Weather

A Tale of Two Deductibles: Post-Tropical Cyclone Sandy is Not a Hurricane

November 3, 2012 06:26
by J. Wylie Donald
You've just weathered a post-tropical cyclone.  Your garage is flattened.  Do you have a hurricane deductible?  Or will your regular deductible apply?  The answer can be worth thousands of dollars as a hurricane deductible is not a fixed amount but is calculated based on a percentage of your home’s insured value.  These questions loom large as the process of recovery from what-was-at-one-time-known-as Hurricane-Sandy gathers steam and homeowners get the lights back on.  The news services and trade press have been all over this topic in the last few days with the governors of New York, New Jersey, Pennsylvania and Connecticut (as well as their Departments of Insurance) weighing in and advising that hurricane deductibles cannot be applied because the storm that started in the south as a hurricane, was no longer a hurricane when it arrived in their respective states. Would that it were so easy.  All you need to determine the meaning of your policy is the ipse dixit of the governor.  Not quite. What actually was going on was this:  the governor was getting advice from his department of insurance, which in turn had reviewed the weather reports and the hurricane deductible form or regulation that had been approved months or years ago.  New Jersey for example issued an executive order, which referenced the applicable regulation.  N.J.A.C. 11:2-42.7 provides:  "This deductible applies, as described below, in the event of direct physical loss to property covered under this policy, caused directly or indirectly in the event of a hurricane named by the National Weather Service or its successor from which sustained hurricane force winds of 74 miles per hour or greater have been measured in New Jersey by the National Weather Service (regardless of whether the sustained hurricane-force winds reach the risk insured under the policy) and shall replace any other applicable deductible in that event.” New York hasn’t codified its hurricane deductible rule and the policy language very much matters.  In the case of one insurer in New York, for example, for a hurricane deductible to apply, a number of things are necessary.  One needs A windstorm of tropical origin; Winds of 74 miles per hour or greater;Those winds must by confirmed by the National Weather Service at a landfall in specified counties.  Because Sandy could not muster 74 mile per hour winds as it entered New York, the hurricane deductible could not be applied.  But suppose the winds had reached 74 mph, what then?  It gets complex fast.  First, according to NASA Sandy packed tropical storm force winds across almost 1000 miles.  The hurricane deductible under this insurer’s policy applies to any insured property “regardless of [its] specific location.”  So, all that is needed is a trace of a hurricane in Montauk at the tip of Long Island and the good citizens of Albany could be facing hurricane deductibles for whatever windstorm loss occurs as the tropical storm ultimately demises, regardless of how violent the winds were (or weren’t).  Second, the deductible applies 12 hours before the hurricane gets there and “ends 12 hours after a hurricane …” – whatever that means. Third, maybe you don’t care about the hurricane deductible because your policy is only triggered by a Category 2 storm or requires that the hurricane force winds be within your county.  Fourth, or maybe you are at the opposite end of the spectrum and your policy applies the deductible if hurricane force winds are in any county in New York, not just coastal counties, or worse, if hurricane force winds are in a contiguous state. The point is that the terms of your policy matter and they may vary widely.  The Department of Financial Services in New York put together a table outlining all the permutations of coverage. We assume that one is likely to have to pay for the differences where more risk is shifted to the insurer. And these wide differences can get even wider as one changes states.  Maryland, for example, requires by statute that the hurricane deductible may only apply “beginning at the time the National Hurricane Center of the National Weather Service issues a hurricane warning for any part of the State where the insured's home is located and ending 24 hours following the termination of the last hurricane warning issued for any part of the State in which the insured's home is located.”  Md. Insurance Code § 19-209(b).   In plainer English, the hurricane warning has to be for the county where your home is, not just any place in Maryland.  (With regard to Sandy, the Maryland Insurance Administration echoed what the governors were doing.  Bulletin 12-24 advised that hurricane deductibles would not apply because "The National Hurricane Center of the National Weather Service did not issue a hurricane warning for the State of Maryland.")  Florida, as might be expected, has its own rules.  A hurricane deductible can only apply per calendar year, and can be a fixed amount, or 2%, 5% or 10% of the home’s value.  The hurricane period is extended out to 72 hours after the last hurricane warning.   Hurricane deductibles are ubiquitous but they are not all the same.  Even where the language is mandated by state law, insurers can always provide more coverage than is required.  You should check that, but also check the premium. Florida’s hurricane deductible popped up after Hurricane Andrew in 1992.  Its calendar year requirement was enacted after Charley, Frances, Ivan and Jeanne wreaked their havoc in 2005.  Connecticut revised its hurricane deductible law following Hurricane Irene.  The meteorologists tells us Sandy was a unique megastorm: a tropical storm, combined with a winter storm, combined with frigid Canadian air, combined with a high tide.  Unique or no, we expect revisions to state hurricane deductible laws as a result. 

