Law and Insurance

Article Asks How To Insure Carbon Capture and Sequestration

A recent article posted by Evan Lehman on Climatewire (see Wanted: 1,000-year Insurance Policy) asks not how to engineer carbon capture and sequestration (CCS), but how to insure the liability risks of such a long-term enterprise.  We all know by now that CCS is the diversion of carbon dioxide from power-plant smokestacks to underground reservoirs, where the greenhouse gas must be stored practically forever.  The press has largely been focused on the front-end questions, how do get the gas under the ground?  How do we pay for it?  But - hey, this is America - it doesn't take long to get to, Who do I sue when the stuff leaks and kills someone or, worse, releases in a day all of the CO2 stored for the last 30 years?  Mr. Lehman asks:

Who will stand ready to compensate for the damage if the vast underground vaults supposed to contain the earth-warming gas leak? Will it be the power company that injects the carbon? Will it be the government?

Good question.  We can be sure, it will be someone.  That's usually where insurance come in. The insurance industry has become more or less adept at underwriting huge risks, like nuclear power plants and space excursions, but the risks associated with these projects are relatively short term.  “I can see this being difficult for insurance companies to get their hands around. How do you quantify a policy over a huge amount of time?” said Christopher Walker, director of the Climate Group, a nonprofit that encourages businesses to reduce their greenhouse gas emissions. “There’s nothing, that I’m aware of, that has a history like that."

If the scientists are right and the only way to achieve the 80% reduction in carbon emissions is through CCS, then finding the right balance for long term risk management of CCS will be essential before anyone will agree to undertake the risk.

Insurance Industry Reacts to Regulators' Questions on Global Warming Risks

Climatewire reporter Evan Lehmann posted a story this week with the headline, "A Tempest Rages Among Insurers and Regulators Over Climate Risks," (see Lehmann Story).  Earlier this month, I reported on the 9-point questionnaire proposed by a committee of the National Association of Insurance Commissioners (NAIC) to the insurance industry and the industry's mixed reception to the idea.  (See Perfect Storm Brewing Over Climate Change Disclosures).  The two sides met last week, and Mr. Lehmann reported the various reactions.

Just to summarize the insurers' reaction:

• some are irate over what they see as a political stunt designed to "'coerce' what is believed to be the world’s largest industry into advancing the notion of human-induced climate change";
• some are concerned that they would have to divulge proprietary or anticompetitive information;
• some fear their disclosures could be used against them in lawsuits; and
• some believe not enough is known about the effects of climate change to justify some of the questions.

NAIC representatives assert they have an obligation to protect consumers by taking steps to ensure that insurers are able to pay "rising claims related to violent weather."  The regulators will vote in September whether to propound the questions and have indicated they are willing to modify the questionnaire, broadening some questions to avoid specific disclosures of proprietary or competitively sensitive information and allowing some answers to be submitted confidentially.

The insurance industry is in a bind. More than any other segment of commerce, insurance companies understand the importance of assessing risk.  Head in sand is hardly prudent risk management. They were among the first to warn of the dangers of ignoring potential global warming risks.  So they feel impelled not to be seen dragging their feet.  But in many ways, they mirror the range of beliefs across society at large, from abject deniers, to minimalists, to true believers that, as one put it, “This is not one risk among many, but really the pre-eminent risk facing the industry.”

No doubt, some form of questionnaire will go out and one hopes some good come of it.  More importantly, as insurers themselves have urged, other industries should be conducting their own risk management assessments.

So the storm watch continues.

Perfect Storm Brewing Over Climate Change Disclosures Sought By Regulators From Insurance Industry

Just before hurricane season heats up, the winds are starting to blow from the insurance industry over questions posed by a committee of the National Association of Insurance Commissioners (NAIC) in a white paper outlining the "Potential Impact of Climate Change on Insurance Regulation."  (See Adopted White Paper).  Unless or until insurance regulation is federalized, the NAIC remains the most powerful body overseeing the U.S. Insurance industry, and for the last year or so has fixed its sights on preparing for climate change.  The Climate Change Task Force of the NAIC has promulgated nine questions to insurers (paraphrased as follows):

1. Do you have a plan to mitigate your own emissions?
2. Do you have a policy for handling climate change risk and investment management?
3. Have you considered the impact of global warming on your own investment portfolio?
4. What steps have you taken to encourage policyholders to reduce losses from climate change?
5. Describe your use of computer modeling to assess global warming impact.
6. Do you know of any trends or effects of global warming that may have a material impact on your operations or financial condition?
7. Are there geographic locations (read Gulf coast) where you are reducing business or line of insurance you are reducing or eliminating due to global warming?
8. What analysis have you conducted on the impact of global warming on your business?
9. Describe steps you have taken to engage key constituencies on the topic of climate change.

