Insurance Coverage for Space Weather Losses
SPACE WEATHER: INSURANCE COVERAGE FOR PROPERTY DAMAGE AND BUSINESS INTERRUPTION CAUSED BY SOLAR STORMS
Introduction
Space weather in the form of solar storms has the potential to cause severe effects on Earth. In particular, coronal mass ejections pose a threat to power grids, pipelines and communications networks. All-risk property policies should cover direct physical damage caused by a solar storm to insured property. Prudent parties to large all-risk manuscript policies who are exposed to service interruption or contingent business interruption losses caused by power failures may choose to explicitly address this risk in their policies rather than relying on a court to resolve the issue of coverage.
What is Space Weather? What is a Coronal Mass Ejection?
The sun emits electromagnetic radiation continuously in solar wind, which normally is deflected when it hits Earth’s magnetic field. The most common effect of this deflected radiation are aurorae (aka Northern Lights). But sometimes the sun ejects billions of tons of electrically charged particles (superheated concentrations of plasma) into space in a phenomenon called a Coronal Mass Ejection (CME). CMEs travel much faster than normal solar wind and radiation levels dramatically increase during these eruptions. When these solar storms erupt in our direction, the charged particles can reach Earth—around 93 million miles away—within an hour. The entry of these charged particles into our atmosphere can cause rapid changes in Earth’s magnetic field and damage satellites in Earth’s orbit. The CMEs also can produce geomagnetically induced currents (GIC) in Earth’s sub-surface, which penetrate metal networks, including the equipment that comprises power grids, pipelines and communications networks. The increased solar activity from CMEs can also cause aurorae to form in lower latitudes than usual.
Space weather, like terrestrial weather, is highly variable. We know that solar activity follows a cycle of around 11 years, with a peak of activity in the middle of this “solar cycle.” We are in the peak of Solar Cycle 25. There is some evidence that we have enjoyed an unusually calm period of solar disturbances in the last few cycles, and that Solar Cycle 25 will produce more severe solar storms. One meteorologist recently warned that a catastrophic occurrence of a solar storm is “just as plausible in [our] lifetime as the main [insurance] industry topics like climate change.”[1]
Insurance and reinsurance companies are aware of these risks and are studying space weather to raise awareness, increase forecasting ability, and mitigate consequences. Policyholders whose businesses depend on electricity, metal cables or pipelines and/or satellite technology may also need to raise their awareness of these risks and assess the adequacy of their insurance coverage as part of their risk management and continuity planning.
Historical Space Weather Affecting Earth
Historical accounts of auroral sightings go back millennia. Scientists can now use evidence preserved in the polar ice to estimate the magnitude of historical solar storms. In September 1859, English amateur astronomists Richard Carrington and Richard Hodgson made the first records of solar flares on the surface of the sun. Their observations corresponded with the largest solar storm on record, now known as the Carrington Event. This geomagnetic storm, four times more intense than any other known event, caused telegraph stations to fail across North America and Europe, sparking fires in some, and in other instances allowing operators to transmit using only the electricity produced by the storm. Aurorae were observed in low latitude areas including Mexico, Cuba and southern Japan.
Space weather since the Carrington Event has continued to affect terrestrial activity from time to time. In May 1921 a solar storm again caused worldwide disruption of telegraph and telephone service. The storm halted train service in New York because of damage to the telegraph stations and signal and switching systems upon which the trains were dependent. Aurorae were visible as far south as Pasadena, California. In August 1972, a CME reached Earth in less than 15 hours and caused widespread electric and communication grid disturbances. The storm caused dozens (and perhaps as many as 4,000) magnetically sensitive US mines in the waters off Vietnam to detonate.
In March 1989, a huge magnetic storm caused the power grid in Quebec to fail within 92 seconds, triggering a cascade of protective shutdowns that lasted for nine hours. The storm also caused damage to transformers in the United Kingdom and at a nuclear plant in New Jersey. In October 2003, the “Halloween storm” space weather event caused 30 satellite anomalies including one total loss, total loss of twelve transformers in South Africa, a one-hour power outage in Sweden, and a 30-hour loss of one of the Federal Aviation Administration’s GPS-based systems.
