December 22, 2012 00:04
Today is the day the world ended. But it didn’t. The spin put by some on the Mayan calendar didn’t pan out and the world continued. Here in Baltimore we didn’t buy into the predictions, but just in case, we went looking for some end-of-the world insurance policies. We didn’t come up with anything. But while we were looking we turned up quite a bit of coverage for the-end-of-the-world-as-we-know-it. Some call it climate change insurance; most just recognize it as an old friend taking on a few new attributes to meet the needs of the present.
We found quite a bit of that old friend. There is the simple stuff. Farmers grow crops. If it doesn’t rain, there are no crops. If it rains too much, there are no crops. If hail is overwhelming, there are no crops. If frost comes early, or stays late, there are no crops. Sounds like extreme and variable weather and also the makings of an insurance policy. Total Weather Insurance agrees. The beauty of TWI's product is that the farmer need not prove any loss. As The Economist reports, he or she just bets on the details of the weather on a 2.5 x 2.5 mile grid across the United States, and with data-processing getting more and more sophisticated, the variations of farming are smoothed substantially.
At the other extreme are catastrophe bonds. These investment vehicles offer something very few investments can offer – zero correlation with the stock market. In a nutshell (and according to Investopedia) a catastrophe bond is a “high-yield debt instrument that is usually insurance linked and meant to raise money in case of a catastrophe such as a hurricane or earthquake. It has a special condition that states that if the issuer (insurance or reinsurance company) suffers a loss from a particular pre-defined catastrophe, then the issuer's obligation to pay interest and/or repay the principal is either deferred or completely forgiven.” We noted earlier this year that Florida’s Citizen’s Property Insurance Corporation issued the largest catastrophe bond ever at $750 million. That trend has continued with this year’s issuance exceeding last year’s by over $2.5 billion.
Some might say that the above would exist even if climate change were not occurring. Possibly. But what about insurance for renewable energy and for green buildings?
William Gallagher Associates offers its Green Energy Insure product, recognizing that new technologies carry more risk than proven ones. Green energy purveyors need to address the risks accompanying their technology and seek coverage for the failure of the technology itself, the cost of opening and closing the equipment to get to the problem, and any ensuing damage that may occur.
Green building insurance was pioneered by Fireman’s Fund, but it is no longer alone in the field. Other companies such as AIG, Zurich, Travelers, and Chubb now offer products addressed to the issues green buildings face like vegetated roofs, building commissioning, recycling of debris rather than disposal, water and lighting efficiency, and certain certified professionals.
One climate change product that has not made an appearance is greenhouse gas insurance. So far as we know, no one is offering carbon dioxide coverage, at least by that name. We have written many times before that such coverage is to be found in general liability policies and D&O policies under the general insuring agreement, because the absolute pollution exclusion doesn’t apply. The issue has been litigated twice and the policyholder has won on both occasions. See Donaldson v. Urban Land Interests, Inc., 564 N.W.2d 728, 732 (Wis. 1997); Steadfast Ins. Co. v. The AES Corp.
The Mayan prophecy advocated by some did not come to pass today. To assuage the disappointment, we will offer another. Insurance products are wonderful; they are even more wonderful when they pay off. People being what they are, there will be disputes over these new instruments. The petitioning policyholder will be more likely to prevail where it has prudently purchased.