LICAP and Its Lessons:
Doubts intensify over New England's radical new market for electric capacity.
Insurance Recovery for Manufactured Gas Plant Liabilities
that filing of the case should take place in the state where the policy was signed, rather than the state in which the MGP sites are located. The analysis may indicate that a date-of-site-demolition trigger is advantageous, or it may point to recovery optimization with a continuous trigger where the utility can pick the policy year to trigger, rather than proration across all triggered policy years. The analysis will also reveal whether site-by-site or global litigation is preferable.
In addition, because the analysis is conducted on a policy-by-policy basis, the insured parties can determine the amounts they can expect to recover from specific carriers and specific types of coverage (e.g., primary, excess) in multi-insurer cases. It is possible that higher recovery will follow from using different trigger/allocation theories for different carriers. Thus, the analysis may indicate that during settlement negotiations with various carriers, the utility will trigger different years and argue for different allocation scenarios to maximize overall recovery. In addition to the expected value from litigation, it will often prove useful to identify the litigation arguments that maximize recovery for each carrier as preparation for settlement discussion. This will allow utilities to determine what types of settlements to accept to avoid or truncate costly litigation.
Another key feature of the valuation exercise is a better understanding of the litigation risk involved in an insurance recovery case. The expected value of overall recovery is derived from a weighted average of thousands of possible outcomes. These possible outcomes range from scenarios in which recovery is less than the litigation costs to scenarios in which nearly full coverage is obtained. This wide range of potential outcomes creates risk for both utilities and insurance companies. It is important for utility managers to understand not only the expected value of the case, but the range of potential recovery and the risks involved.
The information collected in the valuation analysis can be used to develop a distribution of possible recovery outcomes. This distribution shows the likelihood that recovery will be within a particular dollar range (see exhibits 3 and 4 for examples).
This type of risk analysis is very useful in determining litigation and settlement strategy. First, it identifies key vulnerabilities. Second, it communicates to upper management why settlement at levels different from the expected value might be acceptable. Third, the analysis provides documentation to back up the prudence of management decisions regarding settlement and litigation.
Mediating Insurance Disputes
Both utilities and insurance companies can benefit by expeditious settlement of insurance claims for MGP liabilities. However, settlement is often frustrated. Focusing solely on the "bottom line" creates impasses, in which insureds claim coverage for the maximum possible amount and insurance companies categorically deny all coverage. Inability to estimate the value of a claim due to the complexity and uncertainties involved in the valuation also stymies settlement. In both situations, the parties cannot resolve the dispute because they have not broken down the valuation problem into its component parts, and therefore cannot even begin to discuss the bases for settlement.
One way to avoid the impasse, and hopefully