts of electricity worldwide, of which only 10 percent involves actual computations. This is the equivalent output of 30 nuclear power plants. (My reference did not provide a timeframe.)
What type of disaster involving the power industry will be next? Should we expect another nuclear reactor meltdown, or perhaps a drought that dries up the Colorado or Columbia Rivers? A broken oil or gas pipeline that causes a stoppage of fuel, or a refinery explosion that does the same? Whatever it is, undoubtedly an adjuster will be involved in cleaning up the mess. That's part of managing the nation's infrastructure risk —and most of it is not governmental.
After this column was written, Superstorm Sandy struck the Northeast. New Jersey, Lower Manhattan and the East River got flooded, and early reports say that at least 50 million Americans in about 16 states were affected, either with wind, flooding or snow, and as many as eight million lost power, some for weeks. Even some of the New York subways were flooded.
Catastrophe adjusters were already on their way as this was being written; I even got a call but am not qualified on the computer systems used. It will take time, but the power industry will manage, and our nation will be celebrating full restoration of electricity by the holidays.
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