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Harvey Cedars v. Karan: Condemnation at the Shore and the Evolution of the Common Law

July 29, 2013 23:46
by J. Wylie Donald

If you were a municipality that had to take action and condemn private property for the public good to avert disaster, before you got to court you would be particularly pleased to be able to say, "See, I told you so," pointing to an avoided calamity.  When one New Jersey beachfront community, the Borough of Harvey Cedars, took such action, the longed-for serendipity avoided both the trial and intermediate appellate courts. But then fortune smiled and the Borough enjoyed a favorable result before the New Jersey Supreme Court in Borough of Harvey Cedars v. Karan, decided just this month and setting the stage for condemnation actions up and down the New Jersey coast (and potentially elsewhere).

In 1973 the Karans acquired a beachfront home on a small lot (11,868 sq. ft.)  in Harvey Cedars.  It’s a lovely three-story home, the kind of place where one can sit on the porch on the second story and watch the children playing on the beach. Except that is, if there is a 22-foot dune between the home and the water. In that case, to see the little ones one would need to climb up to the third floor. One might, then, be a little incensed if the Borough came and offered $300 for a quarter of the property to put up such a dune.  And the fact that the dune would protect the home from the ravages of a rising and violent ocean, such as that delivered by Superstorm Sandy, might not ameliorate the unjustness of it all. 

That story is pretty much what happened to the Karans.  With funding from the New Jersey Department of Environmental Protection and the U.S. Army Corps of Engineers, the Borough planned to construct a $25 million, 22-foot-high sand dune along its shoreline; it would be placed on private property where necessary by way of an easement. Such a barrier, it was hoped, would protect local homes and businesses from future storm surges. Many beachfront homeowners saw the benefit of a protective dune and voluntarily accepted the easement. Others, including the Karans, did not. The asserted benefits did not sit well with Harvey Karan, who argued that, in nearly four decades of owning the home, he had not seen “a lick of water” reach its living quarters.  We note that this was not a particularly surprising result as the living quarters were on the second and third floor.  In any event, in November 2008, the Borough moved to acquire a portion of the Karans’ property by eminent domain. Unsurprisingly, the Karans rejected the Borough’s offer of $300 “just compensation” and took legal action.

In an evidentiary proceeding, the Karans moved to prevent the Borough’s appraiser, Donald M. Mollier, Ph.D.,  from testifying that the dune’s storm protection increased the value of their home—thus decreasing the amount of compensation to which they were entitled. Instead, they maintained that the project provided “general benefits” to all Harvey Cedar residents, ones that could not be taken into account when determining compensation. Relying on prior New Jersey precedent, Sullivan v North Hudson County Railroad Co., 51 N.J.L. 518 (E. & A. 1889), the court supported this view, instructing the jury:  “the Borough is not entitled to any credit nor should the amount of just compensation to the Karans be reduced by virtue of any general benefit which they may receive along with other property owners in the Borough as a result of the dune and beach replenishment project.”

The jury returned an award to the Karans of $375,000, for the taking of a quarter of their lot and the loss of their view. In early 2012 the Appellate Division affirmed, reasoning "that the advantage accruing to the Karans from the newly constructed dune was not a special benefit but rather 'a classic example of a general benefit,' which cannot be used to offset the loss from a partial taking."

The Borough persisted nonetheless and filed an appeal to the New Jersey Supreme Court. And then came Sandy with its unprecedented devastation up and down the Shore. Over 100 killed, sixty-two billion dollars in damage (much of it uninsured) in the New York-New Jersey metropolitan area. Places like Mantoloking, without a protective dune, were shredded. Places like Harvey Cedars came through relatively unscathed. Hmmmm.  Maybe there's something to the protective dune idea.

The Jersey Shore Partnership thought so and filed a motion seeking leave to be allowed to submit out of time a brief amicus curiae, which the Court granted. Rather than get caught up in an analysis of general and specific benefits, the Partnership took a different tack. Lead counsel, Dave Apy, crafted an argument based on the modern method of any condemnation award:  fair market value.  (Full disclosure:  Mr. Apy mentored me as a younger associate; he has a knack for cutting through legal clutter.)  Rather than staying "mired in technical, nonsensical arguments" over general and special benefits, the courts should look to a simple test:  "whether the benefits, however characterized, are ascertainable and directly enhance the remaining property."  The other amicus, the New Jersey Department of Environmental Protection, likewise advocated for a fair market value approach.   

