Climate Change Effects

Force Placed Insurance When the Flood Plain Fails to Consider Climate Change

May 8, 2012 19:22
by J. Wylie Donald
An interesting case crossed our desk last week from the Texas Court of Appeals. The amount at issue, $4,410.69, belies its significance. In Alvarado v. Lexington Insurance Company, Nos. 01-10-00740-CV, 01-10-01150-CV, slip op. (Tex. Ct. App. 1st Dist. Apr. 19, 2012) (attached), the court thoroughly examined (with extensive citations) the issue of whether a homeowner, subject to "force placed" insurance, has any rights in the policy obtained by his lender.  The majority concluded that the terms of the policy established that the homeowner was an intended beneficiary and could claim under the policy.  The dissent strongly disagreed (attached). This issue is likely to have increasing prominence for lenders (and their insurers) as the correspondence between the mapped flood plain and reality becomes more and more in error.  See Underwater? What Climate Change Means for a Loan Portfolio Near the Flood Plain, Massachusetts Banker (2011).  The proposition is fairly simple. As a result of climate change, storms in many areas will become more frequent and more severe. The effect of this is to make the current 100-year flood plain an under-estimation of the actual area at risk for a 100-year flood. When the Federal Emergency Management Agency (FEMA) or the Army Corps of Engineers finally gets around to preparing accurate flood plain maps, scores of homeowners will find themselves waking up one morning subject to requirements for flood insurance.  See 42 U.S.C. § 4012a(e)(1).  Their lenders may do more than just wake up. Pursuant to federal National Flood Insurance Program (NFIP) requirements, they may send letters advising their borrowers of the requirement to obtain flood insurance. Id.  Some will comply. Some will not. For those choosing not to comply, the lenders will buy the insurance for them and bill their borrowers back.  See 42 U.S.C. § 4012a(e)(2).   Even where NFIP requirements do not apply, lenders may still have the right to place coverage for their borrowers as a result of breach of covenants agreed to by those borrowers. This is force placed insurance.  It is defined by one internet source as:  "The insurance that a lien holder places on a property, to provide coverage in the event the borrower allows coverage to lapse. Forced place  [sic] insurance is intended to ensure that the property remains insured, protecting both the homeowner and the lien holder. The costs associated with forced place insurance are paid upfront by the lien holder, but added to the balance of the lien."   A borrower will covenant to insure the mortgaged property adequately.  When the borrower breaches (either by not purchasing required insurance, cancelling insurance or allowing insurance to lapse, or failing to procure the right type and amount of insurance), the lender may force place the required policy(ies).   All manners of property coverage may be purchased; liability coverage is typically restricted to only general liability.  A detailed discussion of the subject was prepared by the Mortgage Bankers Association in 2006.  In Alvarado, the carrier issuing the force placed policy argued the subject policy was clear about who was named as insured:  the lender (and not the borrower), whose interest was protected:  the lender (and not the borrower), and to whom loss was payable:  the lender (and not the borrower).  The borrower disagreed and pointed to Endorsement 12,  "Special Broad Form Homeowners Coverage," which provided coverage to "You and residents of your household," defined the insured property as the "residence premises" (the "one family dwelling where you reside"), and provided coverage for living expenses and personal liability.  None of these could apply to a bank. The majority concluded that the endorsement clearly established that the borrower was an intended beneficiary of the contract.  "All of these provisions of this endorsement are meaningful only if the "Insured" and "you" referenced in the Definitions and Property Coverages of Endorsement #12 mean the homeowner of an owner-occupied property reported by Flagstaff [the lender] to Lexington [the insurer] on Lexington's reporting forms as having force placed Homeowners Coverage and if the Homeowners Coverage part of the Policy is interpreted as directly insuring the homeowner against loss to property, both real and personal, as well as insuring him against personal liability and certain other personal losses, such as loss of use of the property and additional living expenses."  Alvarado at 35-36.  "We conclude ... that the additional coverage in Endorsement #12 for which the homeowner is forced to pay additional premiums "ha[s] no purpose whatever" and is meaningless unless the "Special Broad Form Homeowners Coverage" was intended by Lexington, the insurer of the property, and Flagstaff, the mortgagee, to directly benefit the mortgagors and homeowners of the properties specifically described ... on Lexington's reporting forms, including Alvarado." Id. at 41. Coverage practitioners will recognize the majority's decision as a simple application of one of the basic rules of coverage:  contra proferentem  -  the policy will be construed against the one who drafted it. The dissent rejected all that:  "The borrower nonetheless is not a third-party beneficiary to [the force placed policy]: he is neither named as an additional insured nor expressly contemplated to be a beneficiary under it, as defined by its terms—most particularly, its liability limits. To rely on provisions that provide homeowner-types of coverage to conclude that the borrower is insured for these homeowner risks would provide more insurance coverage to the borrower than it does to the named-insured lender, whose coverage is limited to losses in which the lender has "a mortgage or ownership interest." But it is axiomatic that a third-party beneficiary cannot claim more rights under the contract than that of the first-party rights it relies on for enforcement." Alvarado (Bland, J., dissenting) at 11. We take two lessons from Alvarado.  First, it teaches that force placed policies may provide more coverage than a lender or insurer will later argue they anticipated.  Policyholders in the unfortunate position of being subject to force placed coverage should not relinquish this possible source of coverage without closely examining the force placed policy for which they are being billed. More importantly, however, is the need to recognize principles and considerations applicable in one situation, and to bring them to bear on new circumstances (such as those accompanying climate change).  Lending institutions may be in the crosshairs as flood risks develop in the coming years and bank real estate portfolios are threatened.  The numbers on which these portfolios were underwritten will no longer represent reality in that the risk of loss will be higher than anticipated. To protect themselves, banks may attempt to force place coverage. As Alvarado shows, however, the bank may come up short as the bank's borrower may have a claim on that protection.  20120419 Alvarado v. Lexington Ins. Co., slip op. (Tex. App. Apr. 19, 2012).doc (98.00 kb) 20120419 DISSENT Alvarado v. Lexington Ins. Co., slip op. (Tex. App. Apr. 19, 2012).doc (47.00 kb)

