How to prepare for a total electricity grid failure

Although government says a total electricity grid failure is highly unlikely, there have been calls for insurers to prepare their clients should it happen. The implementation of stage 6 rolling blackouts, compounded by various other internal challenges at Eskom, has seen predictions that national grid failure may be an imminent possibility.

Rolling blackouts, or load shedding as government likes to call it, is a measure Eskom implemented to address mounting pressures on the national electricity grid. Although rolling blackouts have been with us since 2007, the past few years saw a dramatic upsurge in the severity of scheduled blackouts as Eskom attempts to deal with multiple infrastructural problems as well as theft and vandalism.

“Total grid failure would involve the complete loss of power supply and distribution via the national network for an unknown period of time. Should grid failure occur, the impact on homes, property and business owners would be immense,” warns Karen Rimmer, head of distribution at PSG Insure.

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Security systems, such as alarms and electric fencing, can stop working, while the proper functioning of fire detection systems may also be disrupted, rendering these systems slower to respond to smoke or abnormal temperature increases.

“The resultant failure of refrigeration systems could also lead to major stock losses for food-related businesses, as well as South African households. The knock-on effect of grid failure would also impact the national water and sanitation systems, possibly leading to a lack of water supply or reduced water pressure.”

Failure of multiple systems

Rimmer says the failure of multiple systems servicing homes and businesses throughout the country will increase the risk of fire, opportunistic crime, business interruption and extensive damage to property and other assets. These risks will likely land on the shoulders of insurers, as clients turn to their policies for financial relief in managing the impact of these risks.

With these looming threats becoming increasingly serious, numerous insurers and industry bodies have announced that grid failure as a whole will be regarded as an exclusion on insurance policies. Many of these insurers regard grid failure as equivalent to events such as a nuclear incident or the outbreak of war.

Therefore, grid failure and the losses it causes is widely regarded as an uninsurable risk.

“Should total grid failure occur, policy clauses such as ‘prevention of loss’ and ‘duty of care’ will still apply. For insurers and their advisers this means that clients must be made aware of what these clauses mean and what their risk mitigation-related responsibilities are.”

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Ultimately, Rimmer says, these clauses infer that clients must take all reasonable precautions to prevent loss, damage or liability during events such as rolling blackouts.

“This would include, for example, installing adequate surge protection on all power outlets to prevent losses caused by sudden electrical spikes.”

She says in the same way the ‘duty of care’ clause relates to the client’s obligation to exercise due care to avoid or minimise loss or damage. This could include ensuring that electric fencing security systems have adequate backup power and battery supplies to remain functional during prolonged power cuts.

Consumers will have to prove obligations were met

“In the event of a claim, whether related to grid failure or not, the insured will likely be called upon to produce proof that these obligations were met. Claims are reviewed on their individual merit and could be repudiated if insurers fail to adhere to these clauses is discovered by the insurer.”

She says while grid failure remains a possibility rather than an immediate threat, clients should also reach out to their insurance advisers to ensure that they are aware of what policy wording means in this regard.

“Clients also have a window of opportunity to contact suppliers and service providers on factors such as security, water supply and plumbing, electricity and fire detection systems. Qualified professionals in these fields are in the best position to offer clients alternatives and recommendations that can help them prepare for risks that relate directly to the current energy crisis.”

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Rimmer says advisers must also apply their minds, expertise and sector-specific knowledge to support businesses in implementing continuity plans and strategies to keep their doors open in the event of a crisis.

Insurance advisers will play a vitally important role if the grid fails to ensure that insurers remain financially viable and that the confidence of the clients who support the industry can be retained.

“However, reactive responses to grid failure will not be sufficient in helping clients and insurers navigate their way through a period of unprecedented risk and uncertainty. Proactivity and preparedness are therefore key to providing superior customer service, preserving the reputation of insurers and developing insurance products and services that are in line with what the future holds for South Africans.”

Not an unforeseen event anymore

Hermanus van der Linde, CEO of IntegriSure Broker, agrees that the risk of a total grid failure seems more possible. “Therefore, it can no longer be considered an unforeseen event, meaning it no longer falls within the definition of an insurance peril, making it necessary for insurers to exclude cover.”

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Although the South African Special Risk Insurance Association (Sasria) recently withdrew circulars announcing that it will no longer provide cover for damage to property caused during riots and protests in the event of an electricity grid collapse, there are other risks that need to be assessed, he says.

“The country has reached a stage where preparation for a complete blackout needs to be factored into strategic planning. To manage the risks associated with any incident, including a potential grid collapse, individuals and businesses should take proactive steps and have contingency plans in place to manage any possible disruptions.”

Van der Linde says effective risk management involves identifying potential risks, assessing how likely they are to happen, what their impact may be and how you can minimise or mitigate them. “Once you have determined these elements it is essential to put the right measures in place and formulate a risk management plan.”

Keep this in mind

He says individual consumers and businesses must consider:

• A risk assessment to identify all potential risks and consider the possible resultant damage. Also include a risk assessment related to your finances, investments and legal compliance.
• Risk control as some risks cannot proactively be prevented. Put systems in place to minimise the impact they may have.
• Risk financing involves having a financial buffer in place for reparations or to cover potential losses for a short period of time.
• Risk governance with a risk management strategy that involves formulating a risk management team who are responsible for overseeing all risk management measures and who are accountable for responding to risks as soon as they arise.
• Continuity planning that involves thinking ahead and creating a plan to quickly resume critical functions should an incident occur.

What exactly will then be covered?

“If a defined event takes place at your home as a direct result of grid failure, such as fire or stock deterioration that has caused financial loss to the business, there will be no cover.  Should this occur, you need to consider the consequences of this with your insurance advisor so that a well-considered and structured response is in place,” says Jameson.