Examining the Risk

Could this triple whammy that hit Japan occur in America? Our coastlines are subject to tsunamis, and there is a cliff on one of the Canary Islands in the Atlantic Ocean that is threatening to collapse into the sea. It could create a killer wave that could easily inundate the U.S. East Coast. Many nuclear plants are built along that coast. In fact, the coasts along the Pacific Ocean (including Hawaii) have already experienced tsunamis with relatively limited damage to date, unlike the 2004 Indonesian tsunami from the Indian Ocean that killed hundreds of thousands.

Earthquakes are common, especially along the West Coast. Even so, where did some power companies build their nuclear power plants? Right along fault lines. A few years ago, an earthquake, although mild by comparison with the magnitude-9.0 quake in Japan, struck Lake County, Ohio, where a nuclear power plant is located on the lake shore. Shallow Lake Erie could easily swamp that plant.

Those who live inland, perhaps along the Mississippi Delta, may think a triple whammy could not hit them. However, one of the worst U.S. earthquakes was along the New Madrid fault in 1811, which caused the Mississippi to flow backward. Suppose another such quake caused the Mississippi or some of its tributaries to be dammed with debris, creating a massive lake, and that dam broke. The scene would resemble that of Johnstown, Penn., in 1889 when the Clear Fork Dam burst (see “The Johnstown Flood of 1889,” Claims Magazine, December, 2007). The city of Memphis, Tenn., founded in 1819, may have only been a trading post when that happened in 1811. Today it is vulnerable to both flood and earthquake, a double whammy, and the Port Gibson plant is only 265 miles south of Memphis. The Problem with Nuclear Disasters

The city of Chernobyl, in the Ukraine, has a nearly 20-mile radius that will not be safe to enter for more than a thousand years, thanks to a nuclear power plant disaster that is still costing billions of dollars. There is not only the initial damage in such a disaster, but also the contamination that spreads worldwide. Farm land after Chernobyl was contaminated as far away as Finland. In such catastrophes, who pays? The power company? The government? In the U.S., probably not an insurer. Nuclear disasters, whether from a power plant, a dirty bomb, or nuclear weapons in war, are excluded.

A typical homeowners' form includes an exclusion (A.7) of the nuclear hazard. That is defined in three parts:

1. Any nuclear reaction, radiation, or radioactive contamination, all whether controlled or uncontrolled or however caused, or any consequences of any of these.
2. Damage caused by the nuclear hazard will not be considered loss caused by fire, explosion, or smoke, whether these perils are specifically named in or otherwise included within the perils insured against.
3. This policy does not apply under Section I to loss caused directly or indirectly by nuclear hazard, except that direct loss by fire resulting from the nuclear hazard is covered

In Section II, there is the additional personal liability war exclusion, as “discharge of a nuclear weapon will be deemed a war-like act even if accidental.” In the personal auto policy coverage for damage to your vehicle, any “radioactive contamination” or “discharge of any nuclear weapon, even if accidental,” is excluded. Is any nuclear or radioactive contamination covered under personal policies? Life and medical insurance policies may apply to death, injury, or diseases caused by a nuclear disaster—perhaps except for war causations—and workers' compensation or employers' liability forms do not include a nuclear exclusion. One can concoct a situation that might be covered under an auto or homeowners' liability policy where nuclear contamination might be covered—but only to the policy limit.

Suppose, for example, a maintenance employee is assigned the task of taking the waste from the hospital's nuclear medicine facility to a specified medical waste disposal site. On the way, he is involved in an auto accident, and the lead-lined container of the radioactive waste is breached, with contamination of the vehicles and other people involved in the accident. Damage to his personal car or the hospital's vehicle, if involved, would not be covered, but his injuries would be compensable, and his liability to third parties for contamination if he was at fault in his own car would not be excluded. As the hospital's agent, the hospital would have the contributing liability exposure as it was the hospital's nuclear waste and lead container, but the business auto policy has a pollution exclusion.

