Insurance

Climate Change Legal Work: Changing the Paradigm Does Not Come Easily

May 8, 2013 08:18
by J. Wylie Donald

I learned the other day that for $3995 I can download nearly a 1000 page report on the climate change industry.  The Ah Hah moment was at hand.  The President’s promise at his inauguration and then again at the State of the Union was upon us.  Here it would be revealed what the small group of lawyers focused on climate change law were looking for:  where is the legal work?  But I am a cautious consumer.  The publisher anticipated my skepticism and offered the table of contents for my review for free.  I didn’t even have to give my email address.  It was an offer hard to turn down.

The TOC was extensive.  Pages and pages chronicled the following industry segments:  Solar Energy, Wind Energy, BioEnergy, Geothermal Energy, Wave & Tidal, Carbon Capture & Storage, Energy Efficiency & Demand Response, Energy Storage, The Green Building Industry, Carbon Markets, Adaptation, Climate Change Consulting, and Transportation.  And under each of these segments one can find pages of company "profiles", presumably businesses with expertise in Wind Energy or Adaptation or Green Buildings.  Even lawyers were able to claim a niche.  Seven firms filled out “Law Firms and Climate Change Practices.”

But as we all know, saying you’re doing something, and actually doing it, can be two entirely different things.  Here’s a different measure:  how many clients attend climate change legal seminars?  I have a bird’s eye view on this topic:  I gave one at the end of last month, Climate Change and Insurance:  Recent Litigation and Regulatory Developments.  The attendance was astounding:  2 insurance companies, 29 law firms (but including none of those "profiled" – maybe that should tell us something), and NO ONE ELSE. 

Could it be that most insurers and all non-insurers have all the climate change related insurance issues already figured out?  Would they get 100% on this little quiz:

What is the atmospheric public trust doctrine and how is it being used to address regulation of greenhouse gas emissions?
Are there any decisions in support of finding that carbon dioxide is not a pollutant within the meaning of a pollution exclusion in a general liability policy?
How do building height restrictions affect rebuilding after Superstorm Sandy?
Do pollution exclusions negate coverage for improper climate change disclosures?
Does a title policy insure against rising sea levels?
Are insurers of last resort (wind pools, beach pools) increasing market share and what are the implications of that?

Anecdotally, I know that most, if not all, would struggle merely to get a C.  But so what?  One can’t sell ice in the wintertime or neckties in a nudist colony.  As lawyers we provide a service to clients with the need for that service.  It is not what we want to sell, but rather what they want to buy.  And there is the secret.  Thomas Kuhn wrote a magnificent work explaining how scientific paradigms shift (think the change from a Ptolemaic universe (the sun revolves around the earth) to a Copernican one (the earth revolves around the sun)).  Presently, the received wisdom is that while climate change is happening (I acknowledge that some still have not received even this idea), it is incidental to the larger issues and can be addressed accordingly. 

I submit that that is, like Ptolemy’s world-view, a paradigm that can be improved.  For example, if one is intent on acquiring property at the Shore, one can buy in fee simple, take a ground lease, or take a shorter term commercial lease.  If one is not actively considering the implications of sea level rise in the fundamental choice of the form of the transaction, one is at risk of finding oneself literally under water with no succor. If in contract documents one is making representations and warranties identifying all releases  of “hazardous materials” (broadly defined to be any substance regulated under environmental laws (a common approach)), without scheduling one’s HVAC systems, one is almost assuredly making inaccurate warranties because virtually all entities are emitting carbon dioxide.  If one relies on a flood plain map for planning purposes, without recognition that all flood plain maps are flawed because they only look backward (i.e., they assume the past accurately predicts the future, which is emphatically not the case in a world of climate change), one is again assuming a large risk.  I could go on. 

The point is that the risks and possibilities of climate change are ubiquitous.  Our job as advocates and wise counsel to our clients is to assist the change to a perspective Copernicus might have adopted, one that incorporates climate change in the larger view.  As demonstrated by the attendance at my seminar, we have a long way to go in that regard.

Carbon Dioxide | Climate Change | Climate Change Effects | Insurance | Rising Sea Levels

Who Says Catastrophe Bond Payouts Are Not Correlated With the Stock Market?

March 27, 2013 08:54
by J. Wylie Donald

Here is some food for thought:  Catastrophe bond payouts are correlated with climate change.  Climate change is correlated with stock market returns.  Therefore catastrophe bond payouts are correlated with the stock market.   See Aristotle, Prior Analytics.  We did not study philosophy but Aristotle’s syllogism seems difficult to refute.