Insurance | Legislation | Regulation | Weather

Tough Love: Florida Continues to Improve Its Hurricane Coverage But Will It Be Enough?

September 8, 2012 21:03
by J. Wylie Donald
We have been rather tough on Florida and its insurer of last resort, Citizens Property Insurance Corporation, over the years (not that they pay any attention to climatelawyers.com).  But Citizens has deserved it. Here is what its president, Barry Gilway, has had to say about the current state of affairs: Citizens is close to being able to cover a major hurricane, the kind that strikes once every 100 years. ... Citizens has the ability to pay $19.5 billion in claims – close to the roughly $22 billion maximum expected damage from a 100-year storm. But more than $5 billion, or about a fourth of the claims-paying funds, are from loans that would have to be paid back.   Close to being able to cover?  Close to the maximum expected damage?  Loss payments to be covered by loans?  Not the most fiscally conservative program on the planet and certainly not one that would be approved by any insurance regulator that wanted to keep her job. Tough love coming from somewhere though is having an effect.  This year continues big fiscal change at Citizens, demonstrated again just this past Thursday, when the Florida Office of Insurance Regulation (OIR) 1) announced a significant depopulation (i.e., transfer of policies) at Citizens, and 2) tentatively approved a proposal for low-interest loans to private insurers.  This follows steps by Citizens to pursue a vigorous reinsurance program, cede the largest catastrophe bond ever placed, and restrict its obligations by dropping coverage for carports and screened enclosures, limiting personal liability coverage and raising deductibles.  Citizens has also taken a lot of heat for conducting reinspections of homes claiming wind-storm mitigation features qualifying for premium discounts.  When the features don’t satisfy the inspectors’ standards, the discounts are removed, an approximately one billion dollar boost to the bottom line.   Depopulation is the Florida Legislature’s term.  Under that authority, 150,000 policies were just approved for removal from Citizens, roughly ten percent of the 1.4 million policies provided by Citizens. But depopulation is not mandatory.  Instead, the Florida Legislature settled on incentives to convince private insurers to step in. A private insurer can get up to $100 from Citizens’ for each risk the insurer takes on.  F.S.A. 627.3511(2).  Perhaps more importantly, the insurer can be excluded from assessments for the next three years.  F.S.A. 627.3511(3).  Mandatory ssessments, for those who don’t recall, are the secret sauces relied upon in Florida to balance the books in the event Citizens’ resources are not sufficient to pay claims.  One has to imagine that the reduced coverages and rising rates for Citizens’ policies may be of moment in a policyholder’s decision to shift insurers.  And it is the policyholder’s decision; he or she does not have to agree to leave Citizens.   As for the low-interest loans, this alternative route to depopulation is being pushed by insurers and their investors.  They seek “surplus notes” (last-to-get-paid instruments) from Citizens and guarantees of premium.  In exchange, the companies would commit to: • Renew the assumed policies for at least 10 years after the expiration of the current policy term.• Limit rate increases, for renewal offers from January 1, 2013, through January 1, 2016, to no more than 10 % per policy per year (consistent with Citizens' current 10% glidepath).• Provide substantially the same coverage for the first three years as that provided by Citizens. All of these may be steps in the right direction but caution is still the word.  First, Citizens is subject to a rate increase cap of 10%.  Media advisories issued by the OIR indicate that Florida insurers seeking rate increases in 2012 were looking for increases in excess of 17% (Universal – 22%, Cypress – 17.7%, Sunshine State – 17.8%).  Even if someone agrees to depopulate himself because rates are better at the new insurer, there is no guarantee they will remain better.  One researcher has written: "Over the past five years, indeed, nearly all “depopulated” policies have ended up back in Citizens and as liabilities for Florida’s taxpayers."  Second, Florida’s insurance market is substantially a world unto itself.  A presentation to the Cabinet by the OIR shows this clearly (at 3).  Citizens has 24% of the coverage, other Florida domestic carriers 60% and non-domestic carriers have 16%.  That lack of diversity should give one pause.  Over 80% of the coverage is written by Florida companies.  Tough love is effecting change in Florida.  It remains to be seen whether it will be enough.

