The Emerging Tort Storm
Is climate change the next mass tort? A growing number of experts predict it could be, particularly after the ambiguity of a recent large case settlement opened the door for potential mass litigation.
The insurance implications could also be significant, and corporations that might be contributing to climate change should plan now how to mitigate these exposures.
Environmental damage caused by climate change could be “the next mass tort” if future litigators are able to demonstrate a link between environmental damages and greenhouse gas emissions by large corporations, wrote actuary Jill Mysliwiec in a recent Milliman Inc. report, The Cost of Climate Change: Will Companies Pay in Court?
Mysliwiec pointed to the 2011 U.S. Supreme Court case of American Electric Power, which pitted five large-scale private electric power companies emitting greenhouse gases against the City of New York and eight additional states.
In an 8-0 decision, the Supreme Court held that corporations cannot be sued for greenhouse gas emissions under federal common law, primarily because the Clean Air Act delegates the management of carbon dioxide and other greenhouse gas emissions to the Environmental Protection Agency.
“While the AEP case may not have specifically created a path to indemnification, the fact that it didn’t rule out any possible future litigation efforts speaks volumes,” Mysliwiec wrote. “The ruling may be an indication that such potential efforts may in fact be successful in the future.”
Since a major obstacle in litigation has been demonstrating a cause and effect relationship between damages and emissions, and in identifying a specific defendant, future groups of plaintiffs and defendants might be lumped in a single mass tort litigation case, she wrote.
Such plaintiffs could be armed by each defendant’s public disclosures of their greenhouse gas emissions, now required by the EPA.
“If documentation exists proving that a corporation was aware of its harmful operations, avoiding the consequences becomes more difficult,” she wrote.
“As was the case with tobacco and asbestos, we likely will not know whether climate change will be the next mega-tort for many years.” —Warren A. Koshofer, partner, Michelman & Robinson LLP
Warren A. Koshofer, a partner in the Los Angeles office of Michelman & Robinson LLP, said that there are significant hurdles to obtaining coverage for climate change litigation under standard commercial general liability policies, as highlighted by the Virginia Supreme Court decision in AES Corp. v. Steadfast.
“The occurrence hurdle is one that is not readily susceptible to negotiation when new CGL policies are being obtained,” Koshofer said. “The two exclusions can, however, be the subject of negotiations with the insurer.”
Given the current state of climate change litigation, where plaintiffs are having extreme difficulty overcoming the standing and political question doctrines and otherwise establishing claims against emitters of greenhouse gases, the real goal for an insured is to avoid the insurer being relieved of their duty to defend, which is broader than their duty to indemnify, he said.
Separating the duty to defend from the indemnity provisions of the CGL policy is one potential avenue an insured can explore — whether through negotiated sub-limits or the procurement of a stand-alone defense cost policy.
“As was the case with tobacco and asbestos, we likely will not know whether climate change will be the next mega-tort for many years,” Koshofer said.
“While it certainly is following the early pattern of tobacco and asbestos, a key difference is the injuries alleged in climate change cases thus far have been more focused on property damage than the significant bodily injuries that ultimately fueled the plaintiff’s bar to refine and target tobacco and asbestos related cases.”
Lindene E. Patton, chief climate product officer of Zurich Insurance Group in Schaumburg, Ill., who co-authored a book titled Climate Change and Insurance, said that plaintiffs are now experimenting in the tort liability area, as well as claims of statutory violations or noncompliance.
But so far, that litigation is largely at the procedural stage and “not a whole lot beyond that.”
Still, underwriters should consider looking for appropriate risk management practices from clients that could be potentially exposed to such litigation — whether that is greenhouse gas emitters or professional service providers, such as engineers or consultants who do work involving greenhouse gas or adaptation to climate change, Patton said.
For example, she said, engineers need to understand that the law is now examining whether “conduct evaluating and managing climate-related risks not only should consider historical exposures, but also projected exposures in the future. If an engineer is going to deliver a product to customer who declines to address future exposures expected by climate scientists, then engineers need to explain to their clients the range of potential impacts based on the expert advice.”
There might be dispute about which science to apply. And if a loss occurs, litigation might lead to the ultimate determination of who was right and who was wrong, Patton said. However, underwriters might have to pay for defense expenses, even if the carriers ultimately have no indemnity expenses. This will be true for professional liability policies as well as general liability policies, to the extent they are triggered.
“People who believe that they have followed the law and received a permit to build or have purchased a property may wake up one day with their property blown away or underwater, with no mechanism to get relief, and they may look elsewhere for compensation,” she said. “This appears to be what we’re seeing in some cases of climate change litigation.”
Mysliwiec suggested that companies mitigate potential exposures by forming partnerships with governmental entities to develop a means for funds to be pooled and set aside for damages.
Companies, either individually or as a group, should also take a proactive approach to provide funds to cover losses, “in an effort to appeal to consumers,” she wrote.