Climate Change | Climate Change Effects | Flood Insurance

Studies Map Climate Change Driven Storm Surge Down to Your Zip Code

March 16, 2012 20:09
by J. Wylie Donald
We were on the front page of the New York Times earlier this week. We wish!  Our marketing department has not cracked that nut yet. Not so the folks at Climate Central. Their press release about their report, Surging Seas, got them a front page spot in New York. It also was picked up by papers of record in Miami, Boston, Los Angeles, and Chicago, among others. Internet outlets like the Huffington Post and carried it. Even the UK's Daily Mail has picked it up. What was so momentous?  The researchers in our view did three things. The first is typical. They identified the risk caused by an effect of climate change. It is a serious risk, potentially affecting millions.  The second was astute.  The two published studies on storm surge and rising sea levels (Modelling sea level rise impacts on storm surges along US coasts, and Tidally adjusted estimates of topographic vulnerability to sea level rise and flooding for the contiguous United States) are dense.  Surging Seas converts them to understandable lay terms.  The third was their genius. They brought the issue down to zip code specifics. Let us explain.  The first step was accurately to determine the elevation of all the coastal property in the United States.  This was done using the National Elevation Dataset established by the US Geological Survey. The next step was to compare the elevations to local high tide levels as ascertained using NOAA information and techniques.  Overlaid on that was 2010 census data. Thus the Climate Central researchers had the best data on population and proximity to the sea. What's more, they could show that information visually and with granularity. What remained was to add storm surge data. This is the 900 pound gorilla. Rising sea levels will add only inches to the level of mean high tide in the next 20 years. The effect of storm surge is not so minor. To quote Surging Seas:  In many places, only inches separate the once-a-decade flood from the once-a-century one; and separate the water level communities have prepared for, from the one no one has seen. Critically, a small change can make a big difference, like the last inch of water that overflows a tub. This effect is dramatic. According to the authors of the report, for 2/3 of the locations analyzed the risk of a once-in-a-century flood has doubled, for 1/2 the risk has tripled. What this means is that for many storm surge flooding is no longer something one could expect to see once in a lifetime, or not at all. To get specific, the study "found that at over half the sites examined, there is a one-in-two or better chance of water reaching 4 feet higher than the average local high tide by 2030, at least once." Such flooding puts almost 5 million people at risk. To complete this part of the analysis the researchers looked at local water level gauges, land subsidence rates and global sea level rise to calculate local sea level rise. They then analyzed historical local extreme water level patterns (i.e., storm surges) assumed they would continue to exist, and applied them.  The conclusion is ominous:  "Sea level rise is raising the launch pad for storms and high tides, and being experienced by the ever-more frequent occurrence of extreme high water levels during these events -- long before the ocean reaches damaging heights permanently." Which brings us to the meat of the matter. Our in-laws are in South Florida. We can type in their zip code, and query the Climate Central web page as to the likelihood a 4-foot storm surge will invade their home before 2030. And we can blow up the map and look right at their street. We are buying them a canoe.  

Climate Change Effects | Legislation | Regulation | Rising Sea Levels | Weather

Global Warming Is Cooking Ice Hockey's Goose. But Not If The Western Climate Initiative Has Its Way.*

March 6, 2012 20:39
by J. Wylie Donald
There was dismal news out of the North yesterday.  Researchers in Canada have concluded that climate change threatens the national pastime.  In a March 5 article in Environmental Research Letters, researchers Nikolay Damyanov, Damon Matthews and Lawrence Mysak investigated changes in the outdoor skating season over the period 1951 to 2005.  They found "that the outdoor skating season (OSS) in Canada has significantly shortened in many regions of the country as a result of changing climate conditions."  The implications of that are dire:  "This suggests that future global warming has the potential to significantly compromise the viability of outdoor skating in Canada."  Fending off this looming cultural disaster is the Western Climate Initiative (WCI), which just this past Friday held a teleconference to discuss with stakeholders the recently released (February 21) WCI final recommendations for the Offset System Process.  Offsets are an alternative way to meet emissions reduction limits imposed by, for example, a greenhouse gas cap-and-trade program.  A party wishing to emit a quantity of greenhouse gas in excess of its allowance, may create or purchase an "offset" where certain activities have been completed which prevent the emission of other greenhouse gases, or sequester them, or otherwise reduce the amount of greenhouse gases in the atmosphere.  To quote from the WCI's Offset Systems Essential Elements document:  "An offset certificate represents a reduction or removal of one metric ton of carbon dioxide equivalent (tCO2e)."  Certain attributes of the offset are mandatory:  it must be "real, additional, permanent, and verifiable."  The only one of these attributes that bears additional comment is the concept of additionality, that is, "the portion of greenhouse gas emission reductions or removals that would not have happened under a baseline scenario."  Additionality can be difficult to demonstrate. Establishing the process to achieve these real, additional, permanent and verifiable reductions in atmospheric greenhouse gases are the February 21 Offset System Process recommendations.  They set forth the requirements for 1. Pre-Verification Activities a. registration - ”Project registration requires the submission of information for each project to the responsible WCI Partner jurisdiction."  b.  validation - "Validation is intended to provide the project developer and the WCI Partner jurisdiction with assurance that the project, when implemented, is likely to meet all of the WCI criteria [including reductions that are real, additional, permanent and verifiable]and is likely to result in emission reductions qualifying under the WCI offset system."  c. monitoring - "Monitoring of an offset project is intended to allow for the complete and transparent quantification of GHG reductions or removals." d. quantification - "Quantification is the process of estimating emissions reductions achieved from project activity data collected through monitoring."  e. reporting - "Reporting refers to the process of summarizing project monitoring data, quantifying the GHG reduction achieved in the applicable period according to the calculation methodology in the project plan, and documenting that information in a project report. ... The WCI Partner jurisdictions will establish overall reporting requirements to ensure adequate oversight of the offset system." These pre-verification activities can be completed in any order but must be completed before moving to verification, certification and offset issuance. 2.  Verification- "Verification is the process of reviewing offset project information to ensure that claimed emissions reductions have been achieved in accordance with the appropriate protocol and project plan." 3.  Certification - In the certification step the jurisdiction “accepts” "that the documentation provided and reviewed indicates that the reduction upon which the offset certificate may be based is real, additional, permanent and verifiable." 4.  Issuance of offsets - When all of the above steps are completed, "the WCI Partner jurisdiction will issue offset certificates in a number equal to the reductions credited to the projects, with each issued offset certificate representing one metric tonne CO2e reduced or removed." This protocol is required so that there is "transparency" between the member WCI jurisdictions and an offset project valid in one state or province is accepted and valid in another.  In the event that a project fails to permanently provide the reduction promised (either because of failure of the project, through fraud, or for some other reason) the recommendation provides for the reversal of the offset thus "maintaining the environmental integrity of the program by ensuring every certificate in the system is supported by an emission reduction that is real, additional, permanent and verifiable." Readers are familiar with the facts that Canada has withdrawn from the Kyoto Protocol and is vigorously promoting development of its tar sands to the detriment of reduction of its greenhouse gas emissions.  Readers also are aware that the WCI is, to be charitable not robust as only California and four Canadian provinces remain active.  See Soldiering On: The Western Climate Initiative and RGGI in 2012 and Beyond.  Will the slow demise of ice hockey change any of that?  Some think so.  In an excellent piece by Suzanne Goldenberg in the Guardian, Professor Matthews is quoted:   ""I think this is going to strike a chord with Canadians," Matthews said. "When I think of things that are vulnerable to climate change that people care about in Canada I would place outdoor ice hockey very close to the top of that list." *We apologize for the title of this post. Competition for tired metaphors was heavy. The Montreal Gazette captured the title with a double:  Thin ice:  Outdoor rinks face meltdown.  