The March 2013 Best’s Review reports on investors’ current heightened interest in catastrophe bonds; demand in 2012 was up 37% over the previous year and was the second highest level ever.  See Ron Panko, Behind the Cat Bond Surge, Best’s Review 56 (March 2013).   The “allure of cat bonds” is four-fold:

1.  “They are one of the few assets that are uncorrelated to the broader financial markets.”
2. Their return can be very strong (although if the bond is triggered its investors can lose everything).
3. They are liquid.
4. They are trackable against an index.  

It doesn’t take a lot of insight to note that all of these factors but the first are common to many things investors put their money into.  So the interest in cat bonds is fundamentally the idea that they are not correlated with the stock market.  When the market goes up, down or sideways, cat bond values pay no heed.

The article then provides some interesting data concerning the perils considered by 2012’s catastrophe bonds for property and casualty related risks:  earthquakes, hurricanes, severe thunderstorms, winter storms, and wildfires.  It does not take a climate scientist to notice that four of the five perils are perils exacerbated by climate change.  If one tallies up the 26 transactions, 22 of them consider a climate-related risk (albeit 8 of those also consider earthquakes).  The major premise is satisfied:  catastrophe bond payouts correlate with climate change.

We figured documenting the financial impact of climate change would be easy.  It was.  As scientist Adam Frank put it on NPR:

“Like it or not, the climate system is the underpinning of the economic system. Production and trade do not occur in a vacuum. They occur in the real world of soil and oceans, rainfall and atmospheric flows. Our most basic economic assumptions — the foundations of our way of life — are challenged when the conditions in this real world change.”  

As an example he cited a noted liberal, left-wing, environmentalist publication – the Wall Street Journal – which covered the effects of last year’s drought:  $8 billion in gross domestic product lost.  Archer Daniel Midland’s stock price last summer was not pretty to look at.  Neither was Tyson Foods’.  Thus, and assuming the drought  was caused or aggravated by climate change, the minor premise is satisfied.

Therefore, the conclusion, catastrophe bond payouts are correlated with the stock market, is established.  We realize this flies in the face of conventional wisdom.  The effects of climate change have a tendency to do that.

Climate Change | Climate Change Effects | Insurance | Weather

In Response to Sea Level Rising At Double the Global Rate, Delaware Debates Whether to Accommodate, Avoid, Protect or Retreat

February 20, 2013 17:07
by J. Wylie Donald  & Jameson Tweedie

On February 19, 2013, the Delaware Sea Level Rise Advisory Committee ("DSLRAC") held the second of three "public engagement sessions" to solicit public comment on a list of 61 "Options for Preparing Delaware for Sea Level Rise". These public engagement sessions are part of the second phase -- focusing on adapting to sea level rise -- of the DSLRAC's mission.

The first phase focused on the preparation of a comprehensive assessment of Delaware's vulnerabilities to sea level rise. The Vulnerability Assessment modeled the effects of three potential sea level increases by the end of the century - 0.5 meters (1.6 feet), 1.0 m (3.3 feet) and 1.5 m (4.9 feet) from mean higher high water - and identified state resources that were vulnerable to sea level rise. The state resources considered were broadly divided into three categories: natural resources; society and economy; and public safety and infrastructure. Within these broad categories, the vulnerability of 79 specific resources to sea level rise was examined, of which 16 were determined to be of high concern statewide: dunes and beaches; coastal impoundments; dams, dikes and levees; evacuation routes; freshwater tidal wetlands; future development areas; habitats of conservation concern; heavy industrial areas; the Port of Wilmington; protected lands; roads and bridges; railways; tidal wetlands; tourism and coastal recreation; U.S. Fish and Wildlife Service Refuges; and wells. The models did not include any effects from storm surge or increased storm intensity, and thus the effects are arguably conservative for each of the three modeled sea level increases. Even so, the Vulnerability Assessment found that all three of Delaware's counties would be directly affected by sea level rise, and 8-11% of the entire state's land area would be permanently flooded (at the public engagement session a tax assessed value of $1.5 billion was estimated for the land which will potentially be flooded). (Full Vulnerability Assessment).