The industry's response has been, well, mixed.  Immediate comment by spokespersons for the American Council of Life Insurers and the Property Casualty Insurers Association of America was concern over the potential public release of proprietary and competitively sensitive information.  (See NAIC Climate Change Blueprint for Insurers).

Interestingly, recent comment has focused on the political aspects of the NAIC requests.  Robert Detlefesen, vice president of the National Association of Mutual Insurance Companies, stated that the disclosures are "essentially a call-to-action that seeks to enlist insurers in a campaign to promote an agenda informed not by science or evidence, but by the policy predilections of a handful of interests groups."  (See story posted on ClimateWire).  Mr. Detlefesen may have been reacting to the involvement in the NAIC process of such public and consumer interest groups as Center for Economic Justice and Ceres. 

Other industry voices suggest more openness to some kind of disclosure process and dialog with state regulators.  After all, the insurance industry was probably the first from the private business sector to take global warming seriously and begin planning.  What happens in 2009 from the NAIC disclosure-requests may depend on the 2008 hurricane season.  Another Katrina or Rita and the NAIC may issue subpoenas and promulgate interrogatories; or maybe it won't have to.

Another Global-Warming Lawsuit Brought Against Private Companies

The New York Times reports today that an Alaskan village has filed a nuisance suit against 5 oil companies, 14 electric utilities, and the country's largest coal company, seeking to hold these defendants liable for the impact of global warming forcing the village to relocate because of flooding.  See Flooded Village Files Suit, Citing Corporate Link to Climate Change. 

This is the latest in the ever-growing number of lawsuits brought against private industries under the rubric of "global warming litigation" (perhaps better known to some lawyers as the Klondike).  So far, courts have been shy about entertaining legal theories allowing recovery in these types of actions (e.g., in Connecticut v. American Electric Power, California v. General Motors Corp., and Comer v. Murphy Oil U.S.A., the plaintiffs' cases are being dismissed either as political questions or based on tenuous causation evidence  see Global Warming Litigation Heating Up for discussion of these cases).

I believe, however, that it is too early to tell whether the courts will eventually recognize a workable (or even unworkable) legal basis for allocating liability for damage that can be tied to climate change.  For example, asbestos plaintiffs watched throughout the 1960's while their cases were dismissed before the Fifth Circuit held in Borel v. Fi breboard Paper Prods. Corp., 493 F.2d 1076 (5th Cir. 1973) that asbestos manufacturers could be held more or less strictly liable despite intermediate sellers or product warnings. 

Although Kivalina, the plaintiff Inupiat village may find it difficult to obtain judgment against Exxon Mobil, Corporation, American Electric Power, Conoco Phillips Company and others, it may be a matter of time before a court salutes at one or another aspect of the claims asserted.

What appears new in this case is the allegation of conspiracy, that the defendants sought to mislead the public about the science of global warming "by convincing the public at large and the victims of global warming that the process is not man-made when in fact it is." 

Whatever happens in this suit, we can expect to see more litigation of this kind.

Analysts Predict SEC Will Require Corporate Disclosures of Global Warming Risks

In mid September, a number of state pension funds, treasurers, attorneys general, and interested organizations petitioned the US Securities and Exchange Commission (SEC) to issue an interpretive release clarifying that material climate-related information must be included in corporate disclosures under existing law.  See SEC Petition for Interpretive Guidance.  Earlier this month, the Kiplinger Report stated that the SEC would issue such guidelines under pressure from investor groups, who want to know the companies most at risk for future climate-change lawsuits and what they are doing to reduce carbon emissions.  See Kiplinger Report on SEC Disclosures.  Other analysts have echoed that prediction.

Risk from global warming is, of course, a huge potential insurance nightmare (or opportunity), both from a property/casualty standpoint and that of corporate governance.  Insurance companies themselves may be targeted for failing to disclose foreseeable environmental risks.  SEC action could exacerbate the risk potential.  One of the last times the SEC issued a bombshell interpretive-guidance release was after Enron when the agency announced that disclosure of off-balance-sheet transactions had always been material information under existing law (leaving the plaintiff's bar to infer that corporations that had failed to make such disclosures were potentially liable). 

What will happen to companies that did not disclose climate-impact information in their 2007 disclosures but do so in a big way in 2008?  If 2008 witnesses a recession, then unhappy shareholders may put the blame for sliding stock prices on failures to disclose environmental risk factors, whether this is justified or not.  Either way, the increase in securities lawsuits almost certain to follow will test the softening D&O insurance market.  Interesting times lie ahead.

Will Carbon Emissions Litigation Become the Next Asbestos Deluge for the Construction Industry?

