Power cuts: insurers won't always compensate businesses

While, in theory, companies suffering material damage during a power cut could be compensated by their insurance, the scheduling of power cuts calls into question the principle of randomness on which insurers' compensation guarantees are based.

Substantial financial losses during power cuts

Scheduled power cuts, known as load shedding, which are likely to occur this winter, are of equal concern to businesses and their insurers. Having just emerged from the procedures involved in compensating companies affected by Covid-19, insurers now have to prepare for new and unprecedented situations.

Load shedding can lead to significant financial losses for companies: disruption of the cold chain in the agri-food or mass retail sectors, interruption of production lines, delivery delays, etc. In some factories, stopping and restarting machines can suspend activity for up to a week for just a two-hour power cut. In some factories, stopping and restarting machines could suspend activity for up to a week, for just a 2-hour power cut.

Against this backdrop, companies - and SMEs in particular - fear a repeat of the compensation setbacks experienced during the Covid-19 crisis and successive confinements.

For their part, insurers believe that the Covid-19 pandemic has had the effect of clarifying contracts, particularly with regard to coverage for direct damage and compensation for business interruption. In 2021, the Autorité de contrôle prudentiel et de résolution (ACPR), which supervises banking and insurance activities in France, also asked insurers for greater transparency regarding implicit clauses.

Compensation for property damage?

In the case of load shedding, insurers rely on material damage, which is the condition for activation of business interruption cover. In other words, if the power cut causes a short-circuit or any other material damage, the company can claim compensation.

The only companies likely to benefit from compensation in the absence of material damage are those that have taken out cover for miscellaneous pecuniary losses. In practical terms, this means large companies with a captive reinsurance policy.

For SMEs, the situation is more difficult, as they generally take out "named perils" multi-risk policies: these cover only the risks listed in the policy, and usually exclude property damage and the financial loss it entails.

What's more, even companies with property damage cover can only receive compensation if they have implemented a series of preventive measures required by insurers. These measures sometimes include the use of generators, which few companies are equipped with.

In addition, a number of questions remain: insurance is governed by the hazard principle, which means that only damage caused by an unforeseeable event can be covered. Load shedding, on the other hand, is a type of power cut programmed by network operator RTE to prevent a widespread blackout. They will be announced up to 3 days in advance of their implementation, which is likely to call into question compensation for businesses.

Some insurers are considering compensating for the absence of compensation with commercial gestures that could be enough to cover financial losses, which are likely to be far less massive than during periods of containment.