Delaware's vulnerability to sea level rise is a function not only of its coastal location and economy, but also because sea level rise is occurring faster in Delaware than elsewhere. Currently the global rate of sea level rise used by the DSLRAC (from the International Panel on Climate Change (IPCC) estimates) is 0.07 inches per year, or 7 inches per century (not considering any increase in that rate in the future). However, in Delaware the sea is currently rising at a rate of 0.13 inches per year (13 inches per century), or almost double the global average. This is occurring, in part, because the part of the earth's crust under Delaware is sinking. (Simplistically, during the last ice age some regions were depressed by the weight of the glaciers, while Delaware was not depressed by such heavy glacial coverage and as a result was raised up relative to other regions. This process is now reversing as other regions rebound upward, while Delaware settles downward.) Thus, in Delaware not only are the seas rising, but the land is literally - although slowly - sinking. (See Vulnerability Assessment at 7-8).

With the key vulnerabilities identified, the second phase of the DSLRAC's mission is focused on strategies for adapting to the effects of sea level rise. The DSLRAC has identified four broad strategies: to accommodate sea level rise; to avoid sea level rise; to protect resources form sea level rise; or to retreat from sea level rise. Within these broad strategies - which the DSLRAC does not view as mutually exclusive - are 61 specific options. These range from the very broad - "Increase opportunities for technology transfer and regional coordination for transportation issues affected by sea level rise" (Option 2); "Create new partnerships to increase resources for research and development of adaptation options" (Option 6); "Create a coordinated effort to provide technical assistance to local governments" (Option 56) - to the relatively specific - "Provide sea level rise information to the Delaware Agricultural Land Preservation Program" (Option 7); "Encourage the establishment of a sea level rise group within the American Association of State Highway Transportation Officials (Option 9); "Add additional tidal observation stations in Delaware" (Option 54).

Some of the original proposed options have already proven controversial. For example, Option 33 - "Develop a comprehensive outreach strategy to educate public about sea level rise" - was revised to eliminate a reference to educating public school students about climate change and sea level rise. This revision was reportedly made after objections from the Positive Growth Alliance (which is reported as having described such education as "brainwashing") and the Homebuilder's Association of Delaware (which is reported as questioning the "targeting" of children). Another option would require property owners selling property inside zones predicted to be inundated under a specific sea level rise scenario to disclose that vulnerability to potential buyers (also discussed here). This was met with concern that it might negatively affect sales of or the availability of mortgages for such properties, particularly as some stakeholders questioned the three modeled sea level rise scenarios (0.5 m, 1.0 m, 1.5 m) as "speculation" (click here). (It is worth noting that the scenarios modeled by the DSLRAC are generally in line with the recently issued National Climate Assessment (see National Climate Assessment.)

As Delaware considers whether to accommodate, avoid, protect or retreat from the consequences of sea level rise, the Options put forward by the DSLRAC serve as an excellent point of discussion. Option 24 - "Develop a statewide retreat plan" - will undoubtedly contribute to that discussion, if not controversy. Given recent retreat oriented developments in other jurisdictions, such as the recent proposal of Governor Andrew Cuomo of New York to use federal disaster funding in the wake of "Superstorm Sandy" to buy out certain willing homeowners (click here) or the determination in the Netherlands - experts in keeping the sea out - to begin letting the sea back in (click here), an honest and complete discussion of how to engage in retreat, before any retreat is necessary, may be entirely prudent. Whether such a discussion is politically palatable is another question entirely.

Climate Change | Climate Change Effects | Insurance | Rising Sea Levels

No En Banc Appeal in Kivalina; So What's Next for Climate Change LItigation?

December 8, 2012 22:18
by J. Wylie Donald

When we discuss climate change litigation with colleagues or acquaintances unfamiliar with it, they are always a little incredulous.  “The plaintiffs allege what?  How could you prove that?  There's no way they can win.”  Courts, however, cannot rule from their impressions; instead, they must parse arguments and facts and explicate the legal reasoning that supports shutting climate change cases out of the courtroom.  We have addressed in this blog many of those decisions as the climate change cases have wound their way up the appellate ladder.  That statement-of-reasons rule, however, does not apply when a court is being asked to grant rehearing en banc.  Then a judge can just say, “I’m not interested.”  And the case is done.

That happened at the end of November in Native Village of Kivalina v. ExxonMobil Corp. when the Ninth Circuit issued its denial (see attached) of plaintiffs' petition for rehearing:  “The full court has been advised of the petition for rehearing en banc, and no judge of the court has requested a vote on the petition for rehearing en banc.  Appellants’ petition for rehearing en banc is DENIED.”  Unless the plaintiffs file a petition for certiorari with the Supreme Court, and the Court accepts it (which we think unlikely with no circuit court split and the dismissal being a fairly simple extension of the Court's decision in American Electric Power), Kivalina is done.  That means that there is no federal common law of nuisance relevant to greenhouse gas emissions whether a plaintiff seeks injunctive relief or damages.  The federal Clean Air Act displaces the claim in both instances. 

