Blackout Exposes Power Companies To Potential Lawsuits
Dow Jones Newswires New York
August 18, 2003

Quoted: Michael D. Brown

The biggest blackout in U.S. history looks set to trigger a flood of lawsuits against power companies, but obstacles are high for those who wish to cash in, legal experts said on Monday.

As of now, there was no conclusion that any one company was to blame for the power failure. But a preliminary finding by the North American Electric Reliability Council identified FirstEnergy Corp. (FE) as a likely source of the outage. Three electrical transmission lines owned by FirstEnergy, according to the finding, failed in Ohio Thursday afternoon, in a fast-paced series of events that contributed to the cascading blackout.

There could be "tens of thousands" of lawsuits filed against FirstEnergy and others as a result of the power failure, said Dick Pierce, a law professor at George Washington University in Washington. States, businesses and individuals could sue to recoup economic losses, he added, and some utilities may file suits against other utilities in an effort to shift the blame.

"It's going to be a lawyer's field day and a client's nightmare, but I would only expect a tiny fraction of those to succeed," Pierce said.

Indeed, in order to make the utilities pay, there are a series of hurdles for any potential plaintiffs to cross. "First, they have to show that the utilities were negligent in some way," said Jim Quinn, head of the litigation practice at Weil Gotshal & Manges LLP. In other words, it must be proved that the utilities were "acting reckless, without conforming to normal (industry) standards," Quinn explained.

Then the argument would switch to "what could they be liable for, and who do they owe duty to?" Quinn said, adding that utilities owe duty "only to their particular customers" - not anyone who sues for spoiled food or other damages as a result of the blackout.

In addition to suing power companies directly, businesses - restaurants and grocery stores in particular - may also make claims against their own insurers to recoup blackout-related losses, experts said.

But that doesn't necessarily mitigate any liability risks for utilities. Insurance companies, said Michael Brown, a trial lawyer with Ohrenstein & Brown in New York, will pay the claims - but then they will seek to recover the money they shell out.

Brown, who typically represents insurers during litigation, said insurance companies will eventually sue FirstEnergy and other utilities based on early estimates that businesses suffered about $1 billion in losses. The insurers may claim that FirstEnergy, for instance, was negligent because it ignored warning signs and failed to warn others on the power grid about poor conditions, Brown said.

Added Robert Hartwig, chief economist of the Insurance Information Institute: Insurers have traditionally retained the right to recover funds from third parties if they are forced to pay claims as a result of actions by those parties - a concept known as subrogation.

However, the vast majority of insurance claims don't involve subrogation, Hartwig said.

Insurers often take into account the potential costs of litigation and assets of the third party before determining whether to pursue a suborogation action.

Still, analysts said, last week's blackout in the Northeast, parts of the Midwest and Canada might not turn out to be a major event for insurers.

For one, business interruption claims usually aren't valid unless there is a physical loss to a company's property and loss of operations for several days - most policies require a loss of operations for more than 24 to 72 hours, Hartwig said. This time, the blackout started at 4 p.m. EDT on Thursday, and power had already been restored in many places by noon on Friday.

The most likely claims to be paid are companies that purchased separate coverage for loss of perished goods, such as restaurants and supermarkets, Hartwig said.

Insurers paid out about $2 million in losses from perished goods related to the last major blackout in New York in 1977. The industry paid about $28 million in losses related to looting and civil disorder that occurred during the blackout.

With First Energy's stock trading lower Monday, another potential concern for the utility could be shareholder litigation. While no strike suits have been filed yet related to the power failure, the company is already facing class-action claims filed last week related to earnings restatements.