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GLOBAL WARMING AND INSURANCE. A Gathering Storm or Just “Hot Air” Presented by: Rodney J. Taylor, J.D., P.E., CPCU, CLU, ARM Managing Director Aon Environmental Risk Services November 8, 2007. Global Warming Defined.

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global warming and insurance

A Gathering Storm or Just “Hot Air”

Presented by:

Rodney J. Taylor, J.D., P.E., CPCU, CLU, ARM

Managing Director

Aon Environmental Risk Services

November 8, 2007

global warming defined
Global Warming Defined

“Global Warming refers to the increase in the average temperature of the Earth’s near-surface air and oceans in recent decades and its projected continuance”

  • Temperatures rose 0.74º C (1.33º F) during the last 100 years
  • IPCC concluded:

“Most of the observed increase…since the mid-20th century is very likely due to…anthropogenic greenhouse gas concentrations.”

greenhouse effect
Greenhouse Effect
  • Naturally occurring greenhouse gases increase Earth’s temperatures 33º C (59º F)
    • Without GHG, Earth would be uninhabitable
  • Major GHGs:
    • Water Vapor (Avg. 54%)
    • Carbon Dioxide (18%)
    • Methane (7%)
    • Ozone (6%)
  • Increases in concentrations since 1750:
    • CO2 - 31%
    • Methane – 149%
global warming 1850 to 2007
Global Warming (1850 to 2007)

The year 2006 was sixth warmest year on record, exceeded by 1998, 2005, 2003, 2002 and 2004

Source: Climatic Research Unit and the UK Met. Office Hadley Centre

Brohan, P., J.J. Kennedy, I. Haris, S.F.B. Tett and P.D. Jones, 2006

concentrations of co 2 are expected to increase
Concentrations of CO2 Are Expected to Increase
  • Present - 383 ppm
  • Much higher than any time during last 650,000 years
  • Fossil fuels = ¾ of the increase in past 20 years
  • Future rate of change will depend on economic, sociological, technological and natural developments
  • IPCC models predict concentrations of 541 ppm to 970 ppm by the year 2100
  • Resulting temperature changes of 1.1º C to 6.4º C (2.0º F to 11.5º F) by the year 2100
global warming risk management
Global Warming & Risk Management
  • Concerns regarding Global Warming include:
    • Melting of glaciers/polar ice
    • Rising ocean levels
    • More severe tropical storms/hurricanes
    • Changes in precipitation
    • Draught
    • More severe forest fires
    • Heat related deaths and diseases
    • Tipping Point – Point where damage is irreversible and/or rate of change accelerates
rising sea levels due to global warming
Rising Sea Levels Due to Global Warming
  • Sea levels are up 130 meters (400 ft.) since the last ice age (18,000 years ago)
  • Most occurred 6000 years ago
  • Last 3000 years, sea levels were nearly constant
  • Since 1900 – rising at 0.15 mm/yr.
  • Since 1993 – rising at ten times that rate (1.5 mm/yr.)
  • Global Warming contributes rise in two ways:
    • Expansion of sea water as the oceans warm
    • Melting of ice over land
estimated sea level changes by year 2100
Estimated Sea Level Changes by Year 2100
  • IPCC Models 110 mm to 770 mm (4.34 in. to 30.34 in.)
  • May be altered by:
    • Melting glaciers/polar ice
    • Thawing of permafrost
  • Impacts of sea level rises:
    • Coastal erosion
    • Higher storm-surge
    • Flooding and coastal inundation
    • Impacts to groundwater
    • Loss of wetlands and habitat
  • 634 million people live at levels of 30 feet or less above sea level
  • Also home of 70% of the world’s largest cities
results of sea level rise are already apparent
Results of Sea Level Rise are Already Apparent

Scenes like this are common

from the Pacific to Antarctica

results of sea level rise are already apparent1
Results of Sea Level Rise are Already Apparent

Cape Hatteras Lighthouse

  • Built in 1797
  • Rebuilt 1870
  • Moved 2780 ft.

inland in 1999

worldwide drought conditions
Shortage of water affecting >2 billion people


Natural forces


Inefficient agriculture

Agricultural & industrial pollution

Lack of water treatment facilities (90% of the world dumps untreated sewage and industrial waste in rivers and streams

Exacerbating factors:

Rapid industrialization in India and China

Worldwide Drought Conditions
worldwide drought conditions1
Worldwide Drought Conditions

Ship Stranded in Bed of Former Aral Sea in Uzbekistan

worldwide shortage of usable water
Worldwide Shortage of Usable Water

Industrial Growth is Changing China

and Adding to the Water Shortage

changes in patterns of precipitation
Changes in Patterns of Precipitation
  • With Global Warming not all areas will experience water shortages
    • Some regions will have more rain
    • Hurricanes and tropical storms will cause more flooding and damage
    • Earlier snow melt and lighter winter snow pack will change amounts of water in many areas
    • Coupled with a decrease in the moisture content of soils
changes in weather coupled with changes in demographics u s
Changes in Weather Coupled with Changes in Demographics (U.S.)
  • 53% of population live in coastal areas (17% of land area)
  • 23 of the 25 most densely populated counties are coastal
  • Since 1960, coastal populations have increased by 150%
  • Coastal values exceed 50% of total values in many states
    • Florida – 80%
    • New York – 65%
    • Connecticut – 62%
  • Growth in coastal values is accelerating
example florida
3rd most populous state