Two slim reeds remain for plaintiffs in the first wave of climate change litigation.  First, they need to prevail on an appeal before the Fifth Circuit in Comer v. Murphy Oil USA, Inc., which will require overcoming over half a dozen independent bases for dismissal found by the trial court.  Or second, they must succeed on a state-law-based theory of nuisance.  As we have noted recently, the Clean Air Act is likely to be found to preempt such claims. 

In light of the string of defeats in American Electric Power, Comer and Kivalina for plaintiffs, we went looking to see where the climate change plaintiffs' lawyers were going next.  The websites of the lead Comer and Kivalina lawyers, Gerald Maples and Matt Pawa, were not helpful.  However, journalist Andrew Longstreth didn’t rest on the websites; he reached out directly to Messrs. Pawa and Maples. Here is the future he found: 

"Pawa said that he and his co-counsel in the Kivalina case are discussing their options, which include asking the Supreme Court to hear an appeal or filing a new case in state court that asserts state common law claims. Pawa likened the current state of climate change litigation to the early stages of suits against cigarette makers and companies with asbestos liability. Before plaintiffs' lawyers in those cases were able to win judgments and settlements, they were stymied by defense arguments. "We haven't exhausted our theories or our efforts," he said.

As stated above, the Supreme Court and state law nuisance paths do not seem likely to succeed.  Mr. Maples suggested a different path:

"Future success in climate change litigation, he said, may depend on whether state attorneys general get involved, as they did in the tobacco litigation of the 1990s. With home insurance premiums rising as a result of climate change, Maples said, the litigation could become attractive to state AGs, who like consumer protection cases.  'If you can't afford insurance, that's almost like not affording food,'"

So, is climate change litigation going to take a new turn and become an issue about consumer protection and insurance rates?  After reviewiing the Fourth Amended Complaint in Comer, we suggested in 2011 that this theory was something that bore watching.  Here is the theory in action as alleged in Comer:  “[Defendants' greenhouse gas emissions] put Plaintiffs' property at greater risk of flood and storm damage, and dramatically increase Plaintiffs' insurance costs." (Fourth Amended Complaint ¶ 37.)   Thus, with the demise of federal common law claims, consumer protection law claims may be the next wave. 

20121127 Order (denying rehearing en banc), Kivalina v. ExxonMobil.pdf (34.55 kb)

Carbon Emissions | Climate Change Litigation | Insurance

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

November 3, 2012 09:26
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 YorkNew 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

A Tale of Two Credibilities: Hurricane Sandy and Recent Extreme Weather Reports

October 27, 2012 08:20
by J. Wylie Donald

It was the best of times.  It was the worst of times.  In North America, anyway.  As Hurricane Sandy looms over the Eastern seaboard, we thought it would be worthwhile to take a look at two recent reports about extreme weather.  Ceres, the investor focused “advocate for sustainability leadership,” issued in September its report:  Stormy Future for U.S. Property/Casualty Insurers:  The Growing Costs and Risks of Extreme Weather Events.  Munich Re, one of the world’s leading reinsurers, followed in early October with Severe Weather in North America.  If you want to read Severe Weather in full, it will cost you $100. If an executive summary will do, that only costs an email address.  

Ceres’ report sets up the financial climate facing insurance companies today:  historically low investment returns, a sluggish economy,  and lagging economic performance as measured by return on equity.  It then recounts the vicissitudes of recent extreme weather.  In 2011 the insurance industry suffered more than $32 billion in losses, and “suffered the most credit downgrades in a single year since 2005.”  The federal government issued a record 99 disaster declarations. To get specific:

Losses from excessive precipitation during 2008-2011 were the highest on record.
Average annual winter storm losses have nearly doubled since the 1980s.
Since 1980, wildfires burned the highest amount of acreage in 2005, 2006 and 2007; and in 2010, wildfires caused over $1 billion in damage (and in 2012 record setting wildfires occurred in Colorado and other parts of the West.).
Losses from low precipitation (drought) during 2012 will be the highest since 1988.