Insurance | Legislation | Regulation | Weather

Storm Surge in Your Lobby: You Should Have Been Thinking About Hurricane Isaac Months Ago

August 28, 2012 07:43
by J. Wylie Donald
12 feet.  Water that deep comfortably inundates the front office's front door and floats the boss's desk.  And that is the predicted maximum storm surge for coastal Louisiana and Mississippi as Hurricane Isaac bears down.   So there are likely to be a few problems in that part of the country by the time the sun goes down this afternoon.  What can be done?  At this late hour, very little unfortunately, other than heading for the hills; here the adage “an ounce of prevention is worth a pound of cure” says it all. Other than sand bags and plywood sheeting what preventive steps have some taken?  We’d like to focus on some things lawyers and businesspeople can address ahead of time:  modeling, insurance and contracting. Modeling – Besides wreaking record havoc, Hurricane Andrew in 1992 was the coming of age for catastrophe modelers. As reported by Business Insurance last week, when AIR Worldwide reported an estimated $13 billion in damage to its clients following the storm's passage, reaction ranged from “skepticism to outrage.”   Now modeling is big business and well accepted.  Indeed, modeling was approved by the Maryland Court of Appeals as an appropriate way to make business decisions in January of this year.  See People's Insurance Counsel Division v. Allstate Insurance Co., 36 A.3d 464 (Md. 2012). There is no reason to believe that Maryland’s lead would not be followed elsewhere. Today the public can get the benefit of some of the modelers’ insight in email alerts from companies’ such as AIR, or simply downloading them from the internet.  Those following Hurricane Isaac were able to learn that its ultimate effect was unsettled:  Isaac reaching hurricane status tonight leaves 24 hours of time for additional development prior to landfall; within that window, Isaac could reach Category 2 intensity. How much stronger Isaac will become will depend in part on the storm's track—that is, how much time it will spend over the warm waters of the Gulf of Mexico.  Further adding to the uncertainty around Isaac’s forecast intensity is the fact that the storm will be moving over some of the warmest waters it has encountered to date, so a period of rapid intensification that leads to even stronger winds cannot be ruled out. Subscribers to services offered by modeling firms can assess their exposures long before a hurricane makes landfall and take steps to diversify or minimize risks, can optimize their response to a looming hurricane by shifting production or scheduling a shutdown, and can make time-critical decisions as the catastrophe unfolds with the best data available concerning not only the storm’s effect on one’s own facility, but on the infrastructure and other plants on which one’s facility depends. Including such modeling in business planning leads to improvement of the bottom line. Insurance – It is well-documented that insurers don’t particularly care for flood risk, including storm surge.  Following Hurricane Katrina dozens of cases sought insurance coverage for storm surge. The courts were not sympathetic; most found flood exclusions and anti-concurrent causation clauses valid and applicable. For example, where homeowners did not purchase flood insurance through the National Flood Insurance Program after being told by their carrier “Your policy does not cover flood loss. You can get protection through the National Flood Insurance Program,” the Fifth Circuit affirmed the trial court’s ruling and stated, among other things, “The omission of the specific term "storm surge" does not create ambiguity in the policy regarding coverage available in a hurricane and does not entitle the Leonards to recovery for their flood-induced damages.”  Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419, 438 (5th Cir. 2007).  Commercial insureds fared no better.  E.g., Northrop Grumman Corp. v. Factory Mut. Ins. Co., 538 F.3d 1090, modified, 563 F.3d 777 (9th Cir. 2008). All of which is not to say that flood coverage is not available, but one has to actively seek it out, and pay for it.  This has important implications for supply chain coverage because if one's policy does not cover flood, and one's key supplier (scheduled under the contingent business interruption coverage) is shut down (as happened to many last year with Thailand's epic flooding), then there will be no coverage.  In other words, flood risk must be assessed at all relevant locations, not simply the insured's locations.  Contracting away risk – Considering storm surge, one researcher has written:  "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."  Ben Strauss et al., Surging Seas 4 (Mar. 14, 2012).  We saw just above that insurance may not be available for a storm surge.  Is there any other path to recovery?  Some that have purchased properties that have subsequently suffered flood damage have pursued their transaction professionals for the loss based on the theory that there should have been some disclosure.  They have had some success.  See, e.g., Perri v. Prestigious Homes, Inc., Docket No. A-0403-10T1 (N.J. Super. Ct. App. Div. Jan. 13, 2012) (suing broker for flood damage); Stonacek v. City of Lincoln, 782 N.W.2d 900 (Neb. 2010) (suing realtor, developer, engineer and city for ensuing water damage from flood); Loya v. Howard Hanna Smythe Cramer Co., 2009 Ohio 448 (Ohio Ct. App. 2009) (suing realtor for ensuing water damage from flood); Potter v. First Real Estate Co., 844 So. 2d 540 (Ala. 2002) (suing realtor based on flooding); Clay v. Walden Joint Venture, 611 So. 2d 254 (Ala. 1992) (referring to suit against realtor for flood damage).  It is relatively easy, however, to inoculate oneself against that kind of suit:  make the disclosure in the contract.  Realtors and sellers in Norfolk, Virginia apparently already do that. For a more detailed discussion see J. Wylie Donald, Getting Ahead of Storm Surge, Especially in an Era of Climate Change. Sand bags and plywood sheeting are irreplaceable as a hurricane roars in.  Maybe one should start including other preventive steps as equally necessary in order to avoid the proverbial several pounds of cure.

