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.”
To Keep Cool in a Crisis, Companies Need a Comprehensive Solution
Threats against corporate security come in many forms, from intentional acts of violence to civil unrest to cyber-attacks. The perpetrators don’t discriminate by company size or sector, and the consequences can range from several thousand dollars lost to several lives lost.
The recent shooting in an Orlando nightclub that killed 49, for example, or last year’s San Bernardino shooting that killed 14, are somber reminders that terrorism and violence can erupt anywhere and in any type of business. In addition to loss of life, violence can translate into business interruption and property damage. In Ferguson, Mo., riots lead to over $4 million in property damage.
Cyber-attacks have also become commonplace, with hackers infiltrating private networks to steal data or hold it ransom.
Is your organization prepared for these risks?
“A lot of companies have a crisis response plan on paper, but they don’t have outside resources to come to their aid if there is an incident,” said Reggie Gibbs, Underwriter and Product Manager, Starr Companies.
Mid-size companies especially tend to lack comprehensive insurance coverage and crisis management services for a variety of security events due either to limited resources or an underestimation of their exposure.
Starr Companies’ Cyber and Terror Response (CTR) solution provides three coverages as well as crisis response services tailored to meet the needs of these companies. Each of its components addresses a common security threat.
“We don’t just want to indemnify the security risks our clients face; we want to help them actively manage them.”
— Reggie Gibbs, Underwriter & Product Manager, Starr Companies
Terror and Political Violence
“Political violence can be defined as a strike, riot, protest, or any type of unrest that gets out of hand and turns violent,” said Gibbs, who specializes in terrorism and political violence, workplace violence, and crisis management.
In the case of the Ferguson protests, any first party property damage or third party liability incurred by the disruption would be covered under the terrorism and political violence segment of the CTR solution.
In the case of a terror attack, organizations cannot necessarily rely on TRIA to pick up property losses. In the case of the Orlando shooting, for example, the likelihood of TRIA being invoked is low because property damage will not meet the threshold for coverage to kick in.
TRIA, reauthorized in 2015, provides a federal insurance backstop in the event of a terror attack. The U.S. Secretary of the Treasury, U.S. Attorney General, and U.S. Secretary of Homeland Security must declare an attack to be an act of terrorism, and property damage must exceed $5 million to trigger TRIA.
“We would still view the Orlando shooting as an act of terror, however, because of who the shooter claimed he was working for regardless if the ties to terror groups are clear or not. Therefore, our coverage would apply,” Gibbs said. Even if TRIA was enacted, however, companies would still have a lot of pieces to pick up following an attack. They may have injured or deceased employees, or face legal action from third parties.
For these situations, and any other incident of violence not driven by terrorism, the workplace violence component of Starr’s CTR solution would act as an umbrella to cover other liabilities such as legal liability, loss of life benefits, psychiatric care, and other crisis response services.
One such incident struck a Boston-area Bertucci’s in early May. An attacker wielding a knife drove his car into a Boston shopping