In May 2024, a geomagnetic storm generated aurorae visible at latitudes as close to the equator as Mexico, the Bahamas, western Africa, New Zealand, Australia, Chile and Argentina. The storm was due to no fewer than seven CMEs that erupted from the sun earlier that week, according to NASA’s Solar Dynamics Observatory. Starlink, the satellite arm of SpaceX that owns roughly 60% of the satellites in Earth’s orbit, said it experienced “degraded service” during the storm.
The Likelihood and Impact of A Future Coronal Mass Ejection
The risk of a significant solar storm is a product of its expected frequency by its expected severity. Insurance industry estimates of the expected “return period” of a Carrington-level storm are imprecise. Published reports, however, suggest that the probability is significant enough that regulators will ask (re)insurers to consider the effects of such a storm as part of their solvency compliance models.[2]
If a Carrington-level storm occurred today, the effects would be significant. Experts believe that such a storm would cause the collapse of large portions of power grids over large areas. A severe storm might generate GIC that could cause permanent damage to Extra High Voltage (EHV) transformers, which are very costly, and not easy to procure and replace quickly. Current FERC regulations may not require protection sufficient to mitigate the effect of a Carrington-level event. The main industries whose property would be directly affected are the electric power, spacecraft, aviation, and GPS-based positioning industries.
The collateral effects of an extreme solar storm are also likely to be significant. The risk of damage from solar storms is magnified today because our society is more inter-connected and more reliant on electricity, electronic communications and satellite location technology including the Global Positioning System (GPS). The National Academy of Sciences (NAS) has warned:
Electric power is modern society’s cornerstone technology, the technology on which virtually all other infrastructures and services depend. Although the probability of a wide-area electric power blackout resulting from an extreme space weather event is low, the consequences of such an event could be very high, as its effects would cascade through other, dependent systems.[3]
According to NAS, if an event equivalent to the 1921 storm occurred today, it would result in large-scale blackouts affecting more than 130 million people and could expose more than 350 EHV transformers to the risk of permanent damage.
Failure of a significant number of EHV transformers could also cause cascading failure across power grids, disabling other critical interdependent infrastructure including transportation, digital communications and public health systems, with knock-on effects to a wide array of commercial activity. These secondary effects might include, for example: (a) disruption of financial markets that are dependent on synchronized timing of transactions; (b) interference with wireless technologies including satellite navigation, wireless internet, mobile telephony and short-range device controls (WiFi, Bluetooth); (c) disruption of water distribution and sewage removal and treatment; (d) spoilage of perishable food and pharmaceuticals that require refrigeration; (e) damage to pot lines in aluminum smelters; and (f) interference with the measurements used to guide the direction of drilling in oil and other extractive industries.
The NAS estimates that a solar geomagnetic storm as severe as the 1859 Carrington event could cost $1 to 2 trillion in damages and that recovery could take four to ten years.[4] A November 2016 study funded by AIG estimated that a Carrington-level storm would cause the US insurance industry to incur losses ranging between $55.0 and 333.7 billion.[5] Even at the low end, such losses would roughly double the losses that the industry incurred as a result of Hurricane Katrina or Superstorm Sandy. The study estimated that over 90% of these losses would be attributable to service interruption coverage for property policyholders that lose power.[6]
Insurance Coverage for Losses Caused by Space Weather
Space weather losses implicate a number of types of coverage, especially service interruption coverage. As discussed further below, two courts reached different results while addressing service interruption losses that arose from the same massive August 2003 power outage.
A. Potentially Applicable Policies
Typical “all risks” property and business interruption insurance covers all risks of direct physical damage to, or loss or destruction of, the insured property unless specifically excluded.[7] Risks (perils) commonly covered include natural hazards such as windstorms and lightning. Extraterrestrial natural hazards like geomagnetically induced electrical currents should not be treated differently than terrestrial hazards under all-risk policies. All-risk policyholders who suffer direct physical damage to, or loss or destruction of, their insured property caused by solar storms should be covered unless their policy has been endorsed to exclude such losses. In other words, there should be coverage for direct physical damage caused by a solar storm to property including transformers and other power system apparatus, oil and gas pipelines, and satellites, and for business interruption caused by that direct physical damage.
