California Wildfires and Liability Risks for Utility Contractors

Scrutiny is underway involving Southern California Edison (SCE) and whether its equipment ignited the massive Eaton fire that destroyed large areas of Altadena. According to the Los Angeles Times, more than 40 lawsuits by residents have been filed against the utility.

It’s important to note that it’s not only the utility companies that face potential exposures related to wildfires but also the construction firms that perform work on behalf of the state’s power infrastructure. A firm could face liability claims if the contractor’s work is linked to a wildfire.

Additionally, although there are 14 states with wildfire exposures, California creates unusually high risk with its laws of “inverse condemnation” and “efficient proximate cause doctrine” that places utilities and their contractors at risk. “Inverse condemnation” allows a property owner to recover “just compensation” from public entities and utility companies when private property is damaged for public use. The “efficient proximate cause doctrine” states that, when a loss is caused by a combination of a covered and an excluded risk, the loss is covered if the covered risk is the proximate cause.

The Role of Construction Firms in Utility Infrastructure Work

Utilities contract with construction firms to maintain, update, and repair their power infrastructure, from pole replacement, vegetation management, hardening upgrades, and moving above ground power to underground. They also maintain and upgrade transmission and distribution lines, ensuring that electrical systems run safely and effectively.

While this work is essential, it comes with significant liability risks, particularly risks associated with wildfire exposures. If a contractor’s work is found to have contributed to the wildfire, whether due to defective installation, inappropriate vegetation removal, or negligence in providing materials for installation, the utility’s contractual agreements could expose the contractor.

Moreover, contractors do not have to be actively negligent in a loss to be exposed to a claim. Failure to perform work even if not specified in the scope of the project can create potential liability issues that extend beyond direct loss by the public. For instance, there is litigation involving the Bobcat Fire in 2020 with simply the Forest Service expenses of fire-fighting totaling $56 million.¹ The Bobcat Fire burned 115,796 acres, destroyed over 85 homes, and devastated wildlife and natural areas.²

Liability Insurance Requirements for Utility Contractors

Due to the extreme financial risk, utility companies typically require contractors to procure Liability coverage, and in most cases, require such Liability insurance to specifically address the risk of wildfire. While Liability requirements vary by utility and scope of work performed by contractors, they typically mandate limits that range from $20 million to $50 million or more in their contractual agreements. And while there may be some comfort to negotiating limitation of liability in contracts, such would not likely shield contractors from third-party actions.

Insurance Challenges

Securing wildfire Liability coverage can be challenging. The U.S. insurance market has backed away from wildfire risk in a meaningful way, leading most contractors to seek coverage primarily from the London and Bermuda markets, whose appetite to deploy capacity remains limited to small lines, such as $2.5 million to $5 million. This creates a need for multiple underwriters to fill the requirements of contractors performing the work.

Unlike traditional insurance policies, which may provide large limits from a single insurer, wildfire Liability policies for contractors are layered through an “excess tower,” where multiple insurers each contribute a small portion of coverage. For example, each carrier may provide $3 million to $5 million in limits. To reach $50 million or more in limits, 10 to 20 insurers may be needed.

This process makes building a full tower difficult, slow, and expensive. Additionally, because utility companies purchase wildfire Liability insurance from the same limited pool of insurers, contractors often struggle to find enough available capacity to meet contractual requirements.

Rising Costs and a Tight Insurance Market

The rate-on-line (premium as a percentage of coverage limits) cost of wildfire Liability insurance has skyrocketed in recent years.

For example, for $10 million in coverage, a contractor might pay close to $2 million to $3 million in premiums; for $50 million in coverage, costs could exceed $10 million annually. Construction firms with lower project payrolls could still see higher costs associated with minimum premiums quoted by underwriters for the risk of wildfire.

The Future of Wildfire Insurance for Utility Construction Firms

With litigation and jury verdicts going viral, insurers are becoming more selective in providing coverage. Underwriters scrutinize contractors’ safety protocols and fire-mitigation strategies, project locations (urban vs. rural, transmission vs. distribution work), and payroll and revenue data to assess risk exposure.

We, at McGriff, recommend that contractors and their risk management teams continue to build the international relationships in both London and Bermuda to address the everchanging landscape, which is not expected to improve in the near term. Remain focused on installing and training in wildfire mitigation, while having a clear understanding of the contractual exposures evident in whatever scope of work contemplated.