Insurer settles bad faith claim in failure of 66.8-MW Swift 2

Cowlitz County Public Utility District has reached an out-of-court settlement with TIG Insurance Co., which was accused of bad faith in denying a claim for damages from a 2002 power canal failure at the 66.8-MW Swift No. 2 hydro project. A federal judge dismissed the case Jan. 13.

Cowlitz PUD owns Swift No. 2 (No. 2213), on the North Fork of Lewis River, east of Cougar, Wash. The canal embankment collapsed into an underground lava flow tube on April 21, 2002, sending water, soil, and rock into the project powerhouse and onto a nearby highway. Reconstruction was completed in 2005 for about $135 million, including the cost of replacement power for nearly four years.

In February 2004, TIG and Federated Rural Electric Insurance Exchange sued the PUD, asking a federal district court to declare there was no coverage under their policies. In 2006, the court sided with Cowlitz PUD, which then reached a $25 million out-of-court settlement with Federated later that year. (HNN 8/4/06)

In October 2008, the 9th U.S. Circuit Court of Appeals denied TIG’s final appeal, upholding a lower court decision that TIG must make an insurance payment of $29.8 million for Swift No. 2 repairs. Cowlitz subsequently filed a bad faith claim against TIG under a new Washington law that allows insured entities to seek damages against insurance companies that they believe acted in bad faith.

�This is a new law that allows for enhanced damages and there have been few court rulings since its enactment, making it difficult to predict how a court might view it,� PUD General Manager Brian Skeahan said in November.

In December, the Cowlitz PUD’s board approved a settlement with TIG of the bad faith claim. Based on that settlement, the U.S. District Court dismissed the case Jan. 13. The district said it agreed not to disclose settlement terms.

Insurance now has paid about $100 million of the $135 million total cost, with the balance paid for by bonds issued in 2004.

The PUD and insurer Lloyd’s of London are to share the TIG proceeds under a 2004 agreement in which Lloyd’s paid $70 million for project damages. The shared distribution agreement gave Cowlitz PUD 60 percent and Lloyd’s 40 percent of future receipts from litigation against TIG and Federated. After legal costs, the PUD’s share of the TIG award totals $14.4 million.

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