Coverage is more complicated for policyholders whose insured property suffers no direct physical damage, but whose losses are caused by a solar storm’s effect on the policyholder’s customers or suppliers, including utilities. These policyholders are likely to be for more numerous than those suffering direct physical damage. However, losses from utility service interruption may not be covered by standard property damage forms unless the policy contains an endorsement or separate insuring agreement for such losses.[8]
Businesses that are heavily dependent on utilities are aware of the need to manage the risks of service interruption, and many property insurance policies include specific provisions covering such interruptions. In these cases, revenue or profits lost due to a solar storm may be covered under service interruption and/or contingent time element (business interruption) extensions of coverage, which are common for sophisticated corporate insureds.[9]
Service interruption policy language is highly variable. It may include coverage not just for loss of service from electricity, gas and water utilities, but also from loss of service from oil and gas pipelines, rail lines, sewerage or other publicly regulated utilities, and from the lack of incoming or outgoing voice, data, or video service. Other policies may restrict the scope of the utility service that is covered. Policies may impose a geographical limit restricting coverage to damage within a defined distance from the insured property or within the policy’s defined territory. Service interruption coverage may also be subject to a waiting period, so that coverage does not begin until the service interruption exceeds a specified time. Coverage extensions may be subject to a sublimit, and in many circumstances, policyholders have established their right to coverage only to recover amounts woefully short of their actual losses.[10] Policyholders should assess the adequacy of any service interruption sublimit.
Some contingent business interruption policies separately schedule material suppliers and customers. These policies may have different limits for scheduled and unscheduled suppliers or customers or may restrict coverage to scheduled entities only. For instance, in Pentair, Inc. v. American Guar. & Liab. Ins. Co., 400 F.3d 613 (8th Cir. 2005), Pentair sought contingent business interruption coverage when its Taiwanese supplier could not manufacture products because an earthquake in Taiwan disabled a substation that provided power to the supplier’s factories. The factories were covered suppliers but were not damaged. The substation was damaged, but a divided panel of the Eighth Circuit denied coverage because the utility provider was not a covered Pentair supplier under the contingent coverage. Id. at 617-18.
Some policies include specific utility service interruption coverage where the power failure was caused by damage at the utility service provider’s premises. Others may exclude coverage in that circumstance, and limit coverage to circumstances where the power failure was specific to the policyholder’s premises. Even then, courts may not apply the same terms consistently. For example, in Brooklyn Bridge, Inc. v. South Carolina Ins. Co., 309 S.C. 141 (Ct. App. 1992), the policy excluded coverage for power outages caused by failure away from the insured premises. Hurricane Hugo caused a general power failure resulting in food spoilage in a restaurant. The court found the exclusion ambiguous and construed it in favor of coverage. On the other hand, another court enforced the same exclusion to deny coverage when severe storms caused a downed wire away from the insured premises, which resulted in power outages and food spoilage at two grocery stores. Mapletown Foods, Inc. v. Motorists Mut. Ins. Co., 104 Ohio App. 3d 345 (Ct. App. 8th District 1995) (rejecting Brooklyn Bridge).
B. Coverage for Service Interruption Losses Due to Precautionary Measures
In the solar storm scenario, the thorniest coverage issues under service interruption or contingent business interruption coverage are likely to arise when utility service is interrupted as a precautionary measure and the utility property is not permanently damaged or destroyed by the storm. For example, assume that power grid operators are alerted to an impending geomagnetic storm by NOAA’s Space Weather Prediction Center or by real-time monitoring of ground current, and defensive measures are taken, either by the grid operators or by the system’s automatic disconnection features, to protect the grid against geomagnetically induced currents. If the equipment of the utility providing service to the policyholder is never damaged or destroyed, but these defensive measures cause a cascading blackout that results in property damage or business interruption losses to customers, will the customers have coverage?
Two courts reached different results while addressing service interruption losses that arose from the same massive August 2003 power outage. Lyle Enterprizes, Inc. v. Hartford Steam Boiler Insp. & Ins. Co., 399 F. Supp. 2d 821 (E.D. Mich. 2005); Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524, 968 A.2d 724 (App. Div. 2009).
As explained by the Wakefern and Lyle courts, utility systems from the Rocky Mountains east to the Atlantic Ocean, including Canada, operate in a connected fashion in a grid called the Eastern Interconnection. These utilities share electrical energy through a web of connected transmission lines so that energy produced at any one place in the interconnection may be transmitted to and used at any other point in the interconnection. This interconnection increases reliability from shared generation capacity, but it also makes the grid vulnerable to cascading outages caused by significant events in neighboring utilities. Because of this vulnerability, abnormal events in one part of the interconnection may trigger protective systems that operate to disconnect parts of the system to prevent physical damage to very expensive generators and transmission lines throughout the rest of the interconnection. “In the operation of a large interconnected electric power system, the rapid response of protective relay devices is a requirement, but also a recognized problem with respect to the potential for creating a large-scale cascading blackout.” Wakefern, 968 A.2d at 731 (emphasis in original) (citations omitted).