Climate Change Effects | Regulation

Aronow v. Minnesota is Dismissed: Public Trust Doctrine Not Extended to the Atmosphere in Minnesota

February 4, 2012 18:58
by J. Wylie Donald
We blogged last May and again in December about the tidal wave of litigation set loose by Our Children's Trust (OCT), an Oregon environmental group that had orchestrated the filing of  a dozen suits asserting the defendant States and the United States had an obligation under the public trust doctrine to restrain carbon dioxide emissions, as well as regulatory petitions in about 40 jurisdictions.  One can find OCT on Facebook, Flickr, YouTube and Vimeo. It prepares "backgrounders" for the press (attached). It has even coined its own acronym, ATL (atmospheric trust litigation) for its legal assault.  OCT is media savvy. It has still not established that it is litigation savvy.  The petitions have not fared well.  OCT's website is not up-to-date but petitions have been denied in at least 27 jurisdictions (Arkansas, Connecticut, Florida, Georgia. Hawaii, Idaho, Illinois, Iowa, Louisiana, Maine, Maryland, Michigan, Missouri, Nevada, New Hampshire, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and Wyoming and Washington, DC).   The denials have  prompted two more lawsuits (appeals) in Iowa and Texas.  On the litigation side, motions to dismiss have been the defendants' responses of choice.  The lawsuit against Montana filed in the Montana Supreme Court was dismissed almost immediately.  Montana has a rule permitting an original action before the Montana Supreme Court where there are no factual issues and the matter is urgent. The court rejected that position:  "This Court is ill equipped to resolve the factual assertions presented by Petitioners. We further conclude that Petitioners have not established urgency or emergency factors that would preclude litigation in a trial court followed by the normal appeal process."  Accordingly, the petition for original jurisdiction was denied. Fast forward to today, the tidal wave is starting to break.  New Mexico and Oregon had oral argument on their motions in January. Decisions have not been issued.  In the Oregon suit it was reported that, after argument, the judge remained undecided about whether to dismiss the case.  This month there are hearings in Alaska, Arizona and Washington.    And last Monday the first merits decision was handed down.  In Aronow v. Minnesota the Minnesota District Court dismissed the case with prejudice. Plaintiff's complaint (attached) lays out the threats posed by climate change in great detail.  It then explains the public trust doctrine, including legal authority for extending it to the atmosphere.  "The Public Trust Doctrine is a foundational aspect of sovereignty; it holds government responsible, as perpetual trustee, for the protection and preservation of resources necessary for the common welfare of all citizens, those living and those yet to be born. ... The atmosphere, because of the climate stability it makes possible, is a necessary resource protected by the public trust."  The doctrine is, according to the complaint, partially codified in the Minnesota Environmental Rights Act (MERA) (Minn. Stat. §§ 116B.01 - 13).  Plaintiff coffered two theories as the basis for relief:  one under the public trust doctrine and the other under MERA.  He sought a declaration that the atmosphere was protected by the public trust doctrine and that the defendants were in violation of the doctrine.  He also sought a declaration that defendants had violated MERA (without identifying what part of MERA was violated).  Last, plaintiff asked the court to "Compel Defendants to take the necessary steps to reduce the State's carbon dioxide output by at least 6% per year, from 2013 to 2050, in order to help stabilize and eventually reduce the amount of carbon dioxide in the atmosphere." The defendants, Minnesota, the governor and the Minnesota Pollution Control Agency, filed a motion to dismiss.  They succeeded.   In dismissing the claims, the court set down its opinion (attached) in three parts:  1. can the governor be sued (no); 2. does the public trust doctrine apply to the atmosphere (no); and 3) are there viable causes of action under MERA (no). As to the governor, he had no legislative authority or funding "to  implement the policies sought by plaintiff." Accordingly, he was not a proper party to the suit. As to the public trust doctrine, this ruling is arguably the most important part of the decision.  A ruling in OCT's favor would provide it ammunition in the imminent battles in other jurisdictions.  A ruling against it would supplement the arsenals of the defendants in those other cases.  Further, the court's decision was the first merits decision on the central tenet of OCT's raft of cases:  the public trust doctrine applies to the atmosphere.  The court's analysis is brief so we provide it in full:  Minnesota Courts have recognized the Public Trust Doctrine only as it applies to navigable waters. "Navigability and nonnavigability [sic] mark the distinction between public and private waters. The state, in its sovereign capacity, as trustee for the people, holds all navigable waters and the lands under them for public use." Nelson v DeLong, 7 N.W.2d 342, 346 (Minn. 1942) (emphasis added). The Nelson court ultimately held that a private citizen's riparian rights are subordinate to the State's needs as it manages the navigable waters that are held in the public trust. See also Pratt v. State, Dep't of Natural Resources, 309 N.W.2d 767, 771 (Minn. 1981).  In Larson v Sando, 508 N.W.2d 782 (Minn. Ct. App. 1993), rev. denied (Jan. 21, 1994), the court declined to extend the public trust doctrine beyond the state's management of waterways, partly because the cases cited by the parties applied only to waterways. Id. at 787 (declining to extend the doctrine to land). Similarly, this Court cannot locate, nor did counsel for either party supply, a Minnesota case supporting broadening the Public Trust Doctrine to include the atmosphere. This Court has no authority to recognize an entirely new common law cause of action through plaintiff's proposed extension of the Public Trust Doctrine.  That is it.  There is no analysis of whether the public trust doctrine should or should not apply to the atmosphere.  Instead, the court simply ruled it has not been done before in Minnesota and it will not be done by this district court here. Last, are the MERA claims.  The court went out of its way to consider a variety of ways that a MERA suit might be justified. We want to focus on the simplest: the statutory requirements. Under § 116B.03 a resident of Minnesota could bring suit in the name of the State "for the protection of the air ... from pollution impairment or destruction." A problem was that plaintiffs had not complied with the statutory requirements of giving notice, which was "fatal." Another problem was that plaintiff was required to sue on behalf of the State, which he did not.  A final problem was that the required "pollution, impairment or destruction" was defined by statute, and the statutory requirement, according to the court, was not met.  We have trouble with this conclusion, however.  To be sure the statutory definition required "conduct by any person which violates, or is likely to violate, any environmental quality standard, limitation, rule, order, license, stipulation agreement, or permit," but it also alternatively permitted a claimant to challenge "conduct which materially adversely affects or is likely to materially adversely affect the environment."  Minn. Stat. §  116B.02(5).  Plaintiff expansively alleged how carbon dioxide emissions lead to climate change which is causing numerous deleterious effects on humans and the environment.  And he alleged how Minnesota's state government's conduct (inaction) was materially adversely affecting the environment.  These allegations just don't seem to square with the court's conclusion that "the Complaint does not allege anything falling within the definition of 'pollution, impairment or destruction.'"  We wonder why the court ventured into this area when it had established the procedural bars. Alternatively, under Minn. Stat. § 116B.10 a Minnesota resident could "maintain a civil action .... for declaratory or equitable relief against the state ...where the nature of the action is a challenge to an environmental quality standard, limitation, rule, order, license, stipulation, agreement or permit promulgated or issued by the state ... for which the applicable statutory appeal period has lapsed."  Plaintiff's fundamental problem was that his complaint failed to "refer to or challenge a single environmental quality standard, limitation, [etc.]"  In other words, by its terms plaintiff's claim did not meet the statutory requirements. OCT is 0-27 in the regulatory arena.  It is now 0-2 in litigation.  Notwithstanding, we cannot see the future here.  Regulatory agencies cannot move into new areas without legislative authority.  We will not be surprised if OCT is 0-40 in the not too distant future.  But in the courts it may be a different story.   Montana's dismissal simply set the stage for re-filing in the trial court.  In Minnesota the court did not reject the concept of applying the public trust doctrine to the atmosphere; it simply was unwilling to plow new ground.   And the Oregon trial court is reportedly on the fence.  We still await thoughtful jurisprudence on whether the public trust doctrine applies to the atmosphere.  We note, however, that we expect a long wait for this to settle down; whatever happens in the immediate future, there are certain to be appeals. 20120130 Order of Dismissal, Aronow v. Minnesota (Our Children's Trust).pdf (960.57 kb) Aronow v. Minnesota Complaint (Our Children's Trust).pdf (247.79 kb) Our Children's Trust, National Backgrounder (ATL) 12-1-191.pdf (316.65 kb)