These cap a 30-year trend of increasingly extreme weather.  The effect of all this is, according to Ceres, a grave threat to insurers and those that rely on them.  Ceres goes on and asserts that climate change “likely” will exacerbate the effects of extreme weather.  Nevertheless, Ceres plays it cautiously:  “Connecting the linkages and impacts between rising temperatures and extreme events remains a highly technical exercise fraught with uncertainty.”  But notwithstanding the uncertainty, the cause of the potential economic problem for insurers is “increasing concentrations of insured assets, along with a changing global climate.”  Ceres' recommendations include calling for insurance companies to encourage customers to lower their carbon emissions footprint and to encourage "policymakers to take steps to reduce carbon emissions."  Is this unsupported advocacy or prudent business advice?  We conclude the former.

We start with one of the central themes of Stormy Future:  the costs of extreme weather have been rising steadily over the last 30 years.  But as the report acknowledges, some part of the increase is due to the fact that there are more people, more infrastructure, and more buildings and other property than there were 30 years ago.  Even without any new extremes of weather the costs of weather-related disasters would have increased.  But Ceres offers no more than an acknowledgment.  There are no details to flesh out the relative contribution of extreme weather as compared to the contribution of increasing coastal populations and increasing property values.

We discerned one hint.  In the last twenty years state subsidized insurance plans (so-called “residual” plans or state insurers of last resort) have expanded from $55 billion to $885 billion.  There would be no need for residual plans if people weren’t migrating to areas of higher risk, which for-profit insurers shun.   So with barely any data from Ceres, we went looking.  Professors Howard Kunreuther and his colleagues at the Wharton School had some interesting analysis in their 2009 work, At War with the Weather. Id. at 11.    When hurricanes from 1900 to 2004 are normalized for wealth (i.e., evaluating each hurricane’s impact if it had hit in 2004), the five hurricanes with the most impact occurred in 1926, 1992, 1900, 1915 and 1944. Hardly a trend for increasing extreme weather.  If Hurricane Katrina had been included, it likely would have topped the list, but that would have meant that the top five were 2005, 1926, 1992, 1900 and 1915, and still no extreme weather trend pops out.  Another researcher, Roger Pielke, Jr. has concluded similarly that there is no trend toward increasing extreme weather in the form of tornadoes.  It seems to us that Ceres should have assessed the impact of wealth concentration and population increase so that readers can reasonably conclude that climate-change-induced extreme weather is becoming an increasing substantial contributor to loss and not be forced to take Ceres at its word.

Munich Re does better.  Severe Weather relies for its data on Munich Re’s NatCatService, which contains more than 30,000 records on natural catastrophe loss.  Based on a comprehensive review Munich Re concluded that extreme weather in North America has nearly quintupled in the last 30 years.  In Asia the increase is 4 times, 2.5 in Africa, 2 in Europe and 1.5 in South America.  This has resulted in increased losses. 

Unlike Ceres, Munich Re recognized the importance of addressing the contribution of increasing concentration of wealth and population on rising losses.  The press release heralding Severe Weather  states:  “Up to now, however, the increasing losses caused by weather related natural catastrophes have been primarily driven by socio-economic factors, such as population growth, urban sprawl and increasing wealth.”  But the release goes on: 

For thunderstorm-related losses the analysis reveals increasing volatility and a significant long-term upward trend in the normalized figures over the last 40 years. These figures have been adjusted to account for factors such as increasing values, population growth and inflation. A detailed analysis of the time series indicates that the observed changes closely match the pattern of change in meteorological conditions necessary for the formation of large thunderstorm cells. Thus it is quite probable that changing climate conditions are the drivers. The climatic changes detected are in line with the modelled changes due to human-made climate change.

Munich Re concludes that this is the “ initial climate-change footprint” in US loss data from the last four decades. “Previously, there had not been such a strong chain of evidence.”  There it is:  losses are increasing independently of increases in wealth and population and climate change is a cause.

As noted above, others disagree with this conclusion.  In fact, Munich Re has been slammed in the press and in the blogosphere for over-hyping the risk in the search for profits.   What the criticism misses is that Munich Re is putting its information out into the marketplace.  Consumers are free to accept or reject it.  Those choices ultimately end up being reflected in the bottom line. 

This is our fundamental point about climate change and economic activity. Substantially all business decisions are made with some uncertainty.  Why would those involving a changing climate be any different?  The question to be asked is whether there is enough information to guide action.  Climate change is having effects.  We know this.  Why?  Simply because it is occurring.  And we also know it because of the mountains of evidence.  Prudent business people must think about how those changes will affect them.  Munich Re gives some answers.  