Population growth is twice that of most other states

Florida’s population:

2007 – 18 million

2030 – 28 million

Insured values:

1988 - $566 billion

2007 - $2.4 trillion

2014 - $5.0 trillion (projected)

Example - Florida
why should risk managers care
Why Should Risk Managers Care?
  • If people cause Global Warming - People can stop it
  • If informed - Some people will reduce their impact:
    • Carbon footprint
    • Energy use
    • Water use
    • Recycling
  • If voluntary measures not effective – Legislation will be passed to regulate activities
  • If someone is at fault – They will pay
global warming risk management2
Global Warming & Risk Management
  • Estimated costs of Global Warming:
    • 1 meter rise in sea level - $600 billion to $900 billion
    • Doubling CO2 in the atmosphere –
      • $27 billion increase in windstorm storm damage annually
        • 65% increase over 2006 levels
      • $175 billion increase in flood damage annually
        • 70% increase over 2006 levels)
    • Stern Report - $9 trillion damage due to Global Warming on a world-wide basis
      • Cost to reverse damage – 1.5% of GNP annually
global warming risk management3
Global Warming & Risk Management
  • Insurers’ reactions to Global Warming:
    • Most current changes involve Property Insurance
    • Changes include:
      • Rate changes in areas subject to greater risks
      • Limiting the number of policies issued in high-risk areas
      • Withdrawal from markets
global warming risk management4
Global Warming & Risk Management
  • Risks have been transferred to insureds or government insurance programs
    • Rate surcharges assessed by insurers for windstorm
      • Forces others to subsidize insureds in high-risk areas
    • State programs have been implemented to preserve insurance
    • Federal programs provide the only coverage available for some risks (e.g., flood insurance)
      • There is a current effort to add windstorm damage to the National Flood Insurance Program
national flood insurance program statistics
National Flood Insurance Program Statistics

For 2005:

  • Loss payments totaled $13.1 billion
  • Annual premium collected was $2.2 billion
  • Average flood claim was $87,512
    • Up from $39,094 in 2004.
global warming risk management5
Global Warming & Risk Management

Future Global Warming Risk Issues :

  • Utilities that emit CO2 into the atmosphere may be charged with the costs of storm damages
  • Oil companies may be asked to pay for seawalls to prevent damage from rising oceans
  • Automobile manufacturers may be asked to pay bodily injury claims due to higher temperatures
  • Foreign entities may sue U.S. manufacturers for damage to resources anywhere in the world
global warming risk management legal issues
Global Warming & Risk Management – Legal Issues
  • Global Warming claims to date have taken two forms:
    • Challenge to Regulatory Inaction – Claims against government agencies to require corporate entities to reduce their emissions
    • Target Corporate Defendants – Claimants, including governmental entities, seek declaratory and injunctive relief against emitters based on common-law nuisance theories
global warming risk management legal issues1
Global Warming & Risk Management – Legal Issues
  • Massachusetts v. EPA - Type 1 Claim
    • October 20, 1999 - Environmental groups petitioned the U.S. EPA to regulate greenhouse gas emissions from new motor vehicles
    • Petition was denied by the EPA
    • 12 states, 3 cities, 2 territories and dozens of environmental groups asked the U.S. Court of Appeals to rule on the EPA’s decision not to regulate
    • From denial, case was appealed to the U.S. Supreme Court
global warming risk management legal issues2
Global Warming & Risk Management – Legal Issues
  • September, 2007 - The U.S. Supreme Court: (1) ordered the EPA to comply with its mandate to regulate emissions of air pollutants from new cars; and (2) determined that greenhouse gases are “pollutants” subject to the Act
  • Could result in the application of Pollution Exclusions in liability policies to claims alleging emissions of greenhouse gases
  • While the ruling is narrow, its implications are broad
    • Expect the EPA to now look at regulation of emissions of CO2 from fixed sources as well as automobiles

Question: Is CO2 the kind of Pollution the liability insurers intended to exclude?

