Regulation

Hurricane Modeling Supports the Decision Not to Insure Hurricane Risks Rules the Maryland Court of Special Appeals

March 31, 2011 20:32
by J. Wylie Donald
"Catastrophic risk is different." So concludes an important opinion out of the Maryland Court of Special Appeals filed earlier this month.  In the case of first impression, People's Insurance Counsel Division v. Allstate Insurance Company, the court affirmed the primacy of models and business judgment in the writing of insurance, and further recognized that there is a "gaping difference between ordinary insurance risk and catastrophe risk." The case stems from the decision way back in 2006 by Allstate to advise the Maryland Insurance Administration (MIA) that it did not intend to write any new property policies in certain Maryland counties subject to heightened hurricane risk. As distilled by the court: "certain coastal areas bordering the Atlantic Ocean and the Chesapeake Bay presented an unusually high risk of loss in the event of a catastrophic hurricane. As a result, [Allstate] decided that it was no longer in Allstate's best economic interest to continue to write new property insurance policies in those areas." The MIA concluded that Allstate' business decision was properly made on "an obective basis and [was] neither arbitrary nor unreasonable." However, the state's public advocate, in the guise of the People's Insurance Counsel Division, concluded differently. Following a trip to Maryland's highest court, which confirmed the Division had standing to challenge the MIA's decision, the Division argued that Allstate's determination not to write property policies in certain geographic areas was arbitrary and unreasonable in contravention of Maryland Insurance Article § 19-107. Further, the Division argued that because Allstate had not shown that a hurricane would strike Maryland and that its rates were insufficient to carry that loss, the decision violated § 27-501. Section 19-107 To determine whether it wanted to undertake the risk of hurricanes along the Eastern Seaboard, Allstate retained Applied Insurance Research (AIR) to model the areas of the state and region that were catastrophe-prone, and those that were not.  It concluded that some or all of certain Maryland counties were at a substantially heightened risk of higher levels of hurricane damage than other areas. The model was explained:  "What it did, in order to get down to the zip codes, statistical level, generated the next year 100,000 times. That is, it's doing simulations of the next year, 100,000 times. And what they do in order to do that is they look at the last 100 years of meteorological data to try to come up with a probability of various hurricane strikes." In those 100,000 simulations AIR concluded that there would be eight hurricane strikes that would cause half a billion dollars in damage in Maryland alone. Because Allstate insured a substantial number of properties in these risky areas, it made the "business judgment that further growth at this time could jeopardize [its] anticipated long-term strength." The court quoted the Commissioner in holding that Allstate complied with the law:  "I conclude that Allstate's geographic designation of Hurricane Bands 4-6 had adequate factual support and, therefore, was not arbitrary or unreasonable. Allstate's hurricane bands were developed based on objective and reasonable factors, including modeled hurricane loss data, proximity to water and geographic contiguity. Through its use of the hurricane models, Allstate developed [Average Damage Ratios] ADRs at a zip code level. The higher the ADR, the higher the potential damage the area in the band is likely to sustain in the event of a catastrophic storm." Section 27-501 This section of the Insurance Article forbids an insurer from refusing a "particular insurance risk or class of risk" for "any arbitrary, capricious or unfairly discriminatory reason." The court first held that a decision to stop doing business did not address a particular individual or group of individuals; therefore, because Allstate's decision was "broad-based", section 27-501 simply did not apply. But even if it did, the modeling demonstrated that the decision was not unfairly discriminatory, arbitrary or capricious. The Division asserted that ""Allstate was legally required to show the probability of a catastrophic hurricane striking Maryland in order to justify its no-write decision."  The court was dismissive and characterized the Division's contention as "unreal". The issue faced by Allstate was very plain, syllogistic in fact:  THE ENTIRE EASTERN SEABOARD OF THE UNITED STATES IS AT RISK FROM HURRICANES.MARYLAND IS PART OF THE EASTERN SEABOARD OF THE UNITED STATES.THEREFORE, MARYLAND IS AT RISK FROM HURRICANES (capitals in original).  The court then went on to enumerate the details that the model considered such as historical hurricane reports, weather databases, and property values.  It came down firmly on the value of the model:  "Allstate's use of the AIR Hurricane Model V7.0 cranked out, zip code by zip code, predictive statistical data for 100,000 model years.  We are hard-pressed to understand exactly what more the Division could want." As to the Division's last argument (that prior Court of Special Appeals precedent required Allstate to demonstrate that its rate plan was insufficient to cover catastrophe losses) the court was scathing. Referring to the Division's argument as "fantasy analysis," it demonstrated that the precedent on which the Division relied suffered from a fundamental error in its understanding of the source materials and, as it "was wrong in 1987, ..., as it most assuredly was, it is still wrong 24 years later." The court concluded its analysis with a discussion of catastrophe risk.  It pointed out that for the usual risk, say fire or car accidents, insurers diversify their risk by taking on more insureds.  Where a catastrophic risk is present, however, taking on more insureds increases the risk to the insurer, rather than decreases the risk, because if the catastrophe strikes, all of the insureds will make a claim.  It concluded that catastrophic risk was "unique" and that case law that focused on individual insureds was completely irrelevant. People's Insurance Counsel is significant at a number of levels for those following climate change insurance issues.  First, the modeling data and results were unchallenged.  There are three dominant modeling companies (AIR, EqeCat and Risk Management Solutions) so the Division was not stymied here because Allstate's modeler had a lock on the market. More likely, it was recognized that while a different model might preserve coverage for a few zip codes, the models would not reach fundamentally different outcomes.  If the goal was to ensure that Allstate (and by extension all other insurance companies) could not abandon the front lines of hurricane risk, no model would show that Worcester County (on the ocean) would have a similar risk as Garrett County (at the headwaters of the Potomac). Businesses should take note.  In most businesses, profit is made at the margins.  Employing models to ascertain where the weather-related risks change their character could yield real monetary benefit - as Allstate demonstrated by giving up underwriting in only parts of some counties.   Second, AIR looked at historical weather records. It made no predictions about the future more severe weather called for in climate change models. This reluctance to face the future is not unique to insurance companies.  The Federal Emergency Management Agency takes the same approach in its analysis of flood plains.  We have written elsewhere concerning the head-in-the-sand mentality that afflicts many that are subject to altered climate change risks.  Catastrophe modeling is no different.  We await the case that tests the insurer's ability to rely not on what has happened in the past, but on what is predicted for the future. Third, there is (at the moment anyway) a great belief in the efficiency of the market in identifying the appropriate path for society.  The insurance markets are taking steps to halt the migration to the shore by determining not to insure it.  It remains to be seen whether governments will abide by those business decisions or force dislocations onto the market in order to preserve continued growth in hurricane-prone areas.  Maryland, for the moment, appears to be one state that is allowing the insurance market to shape the future of the shore.  As we have blogged before, other states (notably Florida), are not so laissez-faire.