 The New Jersey Supreme Court bought the Partnership's and the NJDEP's argument. In its ruling, it cited a wide body of case law, dating back to the Magna Carta, and supporting the notion that when private property is taken, the State must pay just compensation. In a complete taking, just compensation is measured by fair market value. The Court saw no reason not to apply the same concept to a partial taking. After laying out the history that led to Sullivan (the basis for the trial court's decision), the Court turned to Mangles v. Hudson County Board of Chosen Freeholders, 55 N.J.L. 88 (Sup. Ct. 1892), decided only a few years after Sullivan and by the same judge. "'Just compensation' could not 'be ascertained without considering all the proximate effects of the taking."  Id. at 92.  "'Any benefit arising from the taking and public use of the property 'which admits of reasonable computation may enter into the award.'" Id.

The remainder of the Court's opinion in Karan bolsters the position of fair market value. It concludes that the general/special benefit distinction "is at odds with contemporary principles of just-compensation jurisprudence."

Thus, there would be a new trial, where “the Borough will have the opportunity to present evidence of any non-speculative, reasonably calculable benefits that inured to the advantage of the Karans’ property at the time of the taking.” "In short, the quantifiable decrease in the value of their property -- loss of view -- should have been set off by any quantifiable increase in its value."

Justice Holmes said in The Common Law, "The life of the law has not been logic; it has been experience."  In Karan, logic required that Sullivan’s hoary general and special benefit distinction would carry the day, as it did before the trial court and the Appellate Division.  Experience (bearing the nom de guerre Sandy), however, led to a different result.

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

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

Call for Comments on the Third National Climate Assessment

February 2, 2013 00:46
by J. Wylie Donald

The draft “National Assessment of Supply Chain and Other Developing Risks” was issued just last month. It outlined increasing threats to infrastructure, food and water supplies, air quality, national security, public health and public safety, and ecosystems. It also discussed measures to reduce those risks and to address them. In short, the Assessment should be required reading for everyone involved in planning a company's response to the things that could destroy the company. Only it won't be because of one small detail. That title, the "National Assessment of Supply Chain etc.," is a fabrication.  The real title is the draft Third National Climate Assessment Report (Assessment).  (It's 147 MB so here's the Executive Summary too.)  Thus, for many companies, the report will be shunted to the EH&S office and the C-Suite will remain oblivious. This is unfortunate.

"National climate assessments act as status reports about climate change science and impacts."  Their legal basis is the Global Change Research Act of 1990 (codified at 15 USC §§ 2921-61), which mandates periodic reports to the President and Congress evaluating the findings of the U.S. Global Change Research Program (USGCRP).  Under the USGCRP the effects of global change (not just climate change) on all facets of the nation (including agriculture, energy, water resources, human health and ecoystems) are analyzed.  Trends are reviewed and projected for up to 100 years.  “The NCA aims to incorporate advances in the understanding of climate science into larger social, ecological, and policy systems, and with this provide integrated analyses of impacts and vulnerability.”  The last National Climate Change Assessment was in 2000.

What is particularly rewarding in the Assessment is that it gets right down to the nitty-gritty.  We have picked only one topic to focus on, Transportation, but one could take a deep dive in over a dozen.  Ports are obviously at risk from sea level rise, but some might think that is manageable because sea level is only changing gradually, even if the worst predictions are accepted.  If it were only that simple.  "When sea level rise is coupled with intense storms, the resulting storm surges will be greater, extend farther inland, and cause more extensive damage."  Draft at 200.  Even without sea level rise, the increase in extreme weather and flooding will result in increased sedimentation.  "Channels that are not well maintained and have less sedimentation storage volume will thus be more vulnerable to significant, abrupt losses in navigation service levels."  Id

Climate change predictions also include increasing temperatures, but so what?  The Assessment offers the following:  "expansion joints on bridges and highways are stressed and asphalt pavements deteriorate more rapidly at higher temperatures.  Rail track stresses and track buckling will increase.  Lift-off limits at hot-weather and high-altitude airports will reduce aircraft operations."  Draft at 197.  Each of these conclusions is referenced to research.  Airports too are not out of harm's way.  Thirteen of the nation's largest airports have at least one runway within 12 feet of current sea level.  Draft at 201.  Readers will remember that the storm surge from Sandy was 14 feet in New York.  Draft at 203.  They may not remember that the storm surge from Katrina was 15 feet along the entire Mississippi coast, and much higher in some places (like an "astonishing 27.8 feet at Pass Christian, Mississippi").  Our business is not freight forwarding or overnight delivery but we bet that those running such businesses pay close attention to the reliability of their transportation routes.  If supply chains matter, one needs to be looking at roads, rails, ports and airports, and we mean locally, as well as abroad.