Carbon Dioxide | Climate Change | Climate Change Effects | Climate Change Litigation

The Maryland Court of Appeals Looks at Models and Likes What it Sees - People's Insurance Counsel Division v. Allstate Insurance Co.: Affirmed

January 28, 2012 21:59
by J. Wylie Donald
Notwithstanding that millions tune in to the long-running reality TV show America's Next Top Model, the real modeling action is not in Hollywood.  Instead, it is on computer mainframes churning out annual simulations of 100,000 years or more of catastrophes such as hurricanes, earthquakes and terrorist attacks. Such analysis drew the attention of the Maryland Court of Appeals in its seminal opinion last Wednesday in People's Insurance Counsel Division v. Allstate Insurance Co. (attached), which affirmed the appropriateness of modeling in an insurer's decision to issue, or not, homeowners' insurance policies. The facts in Allstate were relatively simple. In 2006 Allstate determined that it would no longer write homeowners' policies on Maryland properties within one mile of the Atlantic Ocean. It subsequently extended that decision to completely exclude from new policies five Maryland counties, and portions of an additional six counties (all identified by zip code). It relied on a model developed by Applied Insurance Research, Inc. (AIR), which showed that the hurricane losses Allstate would suffer in the identified zip code areas were too high. Dutifully Allstate filed the appropriate papers with the Maryland Insurance Administration. The Administration found nothing exceptional about the application. The People's Insurance Counsel Division (PICD) (a part of the Office of the Attorney General) did, however, and requested a hearing.  It lost before the Commissioner of Insurance, then before the Circuit Court and again before the Court of Special Appeals (see our post).   PICD then appealed to Maryland's highest court and argued before the Court of Appeals that Allstate had failed to meet its burden of showing that its decision was not "arbitrary, capricious or unfairly discriminatory."  See Md. Ins. Code § 27-501(a)(1).   Following from that, PICD further argued that the designation of areas by zip code did not have an objective basis and therefore was arbitrary and unreasonable. See Md. Ins. Code § 19-107(a).  Allstate's proofs consisted primarily of computer modeling evidence, which the Commissioner found sufficient. Much of the opinion is directed to the parsing of Maryland's Insurance Code and its legislative history to determine whether § 27-501 even applied (the Court of Special Appeals had found it did not, and the Court of Appeals reversed that portion of the decision). We leave it to the insurance blogosphere to address that further. What is of interest to this readership is how modeling came into the decision and where modeling stands as a result. In the proceeding Allstate offered a model that simulates hurricanes from genesis to decay and the damages that would be suffered.  Basically, AIR modelers "developed mathematical functions that describe the interaction between buildings and their contents and the local intensity to which they are exposed." PICD at 7.  Allstate established with expert evidence that catastrophe risk is not diversified ("adding additional catastrophe risk does not reduce overall risk because of pooling but actually increases the overall risk") and that historical loss data is incomplete and outdated "making it difficult to estimate losses."  PICD at 7.  Accordingly, "it has become standard practice for insurance companies to use catastrophe models to anticipate the likelihood and severity of potential future catastrophes before they occur." PICD at 5-6. The advantages of modeling are substantial;  (1) It was able to capture the effects on catastrophic loss distribution of changes over time in population patterns, building codes, amounts insured, and construction costs;(2) It provides a complete picture of the probable distribution of losses rather than just estimates of probable maximum losses; (3) Because simulation models can be tested more easily than other approaches, it leads to greater stability in estimating expected annual losses;(4) It provides a means to determine the impact of new scientific information; and(5) It provides a framework for performing sensitivity analyses and “what if” studies. PICD at 6 As the Court noted, "By using computer models, they can get 100,000 years of simulated loss experience, which is good not just for State-wide pricing but also for loss characteristics related to hurricanes down to the ZIP Code level." PICD at 7.  PICD retained an actuary to rebut Allstate's proofs; he testified with respect to "actuarial science." He was hampered, perhaps fatally, when the Commissioner refused to allow him "to express any opinion with respect to the model that formed the basis of Allstate's amended filing." PICD at 11. We were not there but the Court of Appeals paints a picture of a non-committal expert. He offered that the decision to not write new policies was unreasonable "'because there is no showing that it is reasonable.'" And he "declined to choose" the method Allstate should have chosen to reduce its risk.  