An unprecedented blackout of half of India that left morethan 610 million people—almost a tenth of the world'spopulation—without power has exposed the shockingly poor electricalgrid in the world's second-largest nation. It also exposed theinadequate insurance coverage most global companies have for suchpotentially disastrous events.

“In general, U.S. firms operating abroad are not well-coveredfor power-outage-related service interruptions,” says JeffPhillips, a partner at risk management, forensic accounting andloss advisory firm Dempsey Partners. Most companies, he says, don'teven know what kind of coverage they have paid for.

“I can tell you that since 2001, with almost every single claimI've been involved in, there's been some surprise to the policyholder—some coverage limit they didn't know about, some exclusionthey didn't anticipate, some deductible amount that was larger thanthey had expected,” says Phillips, pictured at right. “There'salmost always some surprise. Insurance contracts are the only casewhere managers will pay millions for a contract they don't even seefor months, and that they often don't read when they finally getit.”

Clark Schweers, managing director at BDO Consulting, a globalaccountancy and advisory firm, says the huge Indian power blackoutshould “clearly be a wake-up call” for global businesses operatingin the developing world.

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

Most companies operating in the developingworld have business interruption insurance coverage, says Schweers,but whether those that suffered losses as a result of theblackout—either directly or because of interruptions in theirsupply chain—will recover any damages depends on the types ofdisruption their insurance covers and the fine print in theircontracts. For example, he says, as many companies discoveredfollowing the Fukushima nuclear disaster, business interruptionpolicies often cover only direct losses, and not contingent lossescaused by the shutdown of third-party suppliers.

“A lot will depend on the cause of the disruption,” Phillipsadds. For example, he says that if the first wave of blackoutsacross India was triggered by a deliberate load-shedding action bya utility, the recovery of losses might be excluded by a policythat is limited to “accidental occurrences.” On the other hand, ifthe second wave of the blackout was caused by a surge as power wasrestored, which then blew out a transformer, losses from that pointforward might be covered.

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

BDO's Schweers predicts that losses from the latest blackout arelikely to be limited and probably won't be tallied in the billionsof dollars. “Obviously, you could have a specific case where oneplant forced into an unplanned cold shutdown could suffer hundredsof millions of dollars in damages, but because of risk managementmeasures already in place, there shouldn't be huge damages or ahuge impact on insurance rates.” He notes that given the frequencyof localized blackouts in India and other countries, companiesgenerally provide their facilities abroad with back-up power atleast adequate to keep critical operations running or allow for acontrolled shut-down.

What is likely, he says, is that insurance companies will askharder questions of policy holders at renewal time, as well asimposing more restrictions, exclusions and limits in newpolicies.

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

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