We would submit that business planning based on Ceres’ report would not be prudent – Ceres leaves out a fundamental analysis:  what is the effect of increasing concentrations of wealth and population on the increasing loss trends from extreme weather?  Munich Re’s report, on the other hand, gives a decision-maker a tool that addresses that uncertainty.  One chooses not to listen at one’s peril.  Hurricane Sandy is the 18th named storm of this hurricane season.  If it lives up to its hype, it will be long-remembered.  But even if it does not, that does not change the business imperative:  plan with the best information available.  We would submit that climate change should be part of that planning. 

Climate Change | Climate Change Effects | Insurance | Sustainability

You Want Hantavirus With That View? Contagion Clouds the Air at Yosemite

September 13, 2012 12:03
by J. Wylie Donald

Nasty diseases like Ebola and SARS are not something one picks up in the good old USA, particularly at a national park, like, say, Yosemite.  Well that would be wrong.  Three visitors have died this summer from something called the hantavirus.  Infectious disease specialists have localized the most likely cause to a rustic tent site in Curry Village, popular with visitors to the park. Hantavirus is transmitted through the aerosolization of infected rodent feces and urine.  The mortality rate is about one in three. This is not good.

You may be saying this is all very interesting, but hardly the subject for a blog about climate change.  Well that would be wrong too. 

Concerning a link between hantavirus outbreaks and climate change, researcher B. Klempa came to this conclusion: 

The early effects of global warming have already been observed in different geographical areas of Europe. Elevated average temperatures in West-Central Europe have been associated with more frequent Puumala hantavirus outbreaks, through high seed production (mast year) and high bank vole densities. On the other hand, warm winters in Scandinavia have led to a decline in vole populations as a result of the missing protective snow cover.

B. Klempa, Hantaviruses and climate change, Clin. Microbiol. Infect. 15(6):518-23 (June 2009).  Jan Clement and his colleagues looked at the rising incidence of nephropathia epidemica (NE), an emerging hantavirus-caused illness, which “has become the most important cause of infectious acute renal failure in Belgium, with sharp increases in incidence occurring for more than a decade.”  Clement’s team reported:

NE, a zoonosis scarcely known before 1990, has been increasing in incidence in Belgium with a cyclic pattern, to reach statistically higher and even epidemic proportions since 2005. NE is a rodent-borne infection, implying that it is at least partly climate-dependent. … A higher availability of staple food for the rodent reservoir Myodes glareolus, together with a higher autumn-winter survival of this rodent, explains the higher and cyclic NE occurrence in Belgium and in neighbouring countries, Germany in particular. … The fact that the growing combined effect of hotter summer and autumn seasons is matched by a growing epidemic trend of NE in recent years, can be considered as an effect of global warming.

J. Clement et al., Relating increasing hantavirus incidences to the changing climate: the mast connection, International Journal of Health Geographics 8:1 (2009). 

At Yosemite, what has been happening to the population of deer mice ?  It has been increasing.  Traps set for mice following the hantavirus outbreak caught mice at a rate at least twice what had been recorded previously.  And it is hardly news that California’s winters have been milder and summers hotter.  Climate change is alleged to be the culprit.  See, e.g., California ex rel Lockyer v. General Motors Corp., No. 06-CV-05755, Complaint ¶¶ 47, 55 (N.D. Cal. filed Sept. 20, 2006) (one of the first climate change liability cases) (attached below). 

The jury is still out on whether California's recent weather would cause an increase in the population of deer mice or not.  But as we have written previously, proving the causative role of climate change is not our point, others can do that.  We focus on what one can do in the face of climate change. Whether the hantavirus outbreak is climate-change driven or not, increases in the range and incidence of infectious disease is a predicted outcome.  Businesses need to prepare.  The first thing of course is to recognize that the fundamental feature of climate change is just that:  change.  And change means that there is no reason to believe that what was satisfactory in the past will continue to be satisfactory.  For example, one of the news stories on the hantavirus outbreak demonstrates this repeatedly.  The article reports criticism of park employees for failing to warn visitors after the first few cases were noted.  Guests continued to be checked into the suspect tents for over a week after the park service began deep cleaning the tents.  The tent design, with a space between the inner and outer fabric, permits mice to enter that space.  The National Park Service, and likely its concessionaire, will undoubtedly be revisiting their procedures and their equipment. 

