Insurance Coverage Crossroads: The Insurance Industry Appears Largely Unprepared to Weather Risks of Climate Change
The potential effects of greenhouse gas emissions on the climate have been discussed for several decades, and collected data is now confirming that warming of the atmosphere and oceans is playing a direct role in the more frequent occurrence of extreme weather events. However, according to a recent report by Ceres, many insurers are unprepared to weather these changes.
Ceres analyzed insurers’ responses to a survey conducted by the National Association of Insurance Commissioners (NAIC) designed to capture insurers’ readiness to deal with the impact of climate change risks. It found that only 23 of the 184 insurers surveyed have developed a comprehensive business plan to address climate change. Of those 23, the majority are large foreign-based insurers. In general, Ceres found that small insurers are far less prepared than large insurers, and property and casualty insurers have substantially more knowledge about climate change risks than life and health insurers.
When Will Insurers Reach a Watershed Moment?
Climate change-related catastrophes can threaten insurer solvency due to the potentially large numbers of policyholders affected. Public awareness about the role of climate change in the development of so-called “superstorms” seems to be gaining some traction, in part due to Superstorm Sandy, the latest in the series of ever-increasing shocks to the insurance industry. Yet it appears the insurance industry as a whole has not reached its “watershed moment,” despite the fact that “the potential liability for insurers is astronomical,” with“[h]undreds of billions, perhaps trillions” in private property and public infrastructure at risk in U.S. coastal areas alone.
If insurers fail to take proactive measures to deal with the effects of climate change on their business, the availability of affordable insurance—the safety net that undergirds global economic growth—will be in question. The insurance market responded to Hurricane Katrina by severely contracting available coverage or withdrawing entirely from the states directly affected. As recommended by Ceres in its report, insurers must work with state insurance regulators so that their premiums and reserves sufficiently incorporate climate-related loss data. If artificially low premiums are required by regulators, insurers unprepared for the effects of climate change may ultimately be forced to withdraw from the market.
Climate Change Litigation: An Emerging Risk
The potential vulnerability of policyholders to climate change litigation—and thus, insurers’ potential liability for the costs of defending and indemnifying their policyholders—appears to be the least recognized future threat to insurer viability. Fewer than 10 percent of the insurers surveyed mentioned any concern about liability for the costs of defending policyholders sued for climate-related damages, although lawsuits against companies emitting substantial amounts of greenhouse gases—either directly through their business activities or indirectly through their products—have already begun to emerge. Theories of liability include negligence, which is covered by most liability policies.
The first round of tort suits seeking damages related to climate change, although unsuccessful, provides a preview of the types of actions likely to be litigated more frequently in the future. In Comer v. Murphy Oil USA, the plaintiffs alleged that the greenhouse gas emissions of numerous companies exacerbated the destructiveness of Hurricane Katrina, causing damages to their property on the Mississippi coast. The Comer litigation recently came to an end when the Fifth Circuit Court of Appeals upheld the district court’s dismissal of the plaintiffs’ claims based on res judicata. This was the second time the case had been before the Fifth Circuit.
A prior suit by the Comer plaintiffs had been dismissed by the same district court based on multiple grounds, including lack of a “traceable” causal connection for purposes of standing and presentation of a non-justiciable political question.
In the first appeal, a panel of the Fifth Circuit would have allowed the plaintiffs to proceed on some of their state law claims. That opinion was vacated when a majority of the Fifth Circuit judges voted to take the case en banc, but without a quorum due to the number of recusals, the district court opinion was reinstated.
In Native Village of Kivalina v. ExxonMobil Corp., an Alaskan village alleged that the emissions of carbon dioxide into the atmosphere by 20 utility companies contributed to rising sea levels and warming temperatures, causing damage to the village. The U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s dismissal of the village’s suit (for reasons similar to those articulated by the district court in Comer), ultimately holding that federal common law claims for damages allegedly caused by emissions of carbon dioxide had been displaced by the Clean Air Act (CAA), which only authorizes actions by the U.S. Environmental Protection Agency. The Kivalina decision did not address the viability of state law causes of action.
It is certainly too early to predict whether the obstacles encountered by climate change plaintiffs will be insurmountable or whether climate change litigation will become the next mass tort (or perhaps more likely, somewhere in between). However, because liability insurers generally have a broad duty to defend their policyholders, insurers could potentially be liable for massive litigation costs whether or not plaintiffs are ultimately able to succeed on the merits of a climate change case.
A Parallel Front: Coverage Litigation
As the climate change litigation develops, parallel litigation between insurers and their policyholders over coverage will be sure to follow. The first significant opinion addressing whether a commercial general liability insurer has a duty to defend an insured against claims related to climate change arose when one of the companies sued in Kivalina, AES Corporation, sought a defense from its insurer, Steadfast Insurance Company.
In AES Corporation v. Steadfast Insurance Company, the Virginia Supreme Court upheld on rehearing the lower court’s ruling in favor of the insurer, explaining that there had been no covered “occurrence” as defined by the policy because the village alleged its “damages were the natural and probable consequences of AES’s intentional actions,” rather than “a fortuitous event or accident.” The effect of this decision outside Virginia is likely to be limited because interpretation of insurance contracts is a matter of individual state law, the wording of particular policies may differ, and the decision turned, in part, on an issue of pleading that could be remedied when future climate change complaints are drafted.
One of the issues Steadfast raised, but the court did not reach, is whether naturally occurring greenhouse gases like carbon dioxide qualify as a “pollutant” under the pollution exclusions prevalent in modern liability policies. This is likely to be heavily litigated in the future. Notably, however, many older liability policies do not include pollution exclusions. Because most “occurrence” policies cover a period of one year and the duty to defend is triggered by an allegation of bodily injury or property damage occurring during that year, multiple policies over a period of many years could be triggered.
Insurer Influence and Innovation
The principal way that insurers signal the level of risk is the pricing of the premium. A premium that reflects the true risk of a particular location or business activity serves to encourage more sustainable behavior. More accurate premium pricing alone, however, is not enough.
The insurance industry has successfully used its collective clout to influence policyholder behavior and public policy in the past. Insurer advocacy played a key role in seat belts and airbags becoming standard equipment in vehicles, improving driver safety and directly benefiting insurers’ bottom line. Insurer innovations similarly have tremendous potential to mitigate the effects of emissions of greenhouse gasses. Examples include “pay-as-you-drive” programs offering lower premiums based on a policyholder’s vehicle usage and driving habits, and discounts or credits for using energy-efficient green building products such as solar panels. As one of the world’s largest industries, insurers have the wherewithal to advance education and accelerate progress on the challenges presented by climate change while also protecting their own continued viability.
Crossing the Climate Change Crossroads
A small number of the insurers participating in the NAIC survey have already integrated the risks associated with climate change into their business model and have taken a leadership role in funding climate-related research, engaging in discussions with public officials, and educating their policyholders.
The industry as a whole should follow suit. As specialists in the proficient analysis of risks based on hard data, insurers can no longer afford to wait to cross the climate change crossroads on the path to ensuring a sustainable future.