Liability insurance hikes await We Energies
New costs would be passed along to customers
By Steve Jagler, of SBT
Wisconsin Energy Corp. expects to pay more for liability insurance premiums in 2004, and those costs ultimately would be passed along to the business and residential ratepayers of the Milwaukee-based company.
Responding to a request from Small Business Times, however, the company declined to disclose how much it pays for liability insurance or to project how much its premiums will increase next year.
"We are not able to disclose to you the amount of our liability insurance or identify our insurance carriers," said Wisconsin Energy spokeswoman Margaret Stanfield.
The company, which is publicly held and operates a public utility (We Energies), would eventually pass its costs for rising liability insurance along as a cost of doing business to its customers, rather than its shareholders, Stanfield said.
"It is a cost of providing service to our customers, and it is something that would fall in the category of the costs that is covered by the ratepayers," she said.
Wisconsin Energy’s current long-term contracts with liability insurance companies are on the verge of expiring, and the company expects those premiums to increase in the coming year, simply because corporate liability insurance in general is increasing, she said.
"We have had long-term agreements with our insurance providers. We’re coming out of that period, and we will see those increases in the near future," Stanfield said.
In the aftermath of the electricity blackout that left the East Coast and much of the Midwest dark on Aug. 14, public utilities’ liability insurance premiums are likely to increase across the board in 2004, according to Ken Silverstein, director and energy industry analyst for UtiliPoint International Inc., an Albuquerque, N.M.-based consulting firm.
The uncertainties generated by the blackout, combined with the previous stock market nosedive, corporate scandals, major tort awards and threats of terrorism, are creating a market in which insurance companies are becoming less eager to provide coverage to utilities, Silverstein said.
"The threat of lawsuits and the corresponding coverage to protect against them is hitting the corporate sector hard, including utilities," Silverstein wrote in an Aug. 28 column headlined, "Sharks Circle Around Utilities."
"With jury awards jumping and underwriters becoming increasingly nervous about taking risks, the cost of liability insurance has skyrocketed. And conditions won’t change anytime soon," Silverstein said.
Those uncertainties will have impact on public utility companies such as Wisconsin Energy, Silverstein said, even though the firm’s Wisconsin region did not lose power in the blackout.
Liability insurance premiums for utilities have increased 50% to 500% over the past three years, Silverstein said.
"And it’s happening even to utilities that have had good claims experience," he said.
Of course, the business of burning coal and natural gas and generating nuclear energy is not without risks.
In July 1999, a jury issued a verdict ordering Wisconsin Energy to pay $100 million in punitive damages and $4.5 million in compensatory damages to Giddings & Lewis Inc. and the City of West Allis after cyanide was discovered at two sites in West Allis.
Wisconsin Energy officials later acknowledged in court they had grossly understated the amount of liability insurance the company held.
The Wisconsin Court of Appeals overturned the jury’s $100 million punitive award and remanded the claim back to court in September 2001. The plaintiff’s claims eventually were settled last year, when Wisconsin Energy agreed to pay $17.3 million.
According to Wisconsin Energy’s annual report this year, the company filed a lawsuit against its unnamed insurance carriers to recover its costs for the West Allis case.
This year, Wisconsin Energy agreed in April to spend up to $600 million in power plant improvements and make other concessions to settle claims by the US Environmental Protection Agency that the firm had violated federal air pollution laws.
As part of the settlement, Wisconsin Energy also agreed to pay $3.2 million in civil penalties and spend at least $20 million to finance a demonstration project to cut mercury emissions from a coal-fired power plant in Michigan.
In July, Wisconsin Energy filed a request to the Public Service Commission of Wisconsin to increase the utility’s electric rates by $63.5 million (3.5%) and its natural gas rates by $26.2 million (3.9%).
In the filing, Wisconsin Energy said the increases are needed "to recover costs that the company will incur in order to continue providing reliable, safe and environmentally sensitive service to its customers, now and in the future."
Stanfield said the projected liability insurance cost increases were not a factor in the firm’s decision to file for the rate increases.
Sept. 19, 2003 Small Business Times, Milwaukee