PICD at 11. In a post-hearing submission PICD argued that "Allstate was required to produce valid statistical data demonstrating the probability of a hurricane sufficiently strong to cause catastrophic damage actually making landfall in Maryland and that it failed to do so."  PICD at 23.  The statistical standard was based on dicta in an earlier Court of Special Appeals decision, Crumlish v Ins. Comm'r, 520 A.2d 738 (1987), which the Commisioner and the Court distinguished.  First, Crumlish's requirement for statistical evidence was not a universal requirement. PICD at 25. More significant was the "catchall" exception added to § 27-501 which established a "standard approved by the Commissioner that is based on factors that adversely affect the losses or expenses of the insurer under its approved rating plan and for which statistical validation is unavailable or is unduly burdensome." PICD at 25. "That is what the Commissioner did in this case."  PICD at 25.  In other words, the Commissioner found Allstate's evidence met its burden of demonstrating that its use of modeling as the basis to stop writing policies in certain areas was reasonably related to its business and economic purposes and was not discriminatory.  The dissent would have adopted the Crumlish dicta and required Allstate to offer statistical evidence concerning the landfall of destructive hurricanes in Maryland. PICD, dissent at 5.  Such an assessment was either to be based on the historical record (an impossibility as no hurricane had ever made landfall in Maryland) or "climate science" (which one would think would include modeling).  PICD, dissent at 9, 10.  According to the dissent, all Allstate provided was a computation of the "relative risk" of a hurricane landfall in Maryland as once in 25,000 years based on the worst 5% of hurricanes that made landfall in North Carolina, Virginia, and Delaware.  Allstate justified its decision based on hypothetical hurricanes, i.e., a model.  PICD, dissent at 7. The Court properly rejected this distinction.  The use of probabilistic catastrophe risk modeling came of age following the destruction caused by Hurricane Andrew in South Florida in 1992. As stated by modeler RMS in its 2008 A Guide to Catastrophe Modeling (p6):  "It became clear that a probabilistic approach to loss analysis was the most appropriate way to manage catastrophe risk. Hurricane Andrew illustrated that the actuarial approach to managing catastrophe risk was insufficient; a more sophisticated modeling approach was needed."  Another modeling firm, EQECat, put it this way:  "The main concern for all users is the uncertainties in the models. Some time ago, the only way to estimate a probable loss was to trust few statistical studies of past losses from some historical events and or on the experience of the underwriter. The uncertainty in these models was quite large as confirmed once a new event [such as Hurricane Andrew] took place. The main problem is that there is not enough historical data, and the standard actuarial techniques of loss estimation are inappropriate for catastrophe losses."  One of the purposes of catastrophe modeling is to assist the user (often an insurer) in avoiding the alliteratively named "risk of ruin."  If all the industry is using a tool that can minimize the risk of run, it would ill-behoove a court to take away that tool.  In Allstate the Maryland Court of Appeals agreed.  Nevertheless, if one is looking for guidance on how modeling will be received in the courts, there is one significant question left unresolved by this decision:  how will competing models be treated?  PCID's expert seems to have been completely out of his league. Whatever his actuarial credentials, if the issue is modeling then a modeling expert is needed. And at the very least the AIR model was subject to challenge. In a review published just this month, Assessing US Hurricane Risk: Do the Models Make Sense?, AIR takes on its competition, RMS, and states:  "with this latest round of updates, we [modelers] find ourselves more divergent in our views of risk than ever." (p5)  As one example of this divergence, "Catastrophe modeling companies have vastly different views on what influence sea surface temperatures (SSTs) in the Atlantic Ocean have on U.S. hurricane landfall risk." (p12).  If AIR is correct, perhaps application of the RMS model would have altered the list of excluded zip codes. More fundamentally, does the uncertainty established by competing models (and that is inherent in modeling) impose an unavoidable and unacceptable arbitrariness in application?  That is for another day.  For the moment, modeling companies and those who use them likely will proceed full speed ahead. Post scriptum - Climate change seems to have been a subject not to be discussed.  As noted by the dissent, if Allstate was worried about the science of climate change, it didn't bring it up.  Nevertheless, the dissent did bring it up and asserted that meteorological change occasioned by climate change could be a legitimate basis for Allstate's decision.  The modeling firms think otherwise. Eqecat's CEO Bill Keogh has stated because of the uncertainty associated with climate change's effect on hurricanes, " it has no role in catastrophe risk modeling." Peoples Insurance Counsel Division v Allstate Insurance Company.pdf (78.07 kb)