Insurance | Regulation | Weather

Anticipated Cooling Tower Rulemaking: Preserving Aquatic Life at the Expense of Increased Carbon Emissions?

February 2, 2011 12:19
We’ve previously written in this blog concerning regulatory uncertainty and its impact on investment or growth of renewable energy.  One example of how this has recently played out is in the early retirement of Exelon’s Oyster Creek nuclear facility in New Jersey.  Setting aside any philosophical debate with regard to whether nuclear is a form of energy that should be lauded as a resource that generates no carbon dioxide emissions, we focus here on the issue of regulatory uncertainty, the dilemma that arises when an agency leans toward choosing one means of technology as a panacea to a potential harm to the environment, and the unintended impact of such regulation on another area of environmental concern.  Regulatory uncertainty and the potential increased environmental compliance costs of anticipated state and federal regulation forced the owners of Oyster Creek to agree to shut down the 645 MW nuclear facility in 2019, ten years before its renewed license to operate expires.  In April 2009, Exelon won a 20-year license extension for Oyster Creek.  Not all power plants are required to use cooling towers, let alone particular types of cooling towers.  Cooling tower regulations are currently being considered by the EPA and NJ DEP as a way to protect aquatic species in the rivers, oceans and lakes that provide cooling water to power plants.  A component cited by Exelon in its decision to close the plant early was the NJ DEP’s attempt to compel construction and operation of a cooling tower at Oyster Creek within seven years, which Exelon said would be cost prohibitive.  To what extent should a regulatory agency dictate the means or methods to be employed in achieving certain environmental results?  With regard to the federal scheme, rule 316(b) of the Clean Water Act has allowed power plant operators to use what is the “best technology available” to capture water for plant cooling purposes.  EPA’s rulemaking is expected to set significant new national technology-based performance standards to minimize adverse environmental impact.  Although the proposed rule has not yet been issued (it is expected in February 2011, to be followed by a final rule in July 2012), the EPA’s anticipated rule, coupled with the inability of plant operators to consider other factors (such as climate change, impact on water use, land use, and cost) may have unintended consequences.  After all, while requiring particular kinds of cooling towers on all existing power plants may benefit some aquatic life, the forced early retirement of multiple nuclear plants will also result in increased carbon emissions.  And, if predictions are true, rising sea levels associated with increased carbon dioxide levels will likely harm far more aquatic life as rivers become more saline, wetlands are drowned, and abandoned infrastructure falls into the sea.