On August 14, 2003, shortly after 4:00 pm EDT, a storm caused three large transmission lines in northern Ohio to sag and contact trees. Protective systems disengaged these three transmission lines from the interconnection and rerouted the current they carried to other lines. This rerouting overloaded another Ohio higher voltage transmission line, and at 4:06 pm that line’s protection system disconnected it from the grid. In turn, this disconnection triggered an uncontrollable cascade as lines and generating units automatically tripped by protective relay action to avoid physical damage. By 4:12 pm, the cascade was completed, and much of the northeastern United States and a large portion of Canada were without electrical power for at least four days.
Among the businesses that lost power during this time were Lyle Enterprizes, Inc., which operated a single grocery store (Larry’s Foodland) in Michigan (“Larry’s”), and Wakefern Food Corporation, which operated 190 ShopRite grocery stores in Pennsylvania, New Jersey, New York, Delaware and Connecticut (“ShopRite”). Each business claimed that its losses resulting from the blackout were insured, but their insurers denied both claims, forcing the grocers to file suits.
Larry’s pursued its claim under a policy that covered losses caused by “direct physical damage” to equipment owned by Detroit Edison, with whom Larry’s had a contract to supply electrical power. The Michigan court denied Larry’s claim, finding:
nothing in the record to indicate that Larry Foodland’s loss of power was caused by direct physical damage to Detroit Edison’s equipment. Rather, it was the engaging of the protective equipment which caused Larry’s Foodland to lose power. The evidence in the record before this Court supports [the insurer’s] contention that the loss suffered by [Larry’s] was not caused by direct physical damage to Detroit Edison’s equipment.
Lyle, 399 F. Supp. 2d at 826.
On the other hand, ShopRite pursued its claim under a policy that covered “physical damage by a peril insured against . . away from a covered location.” The insurer denied the claim, arguing that the system that directly supplied ShopRite had suffered no “physical damage” and therefore there was no coverage. The insurer argued that because the grid had safety features that shut down the generators and transmission equipment, and kept them turned off, the loss of power was not due to “physical damage,” even though the event rendered the system incapable of producing electricity for four days.
The Wakefern appellate court held that ShopRite’s claim was covered, reversing a trial court judgment in favor of the insurer. The appellate court concluded that the:
undefined term “physical damage” was ambiguous and that the trial court construed the term too narrowly, in a manner favoring the insurer and inconsistent with the reasonable expectations of the insured. In the context of this case, the electrical grid was “physically damaged” because, due to a physical incident or series of incidents, the grid and its component generators and transmission lines were physically incapable of performing their essential function of providing electricity.
Wakefern, 968 A.2d at 734. Thus, the court construed the “physical damage” requirement in the policyholder’s favor to find coverage.
The Wakefern appellate court considered the Lyle decision and found it distinguishable because the policy at issue in Lyle required “direct physical damage,” whereas the ShopRite policy required only “physical damage.” 968 A.2d at 738. Nevertheless, the Wakefern court noted that it would have ruled in ShopRite’s favor even if the ShopRite policies had contained the “direct” modifier. The Wakefern court found the Lyle court’s “analysis unpersuasive, and to the extent that [the insurer] would have us apply this narrow construction to the more general ‘physical damage’ clause of its policy, we decline.” Id. at 738-39.[11]
The Wakefern court’s analysis is correct and should also govern analysis of any similar cascading shutdown caused by a solar storm. As the court noted, the policyholder “paid for protection against a very serious risk—the loss of electric power.” Id. at 735. And the average policyholder “would not be expected to understand the arcane functioning of the power grid, or the narrowly-parsed definition of ‘physical damage’ which the insurer urges us to adopt.” Id. If insurers intend that their policies would provide no coverage for electrical grid failure, they are “obligated to define [their] policy exclusion more clearly.” Id.