Climate Change | Climate Change Effects | Insurance | Regulation

Climate Change Litigation: The Second Wave - Our Children's Trust Goes to Washington

December 16, 2011 19:09
by J. Wylie Donald
2000 years ago all roads led to Rome.  Nowadays, as Our Children’s Trust recently found out, the road of a climate change lawsuit leads to Washington.  All are familiar with the path to Washington taken by Massachusetts v. EPA and American Electric Power v. Connecticut.  Last week a different path surfaced:  the trial court.  The District of the District of Columbia became the Washington venue of Alec L. v. Jackson when  the Northern District of California transferred the federal climate change suit instigated by Our Children’s Trust.    Our Children’s Trust (OCT) is an Oregon public interest group that is quarterbacking a set of lawsuits and regulatory petitions seeking to reinvigorate federal and state regulation to combat climate change.  OCT burst on the climate change litigation scene last May with suits or petitions in all 50 states, invoking the public trust doctrine as available to protect the atmosphere – a new twist on an old doctrine.  Besides a dozen lawsuits in state court, one was also brought in federal court in the Northern District of California (where another climate change lawsuit – Native Village of Kivalina v. ExxonMobil - was also filed).  Alec Loorz, a teen-aged environmental activist, and other youths, in company with Kids vs Global Warming and Wildearth Guardians, sued Lisa Jackson, Kenneth Salazar, Thomas Vilsack, Gary Locke, Steven Chu and Leon Panetta. You may recognize the defendants as the EPA Administrator and the Secretaries of Interior, Agriculture, Commerce, Energy and Defense, respectively. In the amended complaint, after explaining the plaintiffs’ circumstances (youths1 and an environmental group that will be harmed by the effects of climate change), the defendants’ alleged misfeasance (failure to act to restrain and reduce carbon dioxide emissions), the effects of climate change and the need to take action (among other reasons: “A failure to act soon will ensure the collapse of Earth’s natural systems resulting in a planet that is largely unfit for human life.”  Complaint ¶ 9.), a single cause of action is set forth. Plaintiffs allege, among other things:   143. The United States government is a co-tenant sovereign trustee of the atmosphere and shares a duty with other co-tenant sovereigns, including Tribal Nations, to protect the atmosphere as the trust asset and prevent its waste or harm for the benefit of the people, including Plaintiffs and future generations of citizens 146. Defendants, and each of them, have wasted and failed to preserve and protect the atmosphere Public Trust asset, and have caused and will continue to cause imminent injuries as described above, from increased greenhouse gas emissions, global heating, and adverse impacts to natural and other resources. 147. Defendants, and each of them, have injured Plaintiffs by failing to protect the atmosphere as a Public Trust asset. Needless to say, the government defendants don’t agree.  But instead of contesting the merits or challenging standing or asserting the political question defense in California, defendants sought something simple:  just a change of venue to Washington, D.C. Plaintiffs opposed.     The district court sided with the defendants in a nine-page opinion that addressed the relevant considerations point by point.  As set out by the Supreme Court, transfer is appropriate based upon an ‘individualized, case-by-case consideration of convenience and fairness.’  Opinion at 2 (citing Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 29 (1988)).  The relevant factors to be considered included:  (1) plaintiffs’ choice of forum, (2) convenience of the parties and witnesses, (3) ease of access to sources of proof; (4) local interest in the controversy; (5) familiarity of each forum with the  applicable law; and (6) relative congestion in each forum.  Opinion at 3 (citing Ctr. for Food Safety v. Vilsack, No. 11-00831 JSW, 2011 U.S. Dist. LEXIS 31688, at *18 (N.D. Cal. Mar. 17, 2011)). Without delving into each of the factors, a fair summary of the court’s view might be:  because the effects of global warming are felt equally by every citizen and the decisions directing the government’s response were made in Washington, there was no compelling reason to keep this case in California and there were good reasons to transfer the case to the District of Columbia.  It is not a very satisfactory analysis. While it is likely that climate change on the whole is bad, some will be advantaged by it (for example, farmers in Canada with longer growing seasons, or shippers that can use the Northwest Passage to the detriment of the Panama Canal); others will be disadvantaged (such as homeowners facing increased insurance premiums in hurricane-prone states, or asthmatics troubled by the particulate arising from more frequent wildfires caused by lack of rain).  To say that all will be affected equally seems plainly wrong. Nevertheless, the court made that point on several occasions to support its conclusion that the plaintiffs did not have an interest localized to the Northern District of California.  See Opinion at 4, 7, 8-9.   Conversely, to find out why the District of the District of Columbia was the proper forum, one needed to look at who the defendants were:  heads of regulatory bodies who resided in or near Washington and whose allegedly improper decisions were likely made there as well.  Opinion at 4, 5, 6, 7, 8.  This reasoning suggests that a plaintiff seeking to avoid transfer should assert his or her claim against the local representative of the federal agency or department.  Of course that would likely be met with a motion to dismiss for failure to join an indispensable party because an agency's local representative would not be the one making the decisions about responding to climate change.  Which further suggests that under this factor, a suit about federal government policies against the federal government is always most appropriate in Washington.  Such a rule sounds like a bad idea. But bad idea or not, the OCT plaintiffs are now in Washington.  Transfer has eliminated the possibility of an appeal to the relatively more liberal Ninth Circuit. Presumably, this was what inspired the motion to transfer. But it has also put the case into a more favorable news market offering better hours for prime time access to a decision.    A hearing date is not set but the case will be taken seriously. Already the National Association of Manufacturers has weighed in on the side of the government.  On the plaintiffs' side, they have drummed up support from nearly two dozen law professors and scholars to explain the application of the public trust doctrine. 1It may only be us but the youth plaintiffs do not appear terribly sympathetic. By the tender age of 16 they have the suffered the misfortunes of going hiking on Icelandic glaciers, visiting Patagonia in the company of Robert Kennedy, Jr. and traveling to Africa.  Complaint ¶¶ 30, 37, 45.

