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Texas Storm to Test Bounds of Sovereign Immunity

March 10, 2021

The recent winter storms and devastation in Texas have drawn closer attention to a case that has made its way to the Texas Supreme Court. Texas’ primary power grid operator, Electric Reliability Council of Texas (ERCOT), faces a lawsuit that could determine future legal liability in this context.

In 2016, Panda Power Funds alleged that ERCOT improperly manipulated projections of the state’s power needs. Relying on these projections, Panda Power constructed three power plants to meet the state’s need. When the demand did not materialize, Panda Power lost more than $2 billion and filed suit against ERCOT. In response, ERCOT claims sovereign immunity shields it from liability. ERCOT is a private company, however, it is also overseen by the state, and sovereign immunity protects governmental bodies from certain liability.

The Texas Supreme Court is now set to determine whether ERCOT is entitled to sovereign immunity. Although unrelated to Texas’ recent winter storms, the court’s decision will have lasting effects on those impacted by the storms’ devastation.

Thousands of Texans are currently suffering damages from power outages, such as frozen water pipes and flooding. Insurance companies stand to face billions from affected policyholders in claims related to these damages. The winter storms and resulting damages raise multiple coverage issues, particularly in the age of COVID-19. Pursuant to government-mandated guidelines, some affected businesses were either shut down or operating at a limited capacity. For these businesses, it is unclear how insurance companies will calculate loss-of-use or business-income losses.

The Texas Supreme Court’s ruling has a heightened importance for not only Texas citizens, but also Texas property insurers who may be looking to ERCOT (and others) in subrogation. We continue to monitor this development and the impact to risk transfer for those on the front lines of claims emanating from this storm.

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