Flood Insurance | Insurance | Rising Sea Levels | Weather

Climate Change Challenges the Republican Convention

August 26, 2012 21:44
by J. Wylie Donald
When the Republican National Committee made the decision to call off Day 1 of the Republican Convention as Hurricane Isaac threatened the Gulf littoral, some thought it was an appropriate comeuppance for Republican obstruction of climate change legislation. We won't pass such judgments.  Our focus here is all about addressing climate change; we leave it to others to assess the blame. What we have noticed, however, is a rising swell of concern in the electorate about climate change, which might start to cause  the Republicans some concern.  To be sure, this is only anecdotal, and filtered through climatelawyers.com's prism.  Still, sometimes it is meet to consider other viewpoints. We start with a Superfund site community meeting we attended a few months ago.  The site is near the ocean and one citizen asked whether the proposed remedy considered rising sea levels. EPA's answer was non-commital.  We next stopped in at a public meeting hosted by the Maryland Public Service Commission to consider electric service reliability. The citizenry turned out en masse to excoriate Baltimore Gas and Electric. Overflowing the hearing room, they questioned BGE's ability to handle the increasingly more severe weather (record blizzards in 2010, Hurricanes Irene and Lee in 2011 and the June 29, 2012 derecho - a new storm word in most vocabularies).  We took away a new thought:  extreme weather can trash not only your facilities; it can also trash your reputation if you are not prepared to deal with it.  And this is so whether one believes climate change is the cause of the problem or not. And what do we know about extreme weather? National Geographic delivered a frightening cover story on the subject in the September 2012 issue. We can't do justice to the article here but note a few unequivocally disturbing facts:  "As the oceans warm, they're giving off more vapor.  ... During the past 25 years satellites have measured a 4 percent average rise in water vapor in the air column.  The more water vapor, the greater the potential for intense rainfalls." This followed a description of the "once-in-a-millenium" flood in Nashville in 2010, which received over 13 inches of rain, more than twice the previous record. And Nashville wasn't alone; the article mentions record floods in Rio de Janiero. Pakistan and Thailand. "Extreme events ... are happening more frequently than they used to." From floods to droughts to heat waves, "Losses from such events helped push the cost of weather disasters in 2011 to an estimated $150 billion worldwide, a roughly 25 percent jump from the previous year."  These losses are characterized in the article by the Reinsurance Association of America as "extraordinary."  More ominously:  "The past is not prologue to the type of weather we're about to see." The article concludes that climate change is part of the cause of this demonstrably increasing extreme weather. National Geographic's circulation is about 5 million monthly in the United States. Query weather that means 5 million voters that believe something ought to be done about it? Extreme weather is not the only climate change effect that is impacting individuals. The News Journal, "serving Delaware daily since 1871," ran a 3-part front-page series last Sunday, Monday and Tuesday on the effects of climate change on Delaware and Maryland. One can look at the predictions of Delaware's losses in the next century:  • All of Delaware’s 73,400 acres of tidal wetlands, and 98 percent of its tidal marsh • Up to 15,000 Sussex County homes or businesses; 18,000 statewide, including 5 percent of identifiable commercial properties. • 44 percent of the state’s parks, refuges, conservation areas and otherwise protected land. • 5 percent of roads and bridges, including 6 percent of evacuation routes. • 6 percent of railroad lines, including areas around Wilmington’s Amtrak station. Or one can look at the effects that are being felt now:  A farmer near Milford is watching salt-water brine kill his crops a mile inland from Delaware Bay. Homeowners in Kitts Hummock have been told by the State that the beachfront community should "go back to nature" "it's not cost-effective to save." The Blackwater National Wildlife Refuge in Maryland is losing an acre a day to erosion and inundation. The salt marsh habitat is, or is becoming, open water. James Island has lost 160 acres to Chesapeake Bay. Smith Island, one of two inhabited islands in the bay, is likely to be entirely submerged should sea level rise another foot. The series notes: "those who don't see or feel the weight of the evidence are finding the facts harder to ignore."  The News Journal, the paper of record in Delaware, thinks climate change is worthy of the front page three days running. The smart money is on those - Republican or Democrat - who have a plan to address it; those whose plan is to deny it are going to get wet, or worse. 