Carbon Emissions | Regulation | Renewable Energy

Highest Court Decisions Affirm Beach Replenishment is Avulsion - a Key Development in a World of Rising Sea Levels

September 23, 2010 08:57
by J. Wylie Donald
Last December 9 was the height of coincidences.  Both the United States Supreme Court and the New Jersey Supreme Court heard oral arguments on the same day in beach replenishment cases.  The fortuity did not continue.  Stop the Beach Renourishment, Inc. v. Florida  was decided by the U.S. Supreme Court in June.  It took the New Jersey Supreme Court over three months longer to decide City of Long Branch v. Liu, where the opinion came down just this past Tuesday.  Nevertheless, both decisions affirmed that beachfront ownership law would be determined based on common law rules.  More significantly, the State's interest in control of the beaches was found preeminent. In Stop the Beach, the Supreme Court considered the following facts:  shorefront property owners in Walton County, Florida, for many years had enjoyed unfettered access to the warm waters of the Gulf.  As part of its efforts to preserve Florida's beaches, the State had renourished (pumped tons of sand) onto the homeowners' beach, and then claimed that land for Florida.  In legal terminology, the property owners' property line changed from the common law mean high water line to a statutorily established erosion control line.  In other words, beach front property now meant that you fronted on a beach, rather than fronted on the ocean.  The homeowners challenged this development as an unconstitutional "taking" under the 5th and 14th Amendments to the Constitution. While the Court could not come to agreement on the meaning of taking in this context (a plurality opinion with two concurrences), the Court was unanimous that this particular circumstance was not one.  It concluded (as had Florida's Supreme Court) that Florida's common law treated the creation of a beach by replenishment as an "avulsion" and under the common law, the Court concluded, homeowners did not acquire ownership rights to such lands, although they did acquire (as Florida conceded) certain other rights (such as access across and an unobstructed view).  In Liu the facts were less sympathetic.  The Lius' upland property had been condemned and its value had been set by a trial.  The Lius also sought, however, to be compensated for the value created when New Jersey's beach replenishment program deposited sand on the Lius' beach and created more land.  Here too New Jersey's highest court found that beach replenishment constituted an "avulsion" and that because the Lius never owned the land below mean high water, they could not own the land created when sand was deposited beyond mean high water, even if that land rose above the surface and severed the Luis's contact with the ocean. Although neither decision addressed the rising sea level problem brought about by climate change, they are very likely to figure prominently in future controversies arising as communities attempt to deal with the submergence of the shore.  Both appellate courts found that beach replenishment constituted an avulsion:  “a sudden and perceptible loss or addition to land by the action of water or otherwise.”  Liu, at 14, “sudden or perceptible loss of or addition to land by the action of the water or a sudden change in the bed of a lake or the course of a stream,” Stop the Beach Renourishment at 3.  Since the common law did not permit property boundaries to be changed by an avulsion, all that was necessary for a decision in favor of the governmental defendants was a finding that beach replenishment constituted an avulsion, which is what the courts held.  One can envision a number of ways how that conclusion may not be obvious.  The courts creating the common law never considered that massive pumps at the bidding of the State would move the seabed.  Nor was it contemplated that governmental entities would be able, at their discretion, to convert littoral properties to land-locked properties.  But be that as it may, this is the law of the land. And as such, communities at the shore can take much solace that they will be able to act to preserve their communities by establishing beaches around their boundaries before they are engulfed.  And who is to say that such beaches may not morph into sand dunes, or even sand walls.  And will the common law permit seawalls and revetments to be constructed on the new lands, converting the former beachfront properties, into beach-view properties, then dune-view properties and ultimately into seawall view properties. The final chapter of this saga is not yet written.  What remains to be seen is whether in the future the littoral property owners at the beach will be as ineffective against the power of the State, as the courtiers in the fable of King Canute were against the rising tide.

