Indian Blackout a 'Wake-up Call'

Companies operating in emerging markets should check their coverage for power interruptions.

An unprecedented blackout of half of India that left more than 610 million people—almost a tenth of the world’s population—without power has exposed the shockingly poor electrical grid in the world’s second-largest nation. It also exposed the inadequate insurance coverage most global companies have for such potentially disastrous events.

“In general, U.S. firms operating abroad are not well-covered for power-outage-related service interruptions,” says Jeff Phillips, a partner at risk management, forensic accounting and loss advisory firm Dempsey Partners. Most companies, he says, don’t even know what kind of coverage they have paid for.

“I can tell you that since 2001, with almost every single claim I’ve been involved in, there’s been some surprise to the policy holder—some coverage limit they didn’t know about, some exclusion they didn’t anticipate, some deductible amount that was larger than they had expected,” says Phillips, pictured at right. “There’s almost always some surprise. Insurance contracts are the only case where managers will pay millions for a contract they don’t even see for months, and that they often don’t read when they finally get it.”

Clark Schweers, managing director at BDO Consulting, a global accountancy and advisory firm, says the huge Indian power blackout should “clearly be a wake-up call” for global businesses operating in the developing world.

“It’s like the earthquake and tsunami in Japan last year, and the U.S. Northeast regional blackout in 2003,” Schweers says. “It shows how vulnerable these grids are, and also how vulnerable companies can be to business interruption.”

Most companies operating in the developing world have business interruption insurance coverage, says Schweers, but whether those that suffered losses as a result of the blackout—either directly or because of interruptions in their supply chain—will recover any damages depends on the types of disruption their insurance covers and the fine print in their contracts. For example, he says, as many companies discovered following the Fukushima nuclear disaster, business interruption policies often cover only direct losses, and not contingent losses caused by the shutdown of third-party suppliers.

“A lot will depend on the cause of the disruption,” Phillips adds. For example, he says that if the first wave of blackouts across India was triggered by a deliberate load-shedding action by a utility, the recovery of losses might be excluded by a policy that is limited to “accidental occurrences.” On the other hand, if the second wave of the blackout was caused by a surge as power was restored, which then blew out a transformer, losses from that point forward might be covered.

“Some of these things could wind up in court,” Phillips says.

BDO’s Schweers predicts that losses from the latest blackout are likely to be limited and probably won’t be tallied in the billions of dollars. “Obviously, you could have a specific case where one plant forced into an unplanned cold shutdown could suffer hundreds of millions of dollars in damages, but because of risk management measures already in place, there shouldn’t be huge damages or a huge impact on insurance rates.” He notes that given the frequency of localized blackouts in India and other countries, companies generally provide their facilities abroad with back-up power at least adequate to keep critical operations running or allow for a controlled shut-down.

What is likely, he says, is that insurance companies will ask harder questions of policy holders at renewal time, as well as imposing more restrictions, exclusions and limits in new policies.

Phillips, for his part, says the Indian blackout should lead companies to review their business interruption policies carefully, to make sure they have what they need, but he’s not optimistic this will happen. “We don’t see policy holders doing much. They’re not going back and doing a detailed analysis of their policies,” he says. “Some do, but it’s not the norm.”

 

For more on insurance coverage in emerging markets, see Supply Chain Insurance Woes.

 

 

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