Likelihood of a “Black Swan”

During the March Japanese disaster, one TV news reporter asked a disaster expert about the likelihood of a “black swan” incident, referring to the rarity of triple whammies. The response was that, given all the thousands of potential disasters that could occur, the statistical probability of some type of disaster is not remote.

In December 2010, word began to circulate among computer experts that a weird new “computer worm” virus was affecting the operation of centrifuges used to purify uranium at the Natanz nuclear laboratory in Iran. Nicknamed “Stuxnet,” this malicious software (malware) had the markings of cyber warfare from abroad. In a comprehensive examination of the known and suspected facts, Michael Joseph Cross reported what was available in a lengthy article titled, “A Declaration of Cyber-War” in the April 2011, issue of Vanity Fair. The first knowledge of a problem came to a computer scientist in Minsk, Belarus after a client in Iran reported that its computers kept rebooting. Within hours, word was spreading around the globe about a fantastic new worm that had an almost indecipherably long code. It seemed to be attaching itself to computer-controlled machine operating systems, then replicating itself seeking a target. The target, according to Cross, was a particular operating system in Siemens German-manufactured centrifuge equipment. The worm was so complex that the current “theory” of its creation is that it was designed by several government intelligence agencies. Of course, all, including MI-6, Mossad, and the CIA, deny any involvement, as do people in the know at Siemens. One news article suggested that officials believe the worm has caused as long as a two-year delay in Iran's nuclear program.

So far, Stuxnet has not affected any other machinery or plants. However, if an enemy were to design a malware worm that entered the power grid to shut it all down, then chaos would ensue. In 2003, the entire Northeastern U.S. lost power for around a week, part of which was because of trees hitting high power lines in Northern Ohio. Trees? Makes one wonder.

Power Outage and the Triple Whammy

Could it happen? Imagine even a week without electrical power in the U.S. Airports would shut down; people working in business offices would be without light, heat or air; homes would be dark; and stores would have to close if their payment systems are computerized. The stock market would go nuts; traffic would stall; and communication would stop. Portable generators would sell like proverbial hot cakes, until the supply ran out.

Keep in mind that would just be the short-term whammy No. 1 while computer gurus identified and corrected the codes and pinpointed the source—which would then trigger a war with whomever created the worm. No. 2 would be longterm economic stagnation. By then, of course, whammy No. 3 might already be in progress (as occurred in the Northern Japan power outage, shutting down the pumps needed to keep cold water on the roasting nuclear fuel rods) if the worm was designed to also kill power generators affecting pumps at nuclear facilities. That would result in boil-offs and explosions vis-à-vis Chernobyl and Japan, with the meltdown referred to as the “China Syndrome,” where the nuclear rods melt through the containment vessel and down to the center of the earth, coming out the other side in China. A terrorist's dirty bomb would be a mild disaster by comparison. Will cyber warfare occur? Has it already occurred, and perhaps we were not told? Most businesses are reluctant to reveal how often their data is hacked, and governments are just as notorious for holding their cards close. When it does occur, what response will insurers have? Will there be coverage for first-party direct loss? What about indirect loss? What about contamination, injuries, diseases and deaths caused by the cyber war?

Attorneys will seek any possible means of suing for damages, as it is hard to do anything these days that does not involve some computerized system somewhere. These are ubiquitous, in our cars, in our homes, in our jobs, and in every other aspect of society. It is the computerized social network that now fosters revolutions. Let us not be naïve—somebody out there is probably working on a new malware worm right now, and we won't know about it until it is too late to stop it.

As for the adjuster, the first step will be coverage analysis. Would any of claimed damages, first- or third-party, be covered? Check the fine print as well as the law. Such a loss, even if it involved only the U.S., would be international through reinsurance treaties. It is not just the Japanese insurance industry responding to the March 2011 triple whammy, but the entire excess and surplus lines reinsurance market.

If any coverage applies, then the next step will be to determine covered damages within the policy limits. That will not be easy, when the source of loss may be threefold. How does one begin to compensate an insured for damages that may very well last a thousand years?