Climate Change Effects | Climate Change Litigation | Regulation

Plugging in Electric Vehicles May Raise IQs

November 11, 2011 21:22
by J. Wylie Donald
It's not Gone with the Wind or Harry Potter, but an article just published in the public health journal, Health Affairs, is worth picking up, if only to start you thinking.  In Six Climate Change–Related Events In The United States Accounted For About $14 Billion In Lost Lives And Health Costs, the authors (two senior scientists at the NRDC, two professors and a law student) grapple with the health costs of climate-change related events.   In the authors' words:  "The objective of this study was to provide a cost calculation of health effects associated with events related to climate change over the past decade. Similar events can reasonably be expected to occur more frequently in the future."  The report looked at six events (ozone pollution, heat waves, hurricanes, infectious disease outbreaks, river flooding, and wildfires) between 2000 and 2009 and estimated that the total health costs exceed $14 billion. It acknowledges that the individual events cannot be linked definitively to climate change and that the relationship between climate change and health is complex and variable.  The report's value, it is asserted, is that it provides information on "the types of health impacts that are projected to worsen under climate change."  Interestingly, it reports health linkages that are generally overlooked.  Increases in carbon monoxide poisoning are associated with hurricanes as a result of power outages and the use of generators.  Wildfires result in increases in asthma. While the report is a good start, in our view it attempts too much.  We have no doubt that everyone will agree that hurricanes and wildfires cost money and threaten health.  But just providing a sample of one hurricane season in one locale and one state's experience with heat waves hardly advances the ball (particularly when it is acknowledged that the studied event was a "high-end, but not extreme, event").  Much more useful would be to explain the variables that affect those health expenditures in each of the subject areas.  Still, one has to start somewhere and other researchers can pick up where this leaves off. The report acknowledges that it did not consider the health benefits of climate change.  We would like to point out one that may soon be more well-known:  the health benefits of the electric car.  And we are not talking about the benefits to your inner ear and auditory canal from the quiet.  Rather, the electric car may be the vehicle for making the nation smarter.   Many years ago engineers figured out that bonding a few organic molecules to a lead atom and adding it to gasoline could eliminate "knocking" in a car's engine. A billion dollar industry was born. Unfortunately, after the anti-knocking job was done, the lead continued on out the exhaust pipe and ended up on the side of the road. That was the end of it until public health specialists drew the connection between retarded cognitive development and other maladies and the use of leaded gas. It took the USEPA only 15 years (including an appeal to the D.C. Circuit) to achieve a total ban on lead in motor vehicle fuel in 1986. Now we are twenty-five years later. Lead is long gone from automobile fuel but health researchers are again focusing on the connections between retarded cognitive development and a host of other maladies and automobile exhaust.  This story is set forth this past Monday in a Wall Street Journal article, The Hidden Toll of Traffic Jams, by Robert Lee Hotz.  Mr. Hotz surveys the scientific literature from across the country and around the globe and points out the correlations scientists are finding between high levels of exhaust and lower IQs, anxiety, memory loss, attention deficits, and premature births.  This time the culprit cannot be lead. In fact, no one knows the identity of the specific etiologic agents.  But even without that information, one solution would be to knock down exhaust levels across the board. Enter climate change. Or more specifically, enter a response to climate change:  the electric car.   It is touted (somewhat misleadingly) as a zero emission vehicle. It has no tail pipe. Even when its emissions are acknowledged (those that go up the power plant stack), however, power plants are far more efficient and much cleaner than internal combustion engines. Hence there are far fewer emissions per mile traveled and the maladies correlated to exhaust invariably will decrease. Will this health benefit drive the adoption of electric cars? Certainly not by itself. Will it be a factor?  Only time will tell, but if leaded gas is any indicator, we will soon see health advocates pushing for charging stations and plug-n vehicles, and some of us will be smarter for it.

Climate Change Effects | Sustainability

Ceres and a Series of Serious Thoughts About the NAIC Climate Disclosures - Part I

September 15, 2011 20:42
by J. Wylie Donald
Ceres released last week the first analysis of the insurer climate change disclosures submitted to state regulators pursuant to the National Association of Insurance Commissioners rule.  The report is eye-opening.  The authors have combed through the disclosures of 88 insurance companies and offer thoughtful insights on, for example, investment practices, management structure and modeling.  Those seeking to advance their bottom line will find nuggets of information directly related to competitive advantage.  In this post, we outline the report and discuss its first recommendation regarding mandatory and public disclosures.  In subsequent posts we will address Ceres’ second and third recommendations. The report’s title is dry and daunting:  Climate Risk Disclosures by Insurers:  Evaluating Insurer Responses to the NAIC Climate Disclosure Survey.   Fortunately, it does not live up to the ominous desiccation foretold by the title.  We know from the get-go where this is going:  "This report documents this powerful industry's sluggish and uneven response to the ever-increasing ripples from global climate change, which could undermine both its own financial viability and the stability of the larger global economy."  Id. at 3. For those to whom Ceres and NAIC are unfamiliar, the former is a non-governmental organization composed of a coalition of investors, environmental organizations and other public interest groups, whose mission is to “integrat[e] sustainability into day-to-day business practices for the health of the planet and its people.”  The latter is the National Association of Insurance Commissioners, which in 2009 approved mandatory requirements for climate change disclosures for insurance companies, because "[a]s regulators, we are concerned about how climate change will impact the financial health of the insurance sector and the availability and affordability of insurance for consumers.  This disclosure standard will give regulators the information we need to better understand these risks."    NAIC later revised its requirements to make disclosure voluntary. Ceres's work is based on the 2010 disclosures of 88 US insurers filed in six states (mandatory:  New York, California, Pennsylvania; voluntary:  New Jersey, Oregon, Washington).  The report is set up in three parts.  Part 1 describes climate change risk and the need for disclosure.  "The changing climate will profoundly alter insurers' business landscape, affecting the industry's ability to price physical perils, creating potentially vast new liabilities and threatening the performance of insurers' vast investment portfolios." Climate Risk Disclosures at 9.  Part 2 is the meaty analysis of the report and addresses the following topics: Risk Perception and Management StructureRisk Exposure and ManagementFinancial EffectsLoss ModelingInvestmentsEmissions ManagementExternal Engagement Its goal is to set out “risk perceptions and management practices for handling climate change across the American insurance industry.”  Id. at 17.  While often couched in possibilities, the analysis raises numerous interesting issues. Part 3 is the Recommendations to Regulators.  There are three and we focus there.  First, Ceres recommends “implement[ing] mandatory disclosure annually, and mak[ing] survey responses publicly available."  Id. at 50.  We take no position on whether NAIC should require climate change disclosures and would be interested to read NAIC’s own evaluation of the disclosures and how they advance the goals of insurance regulators.  As for public disclosure, while we are perhaps more interested than most in these types of things, we are acutely sensitive to the issue of competitive advantage.  There will be winners and losers in the insurance industry as a result of climate change.  The winners will be those who, among other things, recognize correlated risks first, have more accurate models, and innovate better.  Requiring companies to give away their proprietary information may lead them not to generate it in the first place. And items leading to competitive advantage are all over the NAIC submissions. Harleysville Insurance Company reports that “over time the Company has witnessed the traditional tornado alley expand causing increased losses further east and toward the southeastern states." Id. at 24. "[A] handful of insurers discuss the ways their approach to establishing reserves, reinsurance coverage or capital market transfers have been adapted to reflect changing risk statistics or future scenarios where historic statistics do not illuminate future risk."  Id. at 32. Allianz is “developing products and services geared to address climate change, ... leveraging climate change research, and contributing to related public policy development."  Id. at 19. There are a lot of things that make a business succeed.  Intellectual capital is one of them.  Just as we would not expect businesses to give out greenbacks to passersby, why should their green ideas be treated differently?  Tomorrow we will look at Ceres’ second recommendation concerning shared resources.

