Insurance

The Top 7+ Climate Change Insurance Topics for the New Year

December 31, 2009 02:38
by J. Wylie Donald
Crystal balls are preferred by some over tea leaves; others resort to reading entrails. We all seek some assistance as we peer into the future at the cusp of a new year and a new decade. I am no exception, my divining rod: an imprecise dialog with peers and the ever-probing investigation of Google. So here goes a look at coverage in a world of climate change in 2010. 1. The lead story in this area will have to be a decision in Steadfast Insurance Company v The AES Company. In July 2007 Steadfast brought suit against its insured to ascertain coverage obligations in the climate change lawsuit, Native Village of Kivalina v ExxonMobil Corp. Steadfast moved for summary judgment last March; the motion is fully briefed. A decision should be forthcoming. Regardless of how it comes out (unless there is no decision), the ruling will be significant, if only because it will be the first climate change coverage decision. 2. Will the beach pools continue to avoid disaster? Since Katrina in 2005, United States hurricane seasons have been relatively tame. After predicting an above average season last year, meteorologists had to backtrack and acknowledge a below average season. At some point, the averages will catch up and a Category 5 storm will make landfall here. When that happens we will learn whether the post-loss funding mechanisms will fly, or whether a different legislative fix (even a federal fix) will take over. 3a. New products are the name of the game. Insurance is no different. The Property and Casualty carriers have been rolling out green building coverages focused on certification, re-building upgrades, and recycling. Carbon sequestration projects have found cover. Policies covering carbon credits are less apparent. Expect more innovation, but also expect some re-tooling as the carriers respond to more and better information about what they are insuring, and what insureds want. 3b. Don't take my word on this. Dr. Evan Mills of the Environmental Energy Technologies Division of the Department of Energy has annually and comprehensively assessed insurer responses to climate change. Let's hope there continues to be funding for his important work. 4. The National Association of Insurance Commissioners last March established requirements for insurers to disclose climate change risk. The first disclosures are due on May 1. If past history is any metric, the quality of the disclosures will be all over the map. One can be sure the SEC and state regulators will be paying close attention. The SEC has received numerous petitions seeking the same types of requirements for other industries. State regulators are concerned that climate change threatens the viability of insurers. 5. The Carbon Disclosure Project is on an asymptotic roll. It started slowly in 2003 but since 2006 the CDP has grown at an ever-increasing clip (2204 in 2008, up from 1449 in 2007, which is from 922 in 2006). And it has real heft behind it: "on behalf of 475 institutional investors, holding $55 trillion in assets under management and some 60 purchasing organizations such as Cadbury, PepsiCo and Walmart." The CDP reports annually on corporate climate change statements; its cutoff date for the 2009 report was February 1. Companies wishing to join the ever-increasing number of disclosing entities in 2010 will have to move smartly. (For those pondering the link to insurance, the NAIC rule accepts CDP disclosure.) 6. The climate change risk management dialog will become more sophisticated. Climate change will be a disaster for some; for others it will be a golden annuity. Assessing those risks and opportunities will be key to commercial success. As an example, the cement industry is one of the major identified sources of carbon emissions. Yet if adaptation proceeds, cement is going to be a primary element in the "armoring" of the coast. But does one build in a developing country and export the cement with accompanying political risk and transportation cost, or does one make cement where it will be used. Figuring out the successful business plan will not be simple and risk managers and their consultants will have a lot to keep track of. 7. The absolute carbon dioxide exclusion will remain only theoretical. Insurers will continue to rely on their pollution exclusions to stave off any coverage liability for carbon dioxide claims. Don't expect a different approach until the pollution exclusion gets nicked. If you've gotten this far, you deserve a holiday (I find this stuff interesting, but many do not). So take tomorrow off. Contemplate the future and then grab it. It is the only one we have. Best wishes for 2010.  

Climate Change | Insurance

Needed: Action at Copenhagen

December 6, 2009 18:05
by J. Wylie Donald
What is it about Denmark?  Several hundred years ago a Danish prince couldn't make up his mind about a certain King Claudius and there was hell to pay.  Tomorrow, the leaders of the world (or their representatives) will gather in Copenhagen, and, if everything I read is correct, won't be able to make up their collective minds and there will be hell to pay.   Humankind has set loose on the world's stage a specter, Climate Change, impossible to grasp, subject to many disagreements, and of violent character.  To tame it, an army of diplomats gathered and played out Scene I, where the Kyoto Protocol was conceived, delivered, and is now nearing its final rest.  Now the curtain rises on Scene II in Copenhagen, where all await bold and decisive action.  Or even any action.  Let's look at one sector of the world's economy:  insurance.  In the run-up to Copenhagen, Allianz and the World Wide Fund for Nature teamed to produce a report that identifies four tipping points, where rapid change can be expected with just a small additional change in global average temperatures.  See Allianz SE, World Wide Fund for Nature, Major Tipping Points in the Earth's Climate System and Consequences for the Insurance Sector (November 2009).  Those tipping point scenarios are: 1. rising sea levels and accompanying flooding, with a heightened increase in the Northeast United States; 2. droughts as the Indian monsoons falter, 3.  die-back of the Amazon rainforest, and 4. a shift to a very arid Southwest North America. The Tipping Point report identifies the impacts each of these scenarios will have on insurance.  For example, for rising sea levels "[t]he critical issue is the impact that a hurricane in the New York region would have.  Potentially the cost could be 1 trillion dollars at present, rising to over 5 trillion dollars by mid-century.  Although much of this would be uninsured, insurers are heavily exposed through hurricane insurance, flood insurance of commercial property, and as investors in real estate and public sector securities."  There are several important points in these three sentences.  First, the size of the risk:  trillions of dollars.  Second, the insurance sector has a substantial exposure.  Third, much of the loss would be uninsured, meaning that the non-insurance sector (everybody else?) would bear the bulk of the loss. We blogged last month about the amount of money washing around in insurance company coffers - $4 trillion in premium and nearly $20 trillion under management.  Climate change threatens all of that.  If hurricanes and floods drive loss ratios up, insurance companies will falter.  If real estate investments and public infrastructure are literally under water, the financial debacle will make the demise of Bear Stearns and Lehman Brothers (mere tens of billions of dollars) seem quaint.  Accordingly, insurance companies (and other businesses) are looking for action at Copenhagen so they can start planning where to put their assets and make their business plans. That is why we need action at Copenhagen.  Business and industry need to plan; they can't do that if our leaders do not lead.  To paraphrase that Danish prince, "to lead, or not to lead, that is not the question."

