PG&E filing highlights potential extent of wildfire-related liability

PG&E Corporation has announced that it is preparing to enter Chapter 11 with its regulated utility subsidiary, Pacific Gas and Electric Company (the ‘Utility’), as a result of the “extraordinary challenges” they are facing relating to the wildfires that occurred in Northern California in 2017 and 2018.

Related: PG&E warned investors about weather-related disasters. It was mostly ignored

The company’s Form 8-K filed on January 14 highlights the extent of the claims PG&E and the Utility are facing, and its available insurance.

The wildfires

Beginning on October 8, 2017, multiple wildfires spread through Northern California, including Napa, Sonoma, Butte, Humboldt, Mendocino, Del Norte, Lake, Nevada, and Yuba Counties, as well as in the area surrounding Yuba City (the ’2017 Northern California wildfires’).

On November 8, 2018, a wildfire began near the city of Paradise, California (the ‘Camp Fire’ and, together with the 2017 Northern California wildfires, the ’2017 and 2018 Northern California wildfires’).

Potential liability

In the Form 8-K, the company said that if the Utility’s facilities, such as its electric distribution and transmission lines, were determined to be the substantial cause of one or more fires, and the doctrine of inverse condemnation were to apply, “the Utility could be liable for property damage, business interruption, interest, and attorneys’ fees without having been found negligent.”

Related: Mitigating wildfire risks

The company pointed out that California courts have imposed liability under the doctrine of inverse condemnation in legal actions brought by property holders against utilities on the grounds that losses borne by the person whose property was damaged through a public use undertaking should be spread across the community that benefited from such undertaking, and based on the assumption that utilities have the ability to recover these costs from their customers.

Further, the company noted, California courts have determined that the doctrine of inverse condemnation is applicable regardless of whether the California Public Utilities Commission (CPUC) ultimately allows recovery by the utility for any such costs. The CPUC may decide not to authorize cost recovery even if a court decision were to determine that the Utility is liable as a result of the application of the doctrine of inverse condemnation, the company explained.

The company also pointed out that, in addition to claims for property damage, business interruption, interest, and attorneys’ fees, the Utility could be liable for fire suppression costs, evacuation costs, medical expenses, personal injury damages, punitive damages, and other damages under other theories of liability, including if the Utility were found to have been negligent. The Utility also could be subject to material fines or penalties if the CPUC or any law enforcement agency brought an enforcement action, including a criminal proceeding, and determined that the Utility had failed to comply with applicable laws and regulations.

Claims

As reported in the Form 8-K, as of January 11, 2019, PG&E was aware of approximately 50 complaints on behalf of at least 2,000 plaintiffs related to the Camp Fire, six of which seek to be certified as class actions.

The litigation currently pending against PG&E related to the Camp Fire includes claims under multiple theories of liability, including inverse condemnation, trespass, private nuisance, public nuisance, negligence, negligence per se, negligent interference with prospective economic advantage, negligent infliction of emotional distress, premises liability, violations of the Public Utilities Code, violations of the Health & Safety Code, malice, and false advertising in violation of the California Business and Professions Code.

Related: Deadly California fires result in $9B in insured losses

The plaintiffs principally assert that PG&E’s alleged failure to maintain and repair its distribution and transmission lines and failure to properly maintain the vegetation surrounding such lines were the causes of the Camp Fire. The plaintiffs seek damages and remedies that include wrongful death, personal injury, property damage, evacuation costs, medical expenses, establishment of a class action medical monitoring fund, punitive damages, attorneys’ fees, and other damages.

PG&E pointed out that just over two months have elapsed since the Camp Fire, a relatively short amount of time in which to assert claims. As such, PG&E said, it expected a significant number of additional claims to be asserted with respect to the Camp Fire.

In addition, as of January 11, 2019, PG&E said that it was aware of approximately 700 complaints on behalf of at least 3,600 plaintiffs related to the 2017 Northern California wildfires, five of which seek to be certified as class actions. These cases have been coordinated in the San Francisco County Superior Court. The coordinated litigation is in the early stages of discovery. A trial with respect to the Atlas fire has been scheduled to begin on September 23, 2019.