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

Opening Day: CAT Bonds, Climate Change and the 2012 Hurricane Season

May 31, 2012 20:54
by J. Wylie Donald
Tomorrow is June 1,  the official start of the Atlantic Hurricane Season, which is predicted by NOAA to be near normal. It comes almost as an afterthought this year because already we have had two named storms.  In mid-May Tropical Storm Alberto appeared and quickly disappeared.  It was followed shortly after by Tropical Storm Beryl, which made landfall at Jacksonville, Florida with record winds for a May storm.   Some undoubtedly have the view that the season's early arrival is further evidence of climate change.  That conclusion may be premature.  According to a report by the Miami Herald,  single named storms in the pre-season are not that unusual, but to have two, that has happened only thrice in the 150 years of official recordkeeping.  The science too does not support increased frequency of tropical storms as a result of climate change.  In a 2010 article, Tropical cyclones and climate change, Dr. Thomas Knutson with many others set forth what they perceived as the state of the science: Frequency. It is likely that the global frequency of tropical cyclones will either decrease or remain essentially unchanged owing to greenhouse warming. .... Current models project changes ranging from −6 to −34% globally, and up to ±50% or more in individual basins by the late twenty-first century.Intensity. Some increase in the mean maximum wind speed of tropical cyclones is likely (+2 to +11% globally) with projected twenty-first-century warming, although increases may not occur in all tropical regions. The frequency of the most intense (rare/high-impact) storms will more likely than not increase by a substantially larger percentage in some basins.Rainfall. Rainfall rates are likely to increase. The projected magnitude is on the order of +20% within 100 km of the tropical cyclone centre. This may not be nearly as dire as some have suggested, but we point out that ignoring a substantial increase in the frequency of storms like Hurricanes Katrina and Andrew is done at some peril.  People in harm's way are paying attention and using this kind of analysis to make decisions on how to insure the billions of dollars of at-risk property in Florida.  We have written before of the "life on the edge" of Florida's insurer of last resort, Citizens' Property Insurance Corporation.  In trying to get off the edge and get closer to financial stability, Citizens this spring made the insurance record books when it became the ceding insurer on the largest reinsurance catastrophe bond1 ever placed:  $750 million.  So where does climate change fit in?  The CAT bond's offering document doesn't mention climate change at all.  But one should not be fooled.  The modeler for the bond is AIR Worldwide.  AIR is all over climate change risks.  In fact, just this March AIR published a literature review regarding extratropical cyclones (aka North Atlantic winter storms).   • The frequency of ETCs may diminish with increasing global temperatures• The intensity of the more extreme ETCs may rise• ETC tracks are expected to shift poleward in both hemispheres One can see parallels with the conclusions reached by Dr. Knutson et al. regarding tropical cyclones.  Accordingly, we think it would be naive to conclude that AIR did not model for climate change.  We also expect that the negotiators for Citizens wanted to insure that climate change risk was applied. As did the investors. So climate change matters to the people with real skin in the game - like three-quarters of a billion dollars.  As such, one can bet all involved are paying close attention to the official opening of the Atlantic Hurricane Season, and also to what occurs before and what occurs after. 1This is not the financial instruments blog but for those who want a quick explanation try this from BusinessWeek:  "An insurance company issues bonds to financial investors, such as hedge and pension funds, that are willing to place a bet on the probability of a disaster occurring at a particular location and during a specific time frame. During the life of the bond, the insurer pays investors a coupon interest rate. If nothing happens, the insurer returns the money when the bond matures. If the fates are cruel, cat bond investors kiss off all or part of the principal."  What investors especially like is that there is no correlation between cat bond risk and stock market or corporate bond risk.