That said, policyholders and insurers alike would do well to heed the Eight Circuit’s advice that “the parties to a large all-risk manuscript policy covering property and business interruption losses might sensibly decide to explicitly cover the foreseeable question of whether and to what extent the policy will cover losses caused by power failures resulting from covered perils . . . rather than relying on a court to resolve this issue.” Pentair, Inc. v. American Guar. & Liab. Ins. Co., 400 F.3d 613, 617 (8th Cir. 2005).
A Note on Fortuity
On a final note, when faced with large losses, insurers seek nearly every opportunity to invoke the “non-fortuity” doctrine and associated principles in their attempts to avoid coverage. A solar storm would probably be no different. Any argument that space weather should be considered foreseeable and thus no longer “accidental” or “fortuitous” is rubbish and reflects a profound and yet sadly common misconception of the fortuity requirement in insurance.
The important issues with respect to fortuity are what must be known, expected, or intended by the insured (the risk, the act, or the result) and what standard is used to determine that intent (objective, subjective, or something in between). Insurance companies have contended that known risks are excluded, intentional acts are excluded, and expected damage is excluded. Courts have rejected all these arguments. Rather, insurers cannot avoid liability on non-fortuity grounds unless the insured subjectively intended the result or acted with knowledge that the result was substantially certain to occur. Specifically in the context of service interruption cases arising from terrestrial natural events, even courts that have denied coverage for other reasons have acknowledged that such interruption is a fortuitous event. Lyle at 825. Pentair at 615-16.
[1] Isobel Rafferty, “If a solar storm struck Earth tomorrow, is the insurance industry ready?”, Insurance Times 23 June 2023 (quoting Andrew Siffert).
[2] Romain Launay, Solar storms and their impacts on power grids: Recommendations for (re)insurers (SCOR Paper no. 28, February 2014).
[3] National Academy of Sciences, Severe Space Weather Events: Understanding Societal and Economic Impacts (2008) at 3.
[4] Id. at 4.
[5] Oughton, E.; Copic, J.; Skelton, A.; Kesaite, V.; Yeo, Z. Y.; Ruffle, S. J.; Tuveson, M.; Coburn, A. W.; Ralph, D.; Helios Solar Storm Scenario; Cambridge Risk Framework Series; Centre for Risk Studies, University of Cambridge (2016).
[6] Other lines of coverage may be implicated, including claims under D&O policies for the defense and indemnity of underlying claims arising from solar storm losses and alleging breaches of duties relating to preventative action and ensuring business continuity. Specialized coverages for aviation risks, satellites, marine cargo and agricultural properties may also be implicated. These other lines of coverage are beyond the scope of this note.
[7] See David B. Goodwin & Bernard P. Bell, All Risks, 3 New Appleman Ins. L. Prac. Guide, Understanding Commercial Property Insurance (“Goodwin & Bell”), at §31.06[2][d] (2023).
[8] See Bernard P. Bell, Service Interruption Coverage, 4 New Appleman Ins. L. Prac. Guide, Time Element (Business Interruption) Insurance, §46.05[d]; Goodwin & Bell, supra, Service Interruption, at §31.08[6][c] (2023).
[9] See generally 11 Couch on Ins. § 153:22, Application to specific losses—Involving interruption of electrical service (3d ed. 2024).
[10] See Townsley v. Ohio Security Ins. Co., 2021 WL 4702687 (W.D. La., Lake Charles Div., Oct. 7, 2021); Schultz Furriers, Inc. v. Travelers Cas. Ins. Co. of Am., 2017 WL 1731005 (N.J. Superior Ct., May 3, 2017).
[11] For another example of differing judicial analyses of coverage for losses resulting from the same storm, compare Newman Myers Kreines Gross Harris, P.C. v. Great N, Ins. Co., 17 F. Supp. 3d 323 (S.D.N.Y. 2014) (no direct physical loss or damage to Con Ed equipment during Superstorm Sandy), with Johnson Gallagher Magliery, LLC v. Charter Oak Fire Ins. Co., 2014 WL 1041831 (S.D.N.Y. March 18, 2014) (Con Ed property suffered direct physical damage during Superstorm Sandy), and Schultz Furriers, Inc. v. Travelers Cas. Ins. Co. of Am., 2017 WL 1731005 (N.J. Superior Ct., May 3, 2017) (finding coverage for Superstorm Sandy outage under endorsement for “direct physical loss or damage” to off-premises power supply equipment).
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