One can also envision claims for failure to warn, negligence and product liability by injured visitors or their estates.  And certainly, even without any claims, business is down at Yosemite.  The concessionaire would do well to investigate its liability, property and business interruption insurance policies, although it is certainly too late now to do anything about the terms of coverage.  That is not so for others, however.  One typical exclusion, for example, that will make coverage difficult for hantavirus claims (or any disease claims such as SARS, or swine flu, or dengue fever) is the Mold, Fungus and Organic Pathogen Exclusion.  As its name suggests, insurers certainly will assert that injury arising from exposure to the hantavirus is excluded.  But that argument could be eliminated if the insured had simply negotiated for a Fungus or Bacteria Exclusion, such as ISO’s CG 21 67 12 04. In any event, reading from a new perspective whatever exclusion is proffered can only help a company to manage its risks better.

Some will say that the chances of a hantavirus outbreak affecting one’s business are vanishingly small.  We don’t dispute that.  What is not vanishingly small is the fact of climate change and that its effects are not vanishing.

2006 California ex rel. Lockyer v. General Motors Complaint.pdf (36.16 kb)

Climate Change | Climate Change Effects | Insurance

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

September 9, 2012 00:03
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 10:43
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

The Top 6 at 6: A Review of the Most Important Climate Change Legal Stories in the First Half of 2012

July 1, 2012 00:01
by J. Wylie Donald

Arbitrary and capricious.  Familiar words to anyone involved in regulatory activity.  But also applicable to calendars, which willy-nilly cut off a series of events and ascribe them to one solar cycle, as if the sun gave two hoots.  As we perused the various "Climate Change: Year in Review" reviews that crossed our desk last January, we concluded 365 days are arbitrary and one year capricious in assessing what is important to resurrect and re-discuss.  We further concluded that a 12-month look-back is too long.  So, for what it is worth, here is one of six months.

1.  Cap-and-Trade in the U.S. - On January 1 the Western Climate Initiative (WCI) (or what remains of it) initiated its long-anticipated cap-and-trade program for greenhouse gas emissions.  Notwithstanding the lack of support from other WCI members, California and Quebec are moving forward with a cap-and-trade program.  California's and Quebec's mandated reporting rules applied to stationary sources emitting at or above 25,000 metric tons of CO2e per year.  On May 9 coordination between the two programs was announced  initiating the 45-day public comment period.  The first auction will be held in November and then, on January 1, 2013, enforcement begins when covered entities must participate. It is obviously too soon to tell how successful the California program will be, but when the world's eighth largest economy takes an initiative, it is likely to have impact elsewhere, particularly when it is the only program in the nation.

2.  Greenhouse Gas Liabilities and Insurance Coverage - We didn't think there would be anything to say this year about coverage for GHG liabilities.  After all, in the only case in litigation the Virginia Supreme Court issued its opinion in AES Corp. v. Steadfast Insurance Co. in September 2011 and concluded that there was no "occurrence" triggering coverage made in the allegations pleaded by the Native Village of Kivalina against AES Corporation.  But then the Court granted a motion for reconsideration in January and many puzzled as to what was going on.  Apparently nothing as the Court reiterated its previous conclusions in an April 20, 2012 opinion.  The decision will be significant in Virginia because it may have upset coverage in more conventional cases, as the concurring opinion of Justice Mims suggests.  As for the rest of the nation, it is one decision, on one issue, on one set of facts.  The case is important because it is the first, but we will be surprised if it provides guidance anywhere else.
 
As for greenhouse gas liability that is a story unto itself.  Like something out of a Steven King novel, the Comer v. Murphy Oil case refuses to pass quietly into the night.  This is the case that was dismissed by the Southern District of Mississippi, reversed by the 5th Circuit, vacated by the 5th Circuit en banc when it accepted rehearing and then reinstated as dismissed when the 5th Circuit's quorum dissolved.  Following a denial of a request for a writ of mandamus from the U.S. Supreme Court, the Comer plaintiffs re-filed their complaint against over 100 electric utilities, oil companies, chemical companies and coal companies alleging their GHG emissions were responsible for the ferocity of Hurricane Katrina.  And the Southern District of Mississippi dismissed the plaintiffs again on March 20.  And plaintiffs appealed again.  We don't expect the case to be finally at rest until the Supreme Court denies certiorari, or accepts it (perhaps in order to address the Ninth Circuit's much-anticipated decision in Native Village of Kivalina v. ExxonMobil, which has been pending for over six months since oral argument).