Climate Change | Insurance | Regulation | Weather

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 msnbc.com 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

2011: Notwithstanding Extreme Weather, US Climate Policy Does Not Move Forward

December 30, 2011 22:01
by J. Wylie Donald
NOAA reported that 2011 was one for the record books:  12 weather and climate-related disasters each causing over $1 billion in damage.  One might expect (or hope) that a national climate change policy would be coming into place to prevent repeating or setting a new record.  One would be disappointed.  U.S. climate policy is "uncertain," to quote Michael Morris, CEO of American Electric Power, "dysfunctional" is the word applied by Resources for the Future, "hamstrung" is how the chief UN climate change negotiator and Executive Secretary of the UNFCCC, Christiana Figueres, calls it.   We don't disagree with these viewpoints; they are accurate.  But if a response to climate change is the goal, it is worse than these commenters are acknowledging because not only has Congress shown that it is incapable of getting anything done, other avenues are not delivering either.  As the year expires we thought it might be helpful to sift through the year's detritus and assess  the status of attempts to reduce carbon dioxide emissions, distinct from overt attempts like passing laws and adopting regulations. 1. Tax emissions - Some will remember our blog on the federal lawsuit brought by Mirant Corp. against Montgomery County challenging the County's tax on carbon emissions which fell only on Mirant. The County challenged the federal court's jurisdiction and won before the federal district court. In June, however, the Fourth Circuit reversed.  With that Montgomery County folded its tent and abandoned its carbon tax. 2. Favor renewable energy - The inexorable scrutiny of the markets has proved the undoing of several former high-flying renewable energy ventures. Most well-known is the debacle with Solyndra LLC, whose well-publicized collapse generated scrutiny by the FBI and Congress. Others that have failed with less limelight in 2011 include numerous solar companies (Solar Millennium, Stirling Energy Systems, Evergreen Solar, Spectrawatt), as well as ventures in wind (Skycon), energy storage (Beacon Power), and biofulels (Range Fuels). 3. Impose liability for emissions of carbon dioxide - The results here are mixed.  Everyone points to American Electric Power v Connecticut for the principle that for greenhouse gas liability claims the federal common law of nuisance has been displaced by federal regulation. They could equally point to Connecticut v AEP before the Second Circuit for the principle that the political question doctrine does not bar these types of claims or to the Fifth Circuit panel in Comer v Murphy Oil USA that held similarly.  However, even if the cases are permitted to move forward, they face daunting problems in proof of causation. 4. Force state action to regulate carbon dioxide - We blogged last May and just this month about the tidal wave of litigation unleashed by Our Children's Trust, an Oregon environmental group that had orchestrated a dozen suits asserting the defendant States had an obligation under the public trust doctrine to restrain carbon dioxide emissions, as well as regulatory petitions in about 40 jurisdictions.  Time has not been good to OCT. First, its petitions have been denied by at least 23 agencies (Arkansas, Connecticut, Georgia. Hawaii, Idaho, Illinois, Iowa, Louisiana, Maine, Maryland, Michigan, Nevada, New Hampshire, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, and Wyoming).  Where OCT filed lawsuits, three states (Arkansas, Minnesota and New Mexico) responded with motions to dismiss.  The lawsuit against Montana was dismissed. In the federal lawsuit, the plaintiffs lost a motion to transfer. 5. Reach regional agreements - With great fanfare the Regional Greenhouse Gas Initiative was launched in 2005. Despite a recent study that claims significant economic benefit to the states in RGGI, its future success is unclear. New Jersey pulled out, New Hampshire tried to leave but the governor vetoed the bill. In New York, there is a court challenge.  6. Voluntarily trade carbon dioxide emissions credits - The only carbon exchange in North America came to an end in 2010 when the Chicago Climate Exchange closed its doors.  A shadow of its former self, the CCX now registers verified emission reductions based on a comprehensive set of established protocols. 7. Develop carbon capture and storage - The most prominent project in the US came to a halt in July when American Electric Power concluded not to build a full-scale CCS plant at its Mountaineer, West Virginia plant. As noted above, AEP explained its decision as based on the uncertainty of US climate policy.  The lack of direction in American climate change response hurts business. AEP walked away from a $300 million Department of Energy match.  It didn't help that the Virginia consumer advocate, in successfully arguing against including CCS costs in the rate base, asserted:  “Any potential benefit is speculative and outweighed by the enormous cost of the pilot project.” Some may think no policy is the best policy.  We think otherwise.  Climate change is happening.  There will be a response.  All will benefit if that response is choreographed over time, rather than rushed into when political consensus ultimately concludes that something must be done NOW.  Maybe in 2012?  Happy New Year. 