The litigation currently pending against PG&E related to the 2017 Northern California wildfires includes claims under multiple theories of liability, including inverse condemnation, trespass, private nuisance, and negligence. They principally assert that PG&E’s alleged failure to maintain and repair its distribution and transmission lines and failure to properly maintain the vegetation surrounding such lines were the causes of the 2017 Northern California wildfires. The plaintiffs seek damages that include wrongful death, personal injury, property damage, evacuation costs, medical expenses, punitive damages, attorneys’ fees and other damages.

At least 41 Insurance carrier subrogation complaints

Insurance carriers that have made payments to their insureds for property damage arising out of the 2017 Northern California wildfires have filed 41 subrogation complaints in the San Francisco County Superior Court as of January 11, 2019. These complaints allege, among other things, negligence, inverse condemnation, trespass, and nuisance. The allegations are similar to the ones made by individual plaintiffs. Insurance carriers have filed three similar subrogation complaints with respect to the Camp Fire in the Sacramento County Superior Court.

Related: California regulator takes over small failing insurer after Camp Fire

Moreover, the Form 8-K said, various government entities, including Mendocino, Napa, and Sonoma Counties and the city of Santa Rosa, also have asserted claims against PG&E based on the damages that these government entities allegedly suffered as a result of the 2017 Northern California wildfires. Such alleged damages include, among other things, loss of natural resources, loss of public parks, property damages, and fire suppression costs.

The causes of action and allegations are similar to the ones made by individual plaintiffs and the insurance carriers. PG&E added that it expected similar claims to be made by various government entities with respect to the Camp Fire.

PG&E also said that it expected to be the subject of numerous additional claims in connection with the 2017 and 2018 Northern California wildfires.

As PG&E acknowledged, the California Department of Forestry and Fire Protection (‘Cal Fire’) and the CPUC are investigating the 2017 and 2018 Northern California wildfires. PG&E also is the subject of investigations or other actions by the county district attorneys to whom Cal Fire has referred its investigations into certain of the 2017 Northern California wildfires, including the McCourtney, Lobo, Sulphur, Blue, Norrbom, Adobe, Partrick, Pythian, Pocket, and Atlas fires. Additional investigations and actions may arise out of the other 2017 Northern California wildfires and the Camp Fire, PG&E conceded.

Potential losses in connection with the 2017 and 2018  fires

The Form 8-K pointed out that the California Department of Insurance previously announced an aggregate amount of approximately $17 billion of insurance claims related to the 2017 and 2018 Northern California wildfires. PG&E said that it expects that additional claims will continue to be submitted to insurers, particularly with respect to the Camp Fire.

The $17 billion of insurance claims reflected insured property losses only and did not account for uninsured or underinsured property losses, interest, attorneys’ fees, fire suppression and clean-up costs, evacuation costs, personal injury or wrongful death damages, medical expenses, or other costs, such as potential punitive damages, fines or penalties, or losses related to future claims, each of which, PG&E said, “could be significant.”

Related: Insurance lessons learned from the 2017 California wildfires

PG&E pointed out that the “scope of all claims related to the 2017 and 2018 Northern California wildfires is not known at this time because of the applicable statutes of limitations under California law.”

However, PG&E said, if it were to be found liable for certain or all costs, expenses, and other losses with respect to the 2017 and 2018 Northern California wildfires, the amount of such liability could exceed $30 billion — not including potential punitive damages, fines and penalties, or damages related to future claims.

PG&E added that if it were to be found liable for any punitive damages or be subject to fines or penalties, the amount of such punitive damages, fines, and penalties could be “significant.” (PG&E pointed out that it has received significant fines and penalties in connection with past incidents, such as penalties totaling $1.6 billion in connection with the natural gas explosion that occurred in the City of San Bruno, California on September 9, 2010.)

Potential insurance recoveries

PG&E reported in its Form 8-K that it has approximately $840 million of insurance coverage for liabilities, including wildfire events, for the period from August 1, 2017 through July 31, 2018. During the third quarter of 2018, PG&E said, it renewed its liability insurance coverage for wildfire events in an aggregate amount of approximately $1.4 billion for the period from August 1, 2018 through July 31, 2019.

PG&E said that it expected that its losses in connection with the 2017 and 2018 Northern California wildfires would “greatly exceed its available insurance.”

PG&E also said that it expected to face “increasing difficulty securing liability insurance in future years due to availability and to face significantly increased insurance costs.”

Related: Chubb estimates $225M catastrophe loss related to California wildfires