In addition, insurers should develop a means to provide the funds for these losses, potentially through the use of catastrophe models.
“It would be advantageous to all parties involved for a proactive solution to be explored, in an effort to avoid the high costs of defense and litigation that may come from a less assertive approach,” Mysliwiec wrote.
“This uncertainty and our society’s current state could be creating an ideal situation for the next mass tort of our generation. The money to pay for the damages will have to come from somewhere and it remains to be seen just where that deep pocket may be hiding.”
Coping with Cancellations
Airlines typically can offset revenue losses for cancellations due to bad weather either by saving on fuel and salary costs or rerouting passengers on other flights, but this year’s revenue losses from the worst winter storm season in years might be too much for traditional measures.
At least one broker said the time may be right for airlines to consider crafting custom insurance programs to account for such devastating seasons.
For a good part of the country, including many parts of the Southeast, snow and ice storms have wreaked havoc on flight cancellations, with a mid-February storm being the worst of all. On Feb. 13, a snowstorm from Virginia to Maine caused airlines to scrub 7,561 U.S. flights, more than the 7,400 cancelled flights due to Hurricane Sandy, according to MasFlight, industry data tracker based in Bethesda, Md.
Roughly 100,000 flights have been canceled since Dec. 1, MasFlight said.
Just United, alone, the world’s second-largest airline, reported that it had cancelled 22,500 flights in January and February, 2014, according to Bloomberg. The airline’s completed regional flights was 87.1 percent, which was “an extraordinarily low level,” and almost 9 percentage points below its mainline operations, it reported.
And another potentially heavy snowfall was forecast for last weekend, from California to New England.
The sheer amount of cancellations this winter are likely straining airlines’ bottom lines, said Katie Connell, a spokeswoman for Airlines for America, a trade group for major U.S. airline companies.
“The airline industry’s fixed costs are high, therefore the majority of operating costs will still be incurred by airlines, even for canceled flights,” Connell wrote in an email. “If a flight is canceled due to weather, the only significant cost that the airline avoids is fuel; otherwise, it must still pay ownership costs for aircraft and ground equipment, maintenance costs and overhead and most crew costs. Extended storms and other sources of irregular operations are clear reminders of the industry’s operational and financial vulnerability to factors outside its control.”
Bob Mann, an independent airline analyst and consultant who is principal of R.W. Mann & Co. Inc. in Port Washington, N.Y., said that two-thirds of costs — fuel and labor — are short-term variable costs, but that fixed charges are “unfortunately incurred.” Airlines just typically absorb those costs.
“I am not aware of any airline that has considered taking out business interruption insurance for weather-related disruptions; it is simply a part of the business,” Mann said.
Chuck Cederroth, managing director at Aon Risk Solutions’ aviation practice, said carriers would probably not want to insure airlines against cancellations because airlines have control over whether a flight will be canceled, particularly if they don’t want to risk being fined up to $27,500 for each passenger by the Federal Aviation Administration when passengers are stuck on a tarmac for hours.
“How could an insurance product work when the insured is the one who controls the trigger?” Cederroth asked. “I think it would be a product that insurance companies would probably have a hard time providing.”
But Brad Meinhardt, U.S. aviation practice leader, for Arthur J. Gallagher & Co., said now may be the best time for airlines — and insurance carriers — to think about crafting a specialized insurance program to cover fluke years like this one.
“I would be stunned if this subject hasn’t made its way up into the C-suites of major and mid-sized airlines,” Meinhardt said. “When these events happen, people tend to look over their shoulder and ask if there is a solution for such events.”
Airlines often hedge losses from unknown variables such as varying fuel costs or interest rate fluctuations using derivatives, but those tools may not be enough for severe winters such as this year’s, he said. While products like business interruption insurance may not be used for airlines, they could look at weather-related insurance products that have very specific triggers.
For example, airlines could designate a period of time for such a “tough winter policy,” say from the period of November to March, in which they can manage cancellations due to 10 days of heavy snowfall, Meinhardt said. That amount could be designated their retention in such a policy, and anything in excess of the designated snowfall days could be a defined benefit that a carrier could pay if the policy is triggered. Possibly, the trigger would be inches of snowfall. “Custom solutions are the idea,” he said.
“Airlines are not likely buying any of these types of products now, but I think there’s probably some thinking along those lines right now as many might have to take losses as write-downs on their quarterly earnings and hope this doesn’t happen again,” he said. “There probably needs to be one airline making a trailblazing action on an insurance or derivative product — something that gets people talking about how to hedge against those losses in the future.”
From Coast to Coast
The 3,920-ton Left Coast Lifter, originally built by Fluor Construction to help build the new Bay Bridge in San Francisco, will be integral in rebuilding the Tappan Zee Bridge by 2018.
The Lifter and the Statue of Liberty
When he got the news, Scot Burford could see it as clearly as if somebody handed him an 8 by 11 color photograph.