The Assessment is a trove of information and provides citations to the vulnerability studies of numerous cities and states, including Boston and New York City, California, Iowa, Massachusetts, Michigan, Washington, and Wisconsin, which have already begun assessing their transportation vulnerabilities.  Draft at 209.  Although there is a lot of information out there, the Assessment also sounds a note of caution in preparing:  "Impacts of climate on transportation system operations, including safety and congestion, both on road systems and in aviation, have been little studied to date."  Draft at 213.  "[E]xisting models used for snow and ice removal procedures are no longer reliable, requiring better monitoring and new models, as well as better roadway condition detection systems."  Draft at 211.  This uncertainty, however, should not be a reason to do nothing.  As the Assessment states, preparation helps a lot:  " the vulnerability analyses prepared by the metropolitan New York authorities [prior to Sandy] provided a framework for efforts to control the damage and restore service more rapidly."  Draft at 204.

Another approach taken by the Assessment is to comment on the impacts from climate change that can be expected in various areas of the country such as more hot days, or more heavy precipitation (or more drought depending on location). For businesses that don't include weather considerations in their planning, the Assessment won't change anything:  heavy rains have come since the dawn of time and humans have responded. But for those that do any sort of weather preparation and planning, the Assessment points out what extreme weather means, and thus suggests what steps might be worth taking.

For example, torrential rains from Hurricane Irene in Vermont damaged over 500 miles of state-owned roadways and 200 bridges. Draft at 554.  Some communities were isolated for days. Id. Why should people in the Northeast take notice?  Because "between 1958 and 2010, the Northeast saw a 74% increase in the amount of precipitation falling in very heavy events." Draft at 551. In other words, the fate of Vermont is increasingly likely to be the fate of others.

And this is a fundamental feature of climate change.   "Climate change is statistical weather, and manifests itself as a change in the frequency of events that would still occur (but with lower frequency) in the absence of climate change."  Draft at 218. The risk of untoward events is increasing. No one will be able to point to a flood or a hurricane or a heat wave and say this is climate change-related. But that is not necessary, or even relevant. As the risk increases, prudence requires that one spend more time and expense thinking about and countering the risk.  The Assessment is a good place to start.  And a good first step to start one's thinking would be to submit comments on the report.  The deadline is April 12.

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

Top 6 at 12: Highlights of the Top Climate Change Stories in the Second Half of 2012

December 31, 2012 11:59
by J. Wylie Donald

2012 has drawn to a close.  We chronicle here six of the most significant stories on the climate change front in the last six months.  For those looking for hope that government is taking action to rein in greenhouse gas emissions, the focus is on California, where cap-and-trade stepped into reality with California's first emissions auction.  Nationally and internationally regulation is at a standstill or going backward.  In the courts, the climate change liability plaintiffs were pounded again as the Ninth Circuit confirmed the dismissal of Native Village of Kivalina v. ExxonMobil Corp.  Responding to climate change, however, is a different story.  Superstorm Sandy was a wakeup call on adaptation and the impacts of extreme weather; the National Flood Insurance Program managed to obtain statutory authority to include climate change in its considerations.

1.  Superstorm Sandy –  Climatologists are confident that the changing climate will lead to more frequent and more severe storms.  Sandy, following Hurricane Irene the previous year, delivered on both predictions.   A nine-foot storm surge at Battery Park.  Transformers exploding and putting Manhattan into darkness.  The Hoboken PATH station  submerged.  $50 billion in damage.  Superstorm Sandy set records and was completely consistent with the concerns of proponents of climate change mitigation and adaptation.  Did it have anything to do with climate change or was it simply a chance confluence of events?  The weather pattern was unusual.  There was a hurricane (albeit fading), coupled with a nor’easter, intersecting with an arctic high pressure front, under a full moon.  Individually, those are independent of climate change.  But there was also a record lack of sea ice, which has a measured and observed effect on global atmospheric circulation, which could result in severe weather coming together more severely.  So quite possibly Sandy is a result of climate change.  More important than the academic debate, however, is the impact on adaptation.  Regardless of one’s views on climate change, Sandy demonstrated that a major metropolitan area is vulnerable to extreme weather.  Steps will be taken to flood-proof subways, bury electric lines, raise seawalls, improve evacuation plans  and emergency response,  etc.  All of these are part of the steps needed to adapt to climate change.   Whether it is acknowledged as linked to climate change or not (but see Bloomberg Business Week cover following Sandy:   “It’s Global Warming, Stupid!”), adaptation is going to happen. 