3.  Natural Gas:  The Bridge Fuel - With the combining of two technologies, hydraulic fracturing and horizontal drilling, a resource of unprecedented volume is "changing the game" of energy.  "Annual shale gas production in the US increased almost fivefold, from 1.0 to 4.8 trillion cubic feet between 2006 and 2010. The percentage of contribution to the total natural gas supply grew to 23% in 2010; it is expected to increase to 46% by 2035."  Thus reported the Energy Institute at the University of Texas in February in a 400+ page tome entitled Fact-Based Regulation for Environmental Protection in Shale Gas Development.  Momentously, the UT researchers report "there is at present little or no evidence of groundwater contamination from hydraulic fracturing of shales at normal depths."  The reference to "normal depths" acknowledged that in December 2011 the EPA linked contamination in Pavilion, Wyoming to shallow fracking operations. In March 2012, however, EPA agreed to conduct further testing.  And then in May, a personal injury tort case, Strudley v. Antero Resources Corp. et al., No. 2011-CV-2218 (2d Jud. Dist. Ct. Col. May 9, 2012), brought against fracking operators in Colorado was thrown out because plaintiffs could not muster adequate proofs of specific causation. Despite some intense opposition, fracking is moving forward.  What does all of this have to do with climate change?  Natural gas when burned emits half the carbon dioxide of coal.  Accordingly, some argue that natural gas is the bridge to a low-carbon future.  If so, then fracking builds that bridge.

4.  Innovative Climate Change Legal Theories - Last spring the sound and the fury were intense as the environmental organization Our Children's Trust unleashed several dozen regulatory petitions and a dozen lawsuits across the nation.  The goal:  establish the public trust doctrine as applicable to the atmosphere and use it to implement greenhouse gas regulation.  It appears that all of that is signifying nothing. Over two dozen petitions were denied in 2011 and two lawsuits were dismissed (Montana and Colorado).  It did not get any better in 2012.  The first six months of this year delivered only bad news to OCT.  State courts dismissed lawsuits in Alaska, Arizona, Minnesota, Oregon, and Washington.  The federal court in the District of Columbia did the same.   Plaintiffs took a voluntary dismissal in California.  To be sure, OCT has filed appeals (the one in Minnesota is scheduled to be argued on July 18).  Having failed to convince a single court so far, we think we are safe in predicting an uphill battle.

5.  Power Plant Performance Standards - On April 13, 2012, a scant seven months before the presidential election, the EPA published in the Federal Register standards of performance for all new fossil fuel-fired electricity-generating units requiring them to meet an electricity-output-based emission rate of 1,000 lb of carbon dioxide for every megawatt-hour of electricity generated.  The only plants that can meet this standard without implementing costly carbon capture and storage technology are natural gas plants.  Thus, the administration took a strong stand against coal-based generation.  Or it is all smoke and mirrors.  As EPA notes in the proposed rule, because of the glut of natural gas made available by fracking, there is little likelihood of a new coal-powered plant before 2030.  Notwithstanding, industry groups have filed a half-dozen lawsuits seeking to derail the rule.

6.  EPA's Greenhouse Gas Regulatory Program - Less than a week ago USEPA and its GHG program got a firm "thumbs up" from the D.C. Circuit.  Inundated with over two dozen appeals of various USEPA GHG regulations, the Endangerment Finding, the Tailpipe Rule, the Tailoring Rule and the Timing Rule (for citations see The DC Circuit Locks in USEPAs GHG Regulations Sort Of). The court turned away every challenge, sometimes on the merits and sometimes on procedural grounds such as standing.  There is much that deserves comment not the least of which are the differences between the states with California, Connecticut, Delaware, Illinois, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New Mexico, New York, North Carolina, Oregon, Rhode Island, Vermont, and Washington, lining up on one side, and Alabama, Florida, Indiana, Kansas, Kentucky, Louisiana, Nebraska, North Dakota, Oklahoma, South Carolina, South Dakota, Texas, Utah, and Virginia lining up on the other.  To focus more on legal matters, several challenges were turned away on standing.  For example, neither states nor industry groups could challenge the Tailoring Rule as they did not allege the requisite injury.  Because the Tailoring Rule benefits small businesses (who are not required to comply with certain GHG emission requirements), it would appear that the door may remain open for parties who allege competitive injury (i.e., non-regulated entities gain a competitive advantage). In the meantime, do not expect Congress this election year to touch the issue.  

 


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