Bridging the blackout: navigating the grid exclusion dilemma
The recent geopolitical tensions and the closure of the Strait of Hormuz have caused diesel prices to soar, heightening concerns over the potential return of load shedding as winter approaches. While Eskom has reduced its diesel reliance, the stability of South Africa's power grid remains in question.
In this context, the introduction of grid failure exclusions in South African short-term insurance policies has created significant uncertainty. Authored by Wesley Reid, Director of Associated Loss Adjusters, this article explores the implications of these exclusions and how they are reshaping the insurance market.
Wesley provides crucial insights for brokers and policyholders on how to navigate these changes and ensure their coverage is properly aligned with the evolving energy landscape.
Diesel prices and load shedding woes
The recent conflict between the USA and Iran and the closure of the Strait of Hormuz have severely impacted global markets and caused the price of diesel to skyrocket. Although Eskom has reduced their reliance on diesel over the past year, diesel generators are still a crucial part of their plans to prevent load shedding. With surging diesel prices and winter fast approaching, the dreaded return of load shedding may not be far away.
This looming threat brings the stability of the power supply into sharp focus. The introduction of grid failure exclusions has caused a massive shift in the South African short term insurance market. These new rules completely remove insurance cover for any financial losses caused by a collapse of the national electricity grid. Insurance companies and reinsurers view a total grid collapse as a catastrophic event that is simply impossible to insure.
A shift in the insurance market
During the first half of 2023, the insurance market widely adopted these exclusions for both new policies and renewals. This happened because the electricity supply system was under extreme pressure and rumours of a total national blackout were spreading. Insurers wanted to protect themselves from this massive systemic risk before a disaster actually happened.
A few different pressures caused this change. Load shedding was getting worse, making people openly question if the grid could stay stable and avoid a national blackout. At the same time, global reinsurers made it perfectly clear that they would not provide financial backing for a grid failure event. Without that support, local insurers had no choice but to classify grid failure as uninsurable.
The problem of broad exclusions
Short term insurance was never designed to cover an event of this massive scale. Following the unexpected shocks of the Covid 19 pandemic, the riots in 2021, and the floods in 2022, reinsurers became much more cautious. They placed stricter limits on their exposure to widespread systemic risks, including the failure of public utilities.
Right now, the South African market uses about five different versions of this grid failure exclusion. The scope of these exclusions varies dramatically. Some only apply to a complete national grid collapse, but others are written in extremely broad terms. The most controversial versions use words like directly or indirectly, and if read strictly, this broad wording could exclude any loss even slightly connected to unstable public electricity, rather than just a total national collapse.
For example, strict adherence to the broad wording means an insurance company could use this wording to deny a claim for a localized power surge. Many experts believe this broad approach goes beyond the original intention.
The impact on policyholders
The exclusion was originally introduced because of genuine fears about a total national grid collapse or a severe regional failure caused by crumbling infrastructure. Extending it to cover every indirect cause of loss creates major problems. Businesses that specifically bought cover for electricity supply interruptions (public utilities extension) might find their claims denied under this broad reading, which defeats the whole purpose of buying that cover.
There is also the problem of spreading damage. If a post blackout power surge causes a fire in one building, and that fire spreads to the building next door, a strict reading of the exclusion might deny the claim for the second building. The insurer could argue the fire was indirectly caused by a power interruption, even though fire is normally a covered event. These examples show how overly broad rules can undermine basic principles of insurance.
Because of these broad wordings, insurers are handling claims inconsistently. Some stick to the original intention of a national collapse, while others use the exact broad wording to deny claims. This inconsistency will likely end up in court so judges can clarify exactly how these rules should be applied across the industry.
What brokers and policyholders should do
The main takeaway for policyholders is that standard cover no longer protects against national grid failure. The risk is very real, and the financial damage from a blackout may not be covered by insurance. Anyone with a policy needs to read their documents very carefully to understand exactly what is excluded. They should ask their brokers for clarity if the rules seem too broad and they need to make backup plans for energy and communication in case the power goes out for a long time.
While the original idea was just to exclude a total national blackout, the broad wording used by some insurers creates a lot of uncertainty until the courts finally make a ruling.
Writer’s Thoughts
For brokers and policyholders navigating this evolving landscape, it's crucial to understand the implications of grid failure exclusions and ensure policies are properly aligned with the shifting risks. As the situation remains uncertain, staying informed and proactive will be key to protecting both clients and businesses in an increasingly volatile environment. Please comment below, interact with us on X at @fanews_online or email me your thoughts.