global warming risk management legal issues3
Global Warming & Risk Management – Legal Issues
  • California v. General Motors Corp., et al.  - Type 2 Claim
    • CA A.G. sued automakers, alleging vehicles’ emissions contributed to Global Warming
    • Alleged harms included:
      • Reduced snow-pack
      • Loss of fresh water sources
      • Rising sea levels
      • Salt water incursion in aquifers
      • Erosion of beaches
      • Increased ozone pollution
      • Heightened risk of wildfires
      • Increased flooding
      • Health effects on sensitive populations
      • Adverse impact on animals and fish
global warming risk management legal issues4
Global Warming & Risk Management – Legal Issues
  • The U.S. District Court (N. California) dismissed the case, finding it presented a non-justiciable “political” question
    • Required court to determine what is “unreasonable” in the context of CO2 emissions
    • Forces election between competing interests:
      • Reducing emissions
      • Preserving economic/industrial development
    • Claims implicated:
      • Congress’s power over interstate commerce
      • Executive Branch’s power over foreign policy
    • Court could not identify precedent to assist it with legal and factual difficulties in allocating fault and damages
global warming risk management legal issues5
Global Warming & Risk Management – Legal Issues
  • Comer & Cox v. Nationwide Mutual Insurance Company
    • Original complaints – Against insurers for Katrina flood damage
    • Amended to include claims against coal, oil and refining companies
    • Allegation: “Hurricane Katrina evolved into a storm of unprecedented strength and destruction, fed and developed by global warming caused by the production of greenhouse gases by the defendant corporations
    • Damages alleged include:
      • Loss of property and use of property
      • Loss of business and income
      • Cleanup expenses
      • Disruption of lives
      • Loss of loved ones
      • Mental anguish and emotional distress
global warming risk management legal issues6
Global Warming & Risk Management – Legal Issues
  • The U.S. District Court (S. Mississippi) dismissed the case by refusing to certify the class (homeowners suffering damage due to Hurricane Katrina)
    • Court determined fact-specific inquiries must be resolved on the basis of evidence adduced at trial
    • The nature and extent of property damage from a common cause (Hurricane Katrina) will vary greatly in its particulars
      • Depends on location and condition of the property before the storm; and
      • Combination of forces that caused damage
    • Opinion stated:

“I do not believe that a class action of this nature is a superior method of resolving the issues…”

global warming risk management legal issues7
Global Warming & Risk Management – Legal Issues

General and Excess Liability Insurance

  • Coverage issues in Global Warming cases:
    • Complaints are likely to be construed to implicate either:
      • Manufacturing activities conducted by insureds over a long period of time, or
      • Products manufactured by insureds over long periods of time
global warming risk management legal issues8
Global Warming & Risk Management – Legal Issues

General and Excess Liability Insurance

  • Coverage issues in Global Warming cases:
    • What policies are triggered by the claims?
      • Katrina (one policy)
      • California Auto Makers – 50 years or more
      • Lost policy questions
      • Choice of law issues
    • Do greenhouse gas emitting activities constitute an “occurrence” under the CGL Policy(ies)
    • Do harms alleged constitute “Bodily Injury” or “Property Damage?
    • Was the defendant aware of the harmful nature of its emissions?
    • Do exclusions (especially Pollution Exclusions) apply?
global warming risk management legal issues9
Global Warming & Risk Management – Legal Issues

Directors & Officers Liability Insurance

  • Coverage issues in Global Warming Cases:
    • Allegations that defendants:

“…Knew or should have known that their emissions of carbon dioxide and other greenhouse gases contribute to global warming”

    • Involve potential liability of officers and directors who failed to act prudently in the face of “corporate knowledge” of likely injury or damage
global warming risk management legal issues10
Global Warming & Risk Management – Legal Issues

Directors & Officers Liability Insurance

  • Coverage issues in Global Warming Cases:
    • Scrutiny will be greater if executives actively misrepresent or conceal relevant facts
    • Information in the possession of Directors and Officers that differs from the corporation’s official statements may fuel shareholder litigation
    • D&O policies are written on claims-made forms that will result in only one policy being triggered by Global Warming claims
global warming risk management legal issues11
Global Warming & Risk Management – Legal Issues
  • Based on what is currently known, plaintiffs face an uphill battle in pursuing claims against corporate emitters for Global Warming damages
    • Many courts will simply refuse to recognize and wrestle with the complex issues
    • Some cases will be inextricably intertwined with matters of domestic and international environmental policy that involve “political’ questions
    • Causation issues – plaintiffs must prove the injury or damage is the result of the defendant’s emissions
      • Science has not yet established that more severe storms and floods are the result of Global Warming
      • Allocation of damages will also be challenging
global warming risk management legal issues12
Global Warming & Risk Management – Legal Issues
  • Even though it will be difficult for plaintiffs to win cases alleging Bodily Injury or Property Damage due to Global Warming, the insurance industry is not going to escape unscathed
    • Duty to defend is broader than duty to indemnify
    • Insurers must defend claims even if they are groundless
    • Defense of Global Warming claims will be expensive because of the technical evidence that must be produced and reviewed
    • It is likely that insurers will spend millions of dollars defending claims related to Global Warming
  • Expect to see Climate Change and Global Warming Exclusions in insurance policies in the future
  • Global Warming is just beginning to be recognized by insurers as a significant risk factor in property, liability and D&O insurance policies
  • Risks of loss from windstorms, floods, storm surges and other climate change phenomenon are likely to increase in the future
  • Sophisticated modeling capabilities give insurers the ability to predict losses, but these tools are not widely used by the insurance industry
  • Property insurers are using these models to avoid serious losses – risks are being shifted to insureds and government-operated insurers
  • D&O claims pose a significant future risk to insurers and to corporate risk managers
  • Global Warming claims are difficult for plaintiffs to win, but are expensive for insurers to defend