2.  Presidential Election - Climate change was an important part of the campaign:  "The Obama-Biden cap-and-trade policy will require all pollution credits to be auctioned, and proceeds will go to investments in a clean energy future, habitat protections, and rebates and other transition relief for families."  The 2008 election campaign that is. It was a completely different position in 2012. Or maybe not different at all.  No one could tell because nobody was talking about it.  Even Sandy wasn't enough to propel climate change into the debate in the last week of campaigning.

3.  Native Village of Kivalina v. ExxonMobil - The last filed of the original quartet (American Electric Power, General Motors, Comer, and Kivalina) of climate change nuisance cases, Kivalina finally made it to a federal appellate court, where in September it met the same fate as its brethren:  dismissal affirmed.  Plaintiffs asked for rehearing.  The Ninth Circuit wasn't interested.  As of this writing, the only case left is Comer v. Murphy Oil USA, which is on appeal following its dismissal last March (for the second time) by the Southern District of Mississippi.  According to that court, plaintiffs lose for a wide variety of reasons:  standing, political question doctrine, res judicata, collateral estoppel, displacement, statute of limitations and proximate cause.   

4.  Cap-and-trade - California, alone among the fifty states, instituted its multi-industry full-fledged cap-and-trade program auctions in November.  All of its allowances for 2013 were sold at a price slightly above the mandated floor price of $10/ton.  Regulators and environmental groups hailed the auction as a success; some business groups were less enthusiastic.  The California Chamber of Commerce sued the California Air Resources Board to invalidate the auctions.  Meanwhile, the Regional Greenhouse Gas Initiative in the northeast continues with its allowances trading at the floor price, and with less than 2/3 of its allowances selling in its August and December auctions.  Some commentary concludes that it is time for RGGI to shut down as its CO2 emission goals have been met.    From where we sit, RGGI's success or failure can't be judged until its carbon trading is done in connection with  a robust economy.  The world economic malaise suppresses business, and with it, carbon dioxide emissions.  California may face the same issue.  

5.  National Flood Insurance Program Reform - Could a poisonously partisan Congress vote for this: 

(1) IN GENERAL- The Council shall consult with scientists and technical experts, other Federal agencies, States, and local communities to--(A) develop recommendations on how to--(i) ensure that flood insurance rate maps incorporate the best available climate science to assess flood risks; and (ii) ensure that the Federal Emergency Management Agency uses the best available methodology to consider the impact of--
(I) the rise in the sea level; ..."?  

Not the Congress we know.  Or so we thought.  Somehow, somewhere, someone put this into a draft, which made it into and out of a committee, ended up on the floor of both houses, survived two votes and came out as an enrolled bill for the president's signature.  The president signed it into law in July.  This was part of the miscellaneous section of the Moving Ahead for Progress in the 21st Century Act  (aka the Transportation and Student Loan Bill), which may explain how this occurred.  In any event, climate change considerations are statutorily mandated as part of the NFIP.  42 USC § 4101a(d)(1).  We can expect a report by July 6, 2013.  Id. § 4101a(d)(1)(B).  Who'd have thunk? 

6.  Global GHG Regulation - COP-18, the Conference of the Parties to the United Nations Framework Convention on Climate Change, wrapped up in Doha, Qatar in the middle of December widely panned as ineffective.   While it extended to 2020 the Kyoto Protocol addressing global greenhouse gas emissions, major nations (Canada, Russia, Japan and New Zealand) dropped out, and the United States continued to refuse to participate.  Thus, only about fifteen percent of global emissions are now covered by the protocol (the EU and other European nations, as well as Australia, continue to support the protocol).   Developing nations (whose emissions are not restricted by Kyoto) had hoped to obtain commitments for funding "climate finance" of $100 billion, but that did not occur either.  One can see parallels between the Kyoto Protocol and the Western Climate Initiative and RGGI.  In all three members have dropped out and the commitment to address greenhouse gas emissions waivers. 
 
The fiscal cliff was the focus at the end of 2012; climate change got short shrift.  2013 may establish that that was short-sighted.

Even if You Can't Insure the End of Days, You Can Insure Some of the Effects of Climate Change

December 22, 2012 00:04
by J. Wylie Donald

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.  