Climate Change | Climate Change Litigation | Insurance | Weather

AbCDE - Thoughts on an "Absolute" Carbon Dioxide Exclusion

October 27, 2009 17:28
by J. Wylie Donald
We trust that those of you following climate change litigation have heard the veritable tap dance of decisions emanating out of the federal courts in the last month.  First, Connecticut v. American Electric Power was reversed by the Second Circuit.  That was followed by the District Court for the Northern District of California dismissing Native Village of Kivalina v. ExxonMobil and rejecting the Second Circuit’s analysis.  The Fifth Circuit, not to be outdone, reversed the Comer v. Murphy Oil decision, but also provided a special concurring opinion where the judge advised that he would have affirmed on alternative grounds.  All of these cases are thoroughly discussed in the blogosphere. What has been less thoroughly ventilated, however, are the implications for insurance coverage for climate change liability claims.  We have discussed before the Steadfast v. AES coverage case filed in Virginia where the insurer seeks to avoid coverage for the Kivalina suit.  We thought originally that Kivalina’s dismissal might have made that suit go away.  However, with two climate change suits now headed back to the trial court (barring further appeal), we will be surprised if Kivalina is not appealed, and further surprised if Steadfast does not provide some law on climate change coverage. One subject that will not be addressed in Steadfast, however, is the efficacy of an "absolute"1 carbon dioxide exclusion.  Yes, you heard that correctly:  the AbCDE.  I regularly ask my insurer colleagues about their thinking on this and just as regularly am told that it is not in the works or even discussed.  The spoken reason is fairly straightforward:  if carbon dioxide is a pollutant under the terms of the policy, and damage from pollution is excluded, then claims arising from carbon dioxide emissions are already excluded by the so-called absolute pollution exclusion and the AbCDE is not needed.  The unspoken reason reflects the converse:  if a carbon dioxide exclusion is necessary, it must be the case that a policy without such an exclusion provides coverage for carbon dioxide liability - even if it has a pollution exclusion.  From an insurer’s perspective, that could be an expensive outcome and suggests a reason to avoid implementing the AbCDE.  History and policyholder experience suggest, however, a different outcome.  Many will recall the time when coverage for asbestos-related loss was hotly debated.  Where insurers lacked express asbestos exclusions, they sought refuge in pollution exclusions.  Success was mixed.  The New York Court of Appeals’ decision in Continental Casualty Co. v. Rapid-American Corp., 593 N.Y.S.2d 966 (N.Y. 1993), is typical.  Although the court concluded that asbestos could be a pollutant, irritant or contaminant within the meaning of the liability policy, it determined the policy’s pollution exclusion to be ambiguous in context and coverage for asbestos loss was found.  Ultimately, the insurance industry recognized the solution to its asbestos problems and decisions like Rapid-American was to adopt universally what is referred to by some as an absolute asbestos exclusion.  Just as with asbestos, there are infirmities in the pollution exclusion as applied to carbon dioxide (such as the doctrine of reasonable expectations, whether carbon dioxide is reasonably understood to be an irritant or contaminant, whether an agency’s classification of carbon dioxide as a “pollutant” has any relevance to a contract between two private parties, among others).  Indeed, one state supreme court has found that exhaled carbon dioxide was not a pollutant, and thus was not excluded by a comprehensive general liability policy’s absolute pollution exclusion.  Donaldson v. Urban Land Interests, Inc., 564 N.W.2d 728, 732 (Wis. 1997).  Unless carbon dioxide liability suits disappear (and the last month is not auspicious in that regard), it is inevitable that more coverage disputes will unfold and that policyholders will secure coverage victories in some cases.  Against the backdrop of those victories, can it be doubted that a carbon dioxide exclusion will take shape? 1We note that the term “absolute “ is somewhat of a misnomer for any exclusion.  A valuable discussion of this can be found at Ira Gottlieb, The Decline of the So-Called ‘Absolute’ Pollution Exclusion, Mealey’s Litig. Rep. (Feb. 12, 2002).

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