NFIP Renewal. Finally. For a Moment.

July 6, 2010 16:22
by J. Wylie Donald
Well, they finally got around to it. Since May 31 the National Flood Insurance Program has had no authority to issue flood insurance contracts. The House approved extending the NFIP's authority on June 23, the Senate on June 30, and the President signed the bill July 2, retroactive to June 1 (fittingly, the first day of the official Atlantic hurricane season). This is not a new circumstance. The NFIP's authority first lapsed on March 1, again on March 28 and will do so again on September 30, absent a long-term extension. So what does it mean when the NFIP can't make loans? Dante described a place of sadness and hopelessness in Limbo, the first circle of hell. The metaphor seems apt: a would-be home or small business buyer that cannot get required flood insurance, cannot purchase; she is stuck in a bureaucratic Limbo from which there is no escape but the grace of Congress. Ditto for the home or small business seller. Is there reason to think otherwise? The various National Flood Insurance Acts forbid lenders from making loans on property located in a Special Flood Hazard Area where federal flood insurance is available. 42 U.S.C. § 4012(a). Since the lapse in NFIP authority means that federal flood insurance is not available, lenders are authorized to make loans on property in the flood plain, without requiring flood insurance first. The FDIC confirms this in its May 7, 2010 Financial Insitution Letter FIL-23-2010 (click here.)  However, lenders are not released from the obligations under the Acts to make flood determinations, provide notices to borrowers and otherwise comply with the flood insurance regulations. The FDIC confirms that lenders "should evaluate safety-and-soundness and legal risk and prudently manage those risks during the lapse period." Lenders are also required to establish a program to ensure that borrowers obtain flood insurance when (as has happened) the program is reauthorized.   So, what is a prudent lender to do during the lapse period. The FDIC recommends: 1) postpone closing the loan (see Limbo above), 2) close the loan and require the borrower to obtain private flood insurance (which, if such existed at favorable rates, would demonstrate the NFIP is unnecessary), and 3) make the loan without requiring the borrower to apply for flood insurance. But that is a Catch-22 as well. As the FDIC points out, "Each lender remains responsible for protecting its collateral from risk in a manner appropriate to the circumstances ...." If the property is in a SFHA, a loan is given and the property is destroyed by flood, what regulator will recognize that as a prudent lending practice "appropriate to the circumstances"? So, even if lenders may lend when the NFIP lapses, it seems evident that they will not. As we have written before, the NFIP has numerous issues (premiums that do not match risk, billion dollar deficits, lack of penetration into the populations at risk). Serial lapses of authority and serial reauthorization simply compound these problems.

Climate Change | Climate Change Litigation | Weather

2010 Hurricane Season: A Product of Climate Change, or Not?

May 28, 2010 04:13
by J. Wylie Donald
On Monday night on the last day of May we will make our way home from our various Memorial Day activities and on Tuesday welcome the 2010 Atlantic hurricane season.  It looks ominous.  The National Oceanic and Atmospheric Administration reports that this year could be “one of the more active on record.”  A few things form the basis for this prognostication. First, wind shear in the upper atmosphere is deadly for hurricanes.  In 2009 El Niño in the eastern Pacific was strong, and so was the wind shear it generated.  This year El Niño has dissipated.  Second, sea surface temperatures are higher than average.  Low wind shear and high sea surface temperature support hurricane formation.  Third, favorable wind flows off the west coast of Africa are expected.  Scientists refer to the pattern of warm waters and favorable winds over decades as the “tropical multi-decadal signal.”  A component of the tropical multi-decadal signal is the “Atlantic multi-decadal oscillation” or AMO, which is primarily identified with Atlantic sea surface temperatures.  The current state of the oscillation favors the formation of hurricanes and began in 1995. It is worth noting that the AMO arises independently of climate change.  The IPCC includes a discussion of the AMO in its 2007 report.  The language is dense but the graphs are not and I commend them to you. Click here.  To even a lay reader like myself, it is quite apparent that something is cycling and that, whatever it is, we are in the middle of the hot portion. So the interesting question is whether the AMO and climate change together will lead to more severe and more frequent hurricanes.  A working group of the World Meteorological Organization addressed this question in a statement published in 2006. Click here.  To quote the WMO:  “The scientific debate … is not as to whether global warming can cause a trend in tropical cyclone intensities. The more relevant question is how large a change:  a relatively small one several decades into the future or large changes occurring today?” This is no small question.  If climate change will increase the severity and frequency of hurricanes today, then many of the steps society is taking right now may be inadequate.  Building codes, zoning decisions, and emergency response planning are all based on the likely scenarios to be encountered.  But it just may be that we don’t know the likely scenarios.  By the same token, if the climate change effect will not be noticed for decades, strategies for adaptation can be successful. The WMO working group meets again at the end of hurricane season in November.  For planning purposes, let’s hope they can provide more guidance.  In the meantime, maybe a trip to Kansas is in order.