On January 30, the Left Coast Lifter, a massive crane originally built by Fluor Construction to help build the new Bay Bridge in San Francisco, steamed past the Statue of Liberty. Excited observers, who saw the crane entering New York Harbor, dubbed it the “The Hudson River Hoister,” honoring its new role in rebuilding the Tappan Zee Bridge over the Hudson River.
Powered by two stout-hearted tug boats, the Lauren Foss and the Iver Foss, it took more than five weeks for the huge crane to complete the 6,000 mile ocean journey from San Francisco to New York via the Panama Canal.
Scot took a deep breath and reflected on all the work needed to plan every aspect of the crane’s complicated journey.
A risk engineer at Liberty International Underwriters (LIU), Burford worked with a specialized team of marine insurance and risk management professionals which included John Phillips, LIU’s Hull Product Line Leader, Sean Dollahon, an LIU Marine underwriter, and Rick Falcinelli, LIU’s Marine Risk Engineering Manager, to complete a detailed analysis of the crane’s proposed route. Based on a multitude of factors, the LIU team confirmed the safety of the route, produced clear guidelines for the tug captains that included weather restrictions, predetermined ports of refuge in the case of bad weather as well as specifying the ballast conditions and rigging of tow gear on the tugs.
Of equal importance, the deep expertise and extensive experience of the LIU team ensured that the most knowledgeable local surveyors and tugboat captains with the best safety records were selected for the project. After all, the most careful of plans will only be as effective as the people who execute them.
The tremendous size of the Left Coast Lifter presented some unique challenges in preparing for its voyage.
The original intention was to dry tow the crane by loading and securing it on a semi-submersible vessel. However, the lack of an American-flagged vessel that could accommodate the Left Coast Lifter created many logistical complexities and it was decided that the crane would be towed on its own barge.
At first, the LIU team was concerned since the barge was not intended for ocean travel and therefore lacked towing skegs and other structural components typically found on oceangoing barges.
But a detailed review of the plan with the client and contractors gave the LIU team confidence. In this instance, the sheer weight and size of the crane provided sufficient stability, and with the addition of a second tug on the barge’s stern, the LIU team, with its knowledge of barges and tugs, was confident the configuration was seaworthy and the barge would travel in a straight line. The team approved the plan and the crane began its successful voyage.
As impressive as the crane and its voyage were, it was just one piece in hundreds that needed to be underwritten and put in place for the Tappan Zee Bridge project to come off.
The rebuilding of the Tappan Zee Bridge, due to be completed in 2018, is the largest bridge construction project in the modern history of New York. The bridge is 3.1 miles long and will cost more than $3 billion to construct. The twin-span, cable-stayed bridge will be anchored to four mid-river towers.
When veteran contractors American Bridge, Fluor Corp., Granite Construction Northeast and Traylor Bros. formed a joint venture and won the contract to rebuild the Tappan Zee, one of the first things the consortium needed to do was find an insurance partner with the right coverages and technical expertise.
The Marsh broker, Ali Rizvi, Senior Vice President, working with the consortium, was well known to the LIU underwriting and engineering teams. In addition, Burford and the broker had worked on many projects in the past and had a strong relationship. These existing relationships were vital in facilitating efficient communication and data gathering, particularly given the scope and complexity of a project like the Tappan Zee.
And the scope of the project was indeed immense – more than 200 vessels, coming from all over the United States, would be moving construction equipment up the Hudson River.
An integrated team of LIU underwriters and risk engineers (including Burford, Phillips, Dollahon and Falcinelli) got to work evaluating the risk and the proper controls that the project required. Given the global scope of the project, the team’s ability to tap into their tight-knit global network of fellow LIU marine underwriters and engineers with deep industry relationships and expertise was invaluable.
In addition to the large number of vessels, the underwriting process was further complicated by many aspects of the project still being finalized.
“Because the consortium had just won this account, they were still working on contracts and contractors to finalize the deal and were unsure as to where most of the equipment and materials would be coming from,” Burford said.
Despite the massive size of the project and large number of stakeholders, LIU quickly turned around a quote involving three lines of marine coverage, Marine Liability, Project Cargo and Marine Hull & Machinery.
How could LIU produce such a complicated quote in a short period of time? It comes down to integrating risk engineers into the underwriting process, possessing deep industry experience on a global scale and having strong relationships that facilitate communication and trust.
Photo Credit: New York State Thruway Authority
When completed in 2018, the Tappan Zee will be eight lanes, with four emergency pullover lanes. Commuters sailing across it in their sedans and SUVs might appreciate the view of the Hudson, but they might never grasp the complexity of insuring three marine lines, covering the movements of hundreds of marine vessels carrying very expensive cargo.
Not to mention ferrying a 3,920-ton crane from coast to coast without a hitch.
But that’s what insurance does, in its quiet profundity.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.