Carbon Dioxide | Carbon Emissions | Climate Change | Climate Change Litigation | Legislation | Regulation | Renewable Energy | Weather | Year in Review

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

2011 Hurricane Season - Will Florida's Insurer of Last Resort Be Up To It?

May 31, 2011 14:21
by J. Wylie Donald
On the eve of hurricane season, we ponder what would happen if an irresistible force met an immovable object.  To make this concrete, we consider the effect of a Hurricane Katrina-like storm impacting Florida's property insurance program, the centerpiece of which is the actuarially unsound, tax-exempt, non-profit corporation, and insurer of last resort, Citizens' Property Insurance Corporation. The Atlantic hurricane season begins tomorrow. The forecasters at the University of Colorado Hurricane Center predict 16 named storms.  Historically, that is an above average crop. Their methodology is not controversial. After gathering oceanic and atmospheric data - such as sea surface temperature, atmospheric pressure, and wind shear -  in February and March, they then compared those conditions to the historical record and identified the previous seasons that had similar conditions.  All but one (2006) had an above average hurricane season. The distinguishing feature for the exception was that it did not have neutral or La Niña conditions in the Pacific (i.e., El Niño dominated).  The effect of that is to minimize the wind shear in the upper atmosphere, which permits hurricanes to build.    How does an increased hurricane incidence translate to landfalls in the United States?  The forecasters predict an increased probability of landfall.  Of particular note is the ominous comment:  “Except for the very destructive hurricane seasons of 2004-2005, United States coastal residents have experienced no other major landfalling hurricanes since 1999. This recent 9 of 11-year period without any major landfall events should not be expected to continue.”  And what would happen should that probability become reality? One place with a particularly bad outcome may be Florida.  The largest property insurer in the state is Citizens' with over 1.3 million policies insuring $462 billion worth of property.  That is approximately 18 percent of the residential market.  Citizens' estimates that its exposure for a once-a-century storm is $23.4 billion. It has reserves and potential reinsurance of $11.75 billion. That leaves a gap of $11.65 billion.  (For reference, a NOAA report based on inflation-adjusted dollars puts Hurricane Andrew's cost at over $43 billion; the 2004 quartet of Charley, Frances, Ivan and Jeanne cost over $45 billion.)  How can this be?  An analysis done in support of HB 1243 in the Florida House of Representatives gives some insight: Citizens' premiums are less than those charged by private insurers - If the premium in the private market for comparable coverage is 15% or more than Citizens' would charge, Citizens' coverage is available to a homeowner.  Citizens' portfolio of risks are not low-budget - If the value of the property is up to $1 million, or $2 million in designated windstorm areas, Citizens' coverage is available to a homeowner. Citizens' insureds can (and do) shop their other coverages in the private market - In designated windstorm areas, property owners can buy non-wind coverage from private insurers and windstorm coverage from Citizens'. Citizens' rates are not actuarially sound - Citizens rates are required to be actuarially sound but were frozen at 2005 levels for all of 2007, 2008 and 2009. Rate increases are capped. Citizens is not required to be solvent - Citizens does not have to meet the solvency requirements of traditional insurers. If this sounds like a recipe for disaster, many in Florida recognize it as such.  Companion bills to reform Citizens' were introduced in the Florida Legislature this spring.  HB 1243 and SB 1714 had the support of an "unlikely coalition" of industry, environmental groups, tax watchdogs and free market advocates.  Notwithstanding this diverse support, and the documented flaws in the current program, both bills died at the end of the legislative session.  Citizens' form and operations may be immovable given political realities. Florida will lurch into tomorrow's hurricane season keeping its fingers crossed and hoping that this year's cyclonic trajectories all steer clear of the Sunshine State.  If that hope is not borne out, then the irresistible force of 150 m.p.h. winds may demonstrate that immovable political realities are not.

Insurance | Legislation | Weather

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

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