Climate Change | Wind Energy | Weather

Wind Projects and Insurance - CAPE WIND Approval Makes This Even More Important

April 29, 2010 02:29
by J. Wylie Donald
Movie production or distribution is not something I get to do every day.  Or even at all.  But this opportunity is proving hard to pass up.  What happens when a windmill fails?  Let’s watch what happened in Denmark in February 2008.  Can you get insurance for this?  And what about other problems that wind farm owners and operators might face?  This is not of obscure interest.  Last night Interior Secretary Salazar made a decision on whether the Cape Wind wind farm project in Nantucket Sound can move forward:  he approved it.  Proponents assert this is the harbinger of a $270 billion industry and can be the source of 75% of the energy needed by Cape Cod, Nantucket and Martha’s Vineyard.  Critics point to desecration of Native American sites and rituals, as well as the destruction of unique and beautiful views.  (It seems hard to believe that nine years have passed since the project was announced. But that is due process. In the end the Secretary’s decision coincided with the views of Mass Audubon, the NRDC, the Conservation Law Foundation, the governors of Maryland, New Jersey, Massachusetts, Rhode Island, Delaware and New York, national policy and national opinion polls.). But let’s return to our exploding wind turbine.  It goes without saying that there must be insurance for these projects.  The key is in identifying the risks and recognizing what can be insured, what requires indemnification or hold harmless agreements, and what risks must be minimized because they cannot be eliminated or transferred.  This is no more than the usual risk management paradigm. A failed wind turbine is an obvious risk and we can be confident that our Danish wind entrepreneurs procured property insurance.  The description accompanying the video identifies high winds during a storm and a failed braking mechanism as the cause of the calamity. Two technicians barely managed to escape. Debris was hurled 500 meters. While the cause of the loss might seem obvious (high winds and covered), one can be sure the applicable policy was reviewed closely to ensure a "wear and tear" exclusion was not applicable or an anti-concurrent causation clause did not apply. Less certain is the scope of business interruption insurance available.  While certainly the output of one turbine is now absent, is that enough to trigger business interruption coverage, which often requires a “necessary interruption” of one’s business?  Perhaps more significantly, who bears the risk if the wind does not blow, or the design is not as efficient or productive as anticipated.  Similarly, what are the implications for promises of startup by a certain date or contractual obligations to deliver a certain quantity of power or that certain tax credits will be available.  Another side of the operation is liability exposure.  Are individuals or property likely to be injured by a failure?  What is the kind of injury?  Again, it is highly unlikely the Danes did not obtain coverage for an individual or vehicle injured or damaged by the failing structure (whether it was the turbine, the blades or the mast).  Other issues are not so obvious.  In England claims have been asserted that infrasonic waves are dangerous.  Low frequency noise complaints or “strobe effects” are claimed to cause injury.  We may expect assertions of loss of property values when windmills disturb high-priced views.  Will a general liability policy pick up these claims?  The decision on Cape Wind is laudable and necessary for wind energy to become a robust contributor to the nation’s energy mix.  Coverage needs to keep up.