Climate Change | Green Buildings | Greenhouse Gases | Weather

Will Climate Change Considerations Affect Rebuilding After Sandy? The Short Answer is Yes.

November 27, 2012 11:51
by J. Wylie Donald

West Virginia today and Virginia yesterday became the seventh and eighth states to obtain the benefits of a federal Major Disaster Declaration in connection with Superstorm Sandy.  They follow New Jersey, New York, Connecticut, Rhode Island, Maryland and Delaware.  What does that mean?  Money.  Lots of money.  A key question will be whether that money goes to improving the resilience of the community for the next severe storm.

As the FEMA announcements point out, eligible state and local governments may obtain:

• Payment of not less than 75 percent of the eligible costs for removing debris from public areas and for emergency measures, including direct federal assistance, taken to save lives and protect property and public health
• Payment of not less than 75 percent of the eligible costs for repairing or replacing damaged public facilities, such as roads, bridges, utilities, buildings, schools, recreational areas and similar publicly owned property, as well as certain private non-profit organizations engaged in community service activities.
• Payment of not more than 75 percent of the approved costs for hazard mitigation projects undertaken by state and local governments to prevent or reduce long-term risk to life and property from natural or technological disasters. 

However, if improvements are desired, “[f]ederal funding for such improved projects shall be limited to the Federal share of the approved estimate of eligible costs."  44 CFR 206.203(d).

Discerning readers will have latched on to “eligible costs” as the essential criteria of the payments. What are they?  The Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121-5207, makes that clear and it is not a good result.   Under the Stafford Act, eligible costs are “[based on] the design of the facility as the facility existed immediately before the major disaster; and (ii) in conformity with codes, specifications, and standards … applicable at the time at which the disaster occurred.”  42 USC 5172(e)(1)(A).  In other words, to put it in the words of Sean Reilly, a Board member of the post-Katrina Louisiana Recovery Authority, “Under the Stafford Act, you pretty much are relegated to building it back the way it was. You get the depreciated dollar, and you get a vision that says, 'OK, that was a 40-year-old building; let's rebuild a 40-year-old building.'” 

But surely improved building codes or zoning requirements are covered?  They are, but only if they were in place before the calamity.  The regulations provide:  “For the costs of Federal, State, and local repair or replacement standards which change the predisaster construction of facility to be eligible, the standards must:  [among other things, be] formally adopted and implemented by the State or local government on or before the disaster declaration date.” 44 C.F.R. 206.226(b)(3)(i).

One might justifiably be concerned that states and communities are being condemned to repeat the mistakes of the past.  But there is a path to succor:  hazard mitigation by the FEMA Regional Director.  “Hazard mitigation” is “any cost effective measure which will reduce the potential for damage to a facility from a disaster event.” 44 CFR 206.201(f).  Under the regulations, the Regional Director is authorized to “require cost effective hazard mitigation measures not required by applicable standards. The cost of any requirements for hazard mitigation placed on restoration projects by FEMA will be an eligible cost for FEMA assistance.” 44 CFR 206.226(c).  That is, pre-disaster rules and codes are not the only game in town. If a state or municipality rebuilding from Superstorm Sandy wants federal dollars to help it anticipate the exigencies of the future, the FEMA Regional Director must be part of the dialogue.

The future is a changing climate.  Thus, the dialogue will almost certainly include climate change adaptation.  Indeed, the Natural Resources Defense Council and the National Wildlife Federation filed a petition in October seeking to have FEMA explicitly require that climate change be considered in the preparation of state hazard mitigation plans. Connecticut and California already do so and FEMA Administrator Fugate appears to be on board.  As he stated in February of this year:

"When I talk about climate resilience, I’m talking about how we need to forcefully communicate the risk we face in not building resilience to climate change at the local level, which might not have been in anyone’s experience previously ….  We cannot afford to continue to respond to disasters and deal with the consequences under the current model.  Risk that is not mitigated, that is not considered in return on investment calculations, oftentime steps up false economies. We will reach a point where we can no longer subsidize this.”

A premise of the NRDC and NWF petition is that "If states receive federal funds for their disaster mitigation efforts, national taxpayers have a right to demand that the states engage in thoughtful planning to reduce the ultimate federal cost."  We think few would disagree with that.  We likewise think, as the petitioners do, that climate change needs to be part of the plan.

Climate Change | Climate Change Effects | Regulation | Weather

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

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

Climate Change Challenges the Republican Convention

August 27, 2012 00:44
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


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