Climate Change | Legislation | Regulation | Weather

TransCanada renewable lawsuit scores a win in MA

June 11, 2010 09:33
It’s only been about three months since TransCanada Power Marketing Ltd. sued the Massachusetts Department of Public Utilities (DPU), its commissioners, and several other Commonwealth agencies, claiming that Section 83 of the Green Communities Act discriminates against out-of-state renewable energy projects in violation of the U.S. Constitution, but the case has already scored a win for TransCanada. This week, the DPU issued an emergency rule eliminating the in-state requirement from the regulation that mandates electric utilities buy their renewable energy from projects installed in Massachusetts or off-shore wind in the Cape Cod area.  The emergency rule came just 9 days after TransCanada filed a notice of dismissal “with prejudice” to drop its lawsuit against the three named individual commissioners of the DPU. Renewable energy industry insiders were buzzing with talk about this case at the 17th Annual New England Energy Conference in Providence, RI, Monday and Tuesday.  Rumors had it that Commonwealth lawyers and officials were anxious to settle with TransCanada to make this case go away.  And so the emergency rule issued on June 9th takes a major step in that direction.  In fact, the Boston Herald observed this week that the Legislature apparently suspected this provision was unconstitutional when the Green Communities Act was enacted two years ago because the act allowed the DPU to specifically strike down the provision in the event of legal action to challenge it. Without a court decision on the merits of the TransCanada case, however, the question remains how far a state can go in promoting in-state installations of renewable energy projects without running afoul of the Dormant Commerce Clause of the U.S. Constitution. Can a state survive a constitutional attack if it mandates in-state renewable installations in exchange for in-state qualifying renewable energy certificates? While it’s possible the federal court in Massachusetts might get a chance to decide this issue as part of TransCanada’s pending motion for a preliminary injunction, I expect that the rest of the case will get settled quickly as well and the court will not get a chance to issue a decision on the merits.  We will likely have to wait another day for the courts to answer the constitutional questions presented by renewable carve-out provisions.

Climate Change | Legislation | Regulation | Renewable Energy

16 States Back EPA in Suit Challenging Endangerment Finding

January 26, 2010 07:02
It has only been a month since an organization called the Coalition for Responsible Regulation, Inc. filed suit in the U.S. Court of Appeals for the District of Columbia Circuit challenging the U.S. Environmental Protection Agency’s endangerment finding and, already, 16 states have lined up with the EPA, seeking to intervene in support of the challenged regulation.   The challenged regulation, entitled “Endangerment and Cause or Contribute Findings for Greenhouse Gases under Section 202(a) of the Clean Air Act” (the “Final Rule”), was published in the Federal Register on December 15, 2009 and was issued by the EPA in response to the U.S. Supreme Court’s landmark decision in Massachusetts v. EPA, 549 U.S. 497 (2007).  The rules regulate emissions of greenhouse gases from new motor vehicles and engines.    In the Final Rule, the Administrator finds that “the body of scientific evidence compellingly supports” her conclusion that “greenhouse gases in the atmosphere may reasonably be anticipated both to endanger public health and to endanger public welfare.” She defines the resulting air pollution referred to in Section 202(a) of the Clean Air Act to be “the mix of six long-lived and directly-emitted greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O)), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfer hexafluoride (SF6).”  The Administrator concluded that the mix of greenhouse gases from transportation sources contribute to the climate change problem, which is reasonably anticipated to endanger public health and welfare.   The Final Rule triggers the EPA’s statutory duty to promulgate regulations establishing emissions standards for motor vehicles covered by Section 202(a)of the Clean Air Act.   Noting that the Court’s action on the petition for review will affect the public health and welfare of their residents and will also affect a host of global warming impacts that the proposed intervenors are suffering, the following states seek to intervene in support of the EPA: Commonwealth of Massachusetts and the States of Arizona, California, Connecticut, Delaware, Iowa, Illinois, Maine, Maryland, New Hampshire, New Mexico, New York, Oregon, Rhode Island, Vermont and Washington.  The City of New York also filed in support of the EPA.   Notably absent from the Motion for Leave to Intervene as Respondents is the State of New Jersey, from which EPA Administrator Lisa Jackson came as the prior Commissioner of the New Jersey Department of Environmental Protection. New Jersey, which just last week inaugurated new Republican Governor Chris Christie, who unseated Democrat Jon Corzine, formerly supported climate change litigation and was among the states challenging the EPA in Massachusetts v. EPA.  The following states were not in the Massachusetts v. EPA case but joined the fight now in support of the regulations: Arizona, Delaware, Iowa, Maryland and New Hampshire.

Carbon Dioxide | Climate Change | Legislation | Regulation | Greenhouse Gases

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