Wind Energy | Weather

How Do You Spell Certiorari? Climate Change Suits En Banc

April 1, 2010 18:33
by J. Wylie Donald
"Plaintiffs' homeowner's insurance premiums have dramatically increased as a result of global climate change." So asserts Ned Comer and his co-plaintiffs in their Supplemental Brief on Rehearing En Banc, filed yesterday with the Fifth Circuit in the en banc appeal of Comer v. Murphy Oil USA. Although those premiums do not resurface anywhere else in the brief, presumably their insertion is to demonstrate "an invasion of a legally protected interest which is (a) concrete and particularized and (b) actual and imminent, not 'conjectural' or 'hypothetical'. Lujan v Defenders of Wildlife, 504 U.S. 555, 560 (1992). In other words, they may establish the constitutional base for standing. Little did we know ....   Unfortunately for the plaintiffs, the requirements for standing do not stop there. The Lujan decision continues: "there must be a causal connection between the injury and the conduct complained of - the injury has to be fairly traceable to the challenged action of the defendant ..." Id. Plaintiffs are dismissive of the Comer defendants' abilities to sustain their arguments on this point. That may be myopic. The causation hurdle was expressly enunciated in the district court's opinion: "I foresee daunting evidentiary problems for anyone who undertakes to prove, by a preponderance of the evidence, the degree to which global warming is caused by the emission of greenhouse gases; the degree to which the actions of any individual oil company, any individual chemical company, or the collective action of these corporations contribute, through the emission of greenhouse gases, to global warming; and the extent to which the emission of greenhouse gases by these defendants, through the phenomenon of global warming, intensified or otherwise affected the weather system that produced Hurricane Katrina."  Comer v. Nationwide Mut. Ins. Co., Civ. A. No. 1:05 CV 436-LTD-RHW, 2006 WL 1066645, *4 (S.D. Miss. 2006). Defendants recognize a winning argument and are pressing it in their papers: "Plaintiffs' claims require a piling of inference upon inference to causally connect Defendants' GHG emissions with damages suffered by Plaintiffs during Hurricane Katrina." Petition for Rehearing En Banc.  As stated in the defendants' introduction: "Plaintiffs seek to impose liability on Defendants premised on conclusory and speculative allegations: Defendants' GHG emissions over decades, along with the emissions of millions of other actors around the world, contributed to global warming, which in turn increased ocean temperatures, which in turn raised the possibility of hurricanes forming with increased ferocity, which in turn contributed to Hurricane Katrina's strength, which in turn harmed Plaintiffs."  Id.  Plaintiffs counter, however, that proximate cause simply is not an element of standing analysis. Coupled with the causation element of standing, defendants also re-assert the political question doctrine, which was adopted by the Native Village of Kivalina v. ExxonMobil trial court (now on appeal to the Ninth Circuit) and the California v. General Motors trial court (appeal abandoned), but rejected by the Second Circuit in Connecticut v. American Electric Power. The Second Circuit likewise rejected the Connecticut defendants' petition for rehearing or rehearing en banc. Observers feel that a petition for certiorari is inevitable. Oral argument in Comer is scheduled for the week of May 24. It is sure to be interesting. If defendants prevail, the circuit court split increases the chances that climate change will lodge another appearance before the Supreme Court. For my purposes (following insurance issues), I will be watching to see if plaintiffs' premium argument is indeed a premium argument.

Climate Change | Weather | Greenhouse Gases

Remember Hurricane Wilma? The Damage is Still Not Paid For

March 7, 2010 18:15
by J. Wylie Donald
There was scary news out of Florida at the end of last month. Insurers were lobbying the cabinet for an increase in catastrophe fund insurance policyholder fees. This is the surcharge Florida regulators place on every automobile and property policy to pay for the Florida Catastrophe Fund, which needs up to $710 million to pay for 2005 (sic) claims that are still coming in. The Fund managers sought to increase the current surcharge from 1% to 1.3% of premiums. The increase was rejected by the Florida cabinet, ostensibly because of concerns over fraud. Seems public adjusters in Florida are too effective and have precipitated an unbudgeted increase in payouts from the Fund. The explanation for the increase in claims and payouts is that fraud is being carried on. Cynical observers cite a different reason. Governor Crist is running for the Senate and is not going to be tagged with increasing the cost of insurance. Whatever the reason, what should really be cause for concern is that the Fund may need an additional $710 million. I have blogged repeatedly and skeptically on the beach pools and wind pools. Turns out I am not alone. Zurich Insurance Company published a White Paper last summer that makes the point far more eloquently than I did.   In The Climate Risk Challenge: the role of insurance in pricing climate-related risks,, Zurich posits that in addressing climate change, there is a great need to engage the insurance industry's skill in managing risk. The trick is how to engage an industry whose business is protecting private assets, so that that protection furthers the public good. Zurich points out that this has been done before. Fire protection codes and vehicle safety requirements are two areas of note. Following along in that vein, climate-friendly requirements that are built into zoning and building codes, such as hurricane-proofing structures, mandating energy efficiency, and restricting construction in flood -prone areas, can be supported by insurance products, which will bring market forces into play. However, as Zurich notes, "The ability of the insurance industry to assist public policy-makers in the effective and efficient implementation of climate change policy is to a large extent dependent on [policymakers'] willingness to resist the temptation to distort markets in a manner that interferes with the role of and ability of insurers to send price signals about risk." Distortion seems rampant in Florida. In the fifth year after Hurricane Wilma, the Florida Catastrophe Fund still lacks sufficient funds to pay for those claims. Perhaps more significantly, the procedure in place to pay for those losses cannot do so. Zurich's tag-line is "Because change happenZ." I would amend that. "Because climate change is happening." Policymakers need to tap into the experts who manage the balance between risk exposure and financial sustainability. Until the Florida insurance market reflects true price signals for risk, those experts are very likely to remain sitting on the sidelines and Florida's hurricane risk effectively uninsured.

Climate Change | Flood Insurance | Insurance | Weather

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


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