Climate Change | Climate Change Effects | Insurance | Regulation


Flooding from Irene: Whither the Flood Plain?

August 30, 2011 20:50
by J. Wylie Donald
My train this morning usually continues to New York. Today it terminated in Philadelphia, a victim of the deluge delivered by Hurricane Irene. Amtrak explained: Most Northeast Regional service will operate south of Philadelphia, but no Acela Express, Northeast Regional or other Amtrak trains can operate north of Philadelphia to New York. As of early this Monday evening, about a half-mile of Amtrak right-of-way remained submerged near Trenton, N.J. As the water levels recede, Amtrak engineering forces will make repairs to the track and signal control infrastructure. Updates will continue to be provided and an estimate for restoration of full service south of New York is not yet available. Many attribute the recent spate of natural disasters (heat waves, droughts and wildfires in Texas, tornadoes in Missouri and Alabama, Hurricane Irene) to the effects of climate change. We reserve judgment. Climate change is about trends, not individual events. One trend we are watching closely is the status of flood plains. We dug up the Flood Insurance Rate Map for the Trenton train station. The Amtrak right of way mentioned above is in the 100 year flood plain. We weren't able to determine how many times it had flooded recently, but the mayor of nearby Lambertville noted that they have been flooded out 5 times in the last ten years.   The flood at the train station was a record, nearly seven feet above flood stage.  Id. And  a study out of the University of New Hampshire  reports New Hampshire has experienced 4 100-year floods in the last four years.  Some may discern a trend. Fortunately, we are not the only ones watching. FEMA is in the process of preparing a report on climate change impacts on the National Flood Insurance Program. Preliminary information indicates that some Special Flood Hazard Areas (the 100-year flood plain) will double in size and that by the next century the nation's flood plain will be 40%-45% larger.  Look for The Impact of Climate Change on the National Flood Insurance Program to be out this fall. FEMA currently does not directly address climate change in the NFIP, because its practice is to make its assessment based on the historical record.  But that does not mean communities and businesses cannot.  For example, a community may request that the applicable Flood Insurance Rate Map address future conditions.  44 CFR 64.3(a)(1).  Where business continuity planning is standard practice (and we hope that is everywhere) vulnerability assessments need to ask not only where is the flood plain, but where is it likely to be.  Many have been off to a slow start on climate change planning.  But, as with trains, late is better than never. View of Trenton Amtrak right of way (c) Times of Trenton

Climate Change | Climate Change Effects | Flood Insurance | Regulation

National Weather Service 30-Year Averages Confirm the Climate is Getting Hotter in the U.S.

August 4, 2011 19:36
by J. Wylie Donald
Half a degree doesn't sound like much. And it isn't, if you are talking about a baccalaureate. But in a world of climate change, a half a degree increase in Baltimore's average temperature combined with average temperature increases in all the lower 48 states is confirmation of what the scientists are telling us:  the planet is warming.  Thus, the National Weather Service's release on Monday of revised 30-year average temperatures gives some satisfaction, or at least Schadenfreude, to those trying to lead (or push) their organizations into proactively managing climate change. Or does it?  Here is how this news was reported in Tampa, Florida  "Some of the changes emerge from tossing out statistical peaks and valleys from the 1970s, the weather service says. A shift in instrument locations could explain more change. And the continued development around Tampa International Airport and Tampa in general could account for some of the warmer nights that helped push average temperatures higher for April through August. A slight shift in equipment location at Tampa International Airport could also influence the low morning readings, the weather service says. Or, the overall reason also could be changes in global climate, but that’s impossible to determine from readings at one location, the weather service says." So if this is all statistics, what is one to do?  You could instead get your weather news from Montgomery, Alabama, which reported on the same news: Updated theories of global warming and climate change predict a pattern of increasing temperatures. The theories are based on an increased amount of carbon dioxide in the atmos­phere leading to high tempera­tures. The shift in temperatures is more likely associated with the Pacific Decadal Oscillation, said Dr. Roy Spencer, a princi­pal research scientist at the University of Alabama in Huntsville. Spencer also has served as a senior scientist for climate studies at NASA's Mar­shall Space Flight Center in Huntsville. So which is it?  Statistics, decadal oscillation or climate change?  The statistics answer is easy to discern.  For Tampa, scientists cannot say that its temperature specifically is driven by climate change.  But when the whole country is changing, that is a different story.  Montgomery is a little more difficult.  I tracked down Dr. Spencer's webpage  and learned that he believes, "Climate change — it happens, with or without our help."  His research is into whether the climate change we are observing is natural or man-made.  He agrees that the climate is changing. This seemingly disparate information contains a valuable lesson.  Where there is no controversy or skepticism, it is easy to make choices of what to do.  Where controversy surfaces, however, to move forward, one needs to understand precisely what is controverted.  And often, of course, that will have to be done by degrees as understanding matures.

Climate Change | Climate Change Effects | Weather


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