In an article published this week in Business Insurance magazine (republished in IndustryBrief at Buildings' Carbon Emissions), author Stacy Shapiro poses the question whether in a few decades building owners, contractors and architects might face huge liability claims for failing to build green buildings, creating a wave of litigation that could dwarf the tobacco and asbestos litigation of prior years.  If carbon emissions are the largest man-made contribution to climate change, buildings, residential and commercial, account for approximately 38% of such emissions in the United States, more than either the transportation or industrial sectors.

At present, attention largely rests on such entities as power companies and automobile manufacturers and there is no know litigation targeting carbon emissions from buildings.  However, Ms Shapiro observes that legal experts see a real potential for litigation in the commercial construction sector either from the buildings' inhabitants who complain of losses from violations of health and safety laws, or from other potential plaintiffs seeking accountability for failing to keep pace with climate change regulations.

Although it may several decades before this type of litigation emerges, it is not too soon to be watching what one commentator calls the New Carbon Cycle.

New Marsh Think Tank Sees Large Companies Unprepared for Future Water Shortages

The recently formed Marsh Center for Risk Insights surveyed over 100 corporate-level executives on their views of eight potential crises and found the following percentages of companies that have prepared for them: (see Marsh research)

• 58%   Natural disaster
• 55%   Steep rise in oil prices
• 44%   International terrorist attacks
• 41%   A pandemic disease
• 25%   Global climate change
• 24%   Housing market collapse
• 17%   Reduced access to water
• 12%   Nanotech related risks

Even though roughly half of the executives report that access to water is critical to their companies' businesses, less than 20% of the companies have taken action to prepare for possible water shortages that could result from global warming.  Also surprising is that that 44% of those surveyed said their companies had not prepared because these crises were not seen as relevant to their business.

Research of this kind is useful as we move into the risky 21st century.

"Green" Insurance Program Offered to Eco-Friendly Companies

Two insurance services companies have announced a new insurance package called "GREEN" designed for policyholders that have demonstrated a commitment to sustainable business practices such as using renewable energy and producing environmentally friendly products (see Domani Press Release).  Domani Sustainability Consulting, based in Denver, and Garnet Captive Insurance Services, offices in San Francisco and Minneapolis, hope to offer workers' compensation, general liability, and automobile insurance policies at reduced premiums to qualified companies.

"We believe that companies that have demonstrated a commitment to sustainability should have lower insurance risks," said Andrew Cavenagh, President of Garnet Captive Insurance Services. "We expect that the positive impact these companies have on their corporate cultures can translate into lower insurance liabilities, including stronger employee safety records."

Qualification for membership in the program will include companies that:

1)   Purchase or generate energy from renewable sources;

2)   Implement energy efficiency best practices;

3)   Set targets for reducing environmental impacts;

4)   Occupy LEED® certified buildings;

5)   Develop clean technologies and environmentally-friendly products;

6)   Provide services or products that support healthy lifestyles; and/or,

7)   Participate in environmental community outreach programs.

"We are currently defining sustainability metrics and screening methodologies for membership to the program," said Blake Mackey, Manager in DOMANI's Strategic Sustainability Services group. Domani will evaluate applications.  Garnet Captive Insurance Services will consult with member companies to manage the costs of retained risk through quality claims handling and risk reduction consulting.

DOMANI Sustainability Consulting, LLC (www.domani.com) is an executive level consulting and management firm that has helped dozens of large corporations realize new bottom line value through precise, market driven sustainability strategies. DOMANI, with offices in Denver, Chicago, and New York, is a subsidiary of ENR 200 environmental consulting firm, Roux Associates, Inc. (www.rouxinc.com).

Garnet Captive Insurance Services, LLC (www.garnetcaptive.com), an industry leader in structuring captive and group captive programs, provides alternative risk consulting and brokerage services to retail insurance agents and their clients.

GAO Report Faults Government Insurance Programs for Ignoring Increased Exposure From Global Warming

A report by the Government Accountability Office to the Senate Homeland Security and Governmental Affairs Committee said last week that federal insurance programs aimed at flood and crop risks are not adequately preparing for anticipated increases in losses from global warming.  For example, in 2005 the National Flood Insurance Program faced losses of approximately $875 billion, compared with $207 billion in 1980, the report said.  The Federal Crop Insurance Corporation's exposure increased to $44 billion, from $1.7 billion.  Insurance payments in these two programs could reach $919 billion this year, compared with $209 billion in 1980.  The report noted that private insurers now consider models and studies aimed at predicting increased losses from droughts, hurricanes, flooding and other factors of climate change.  The GAO recommended more research to help Congress keep a lid on "an emerging high-risk area with significant implications" for the budget.  See AP story by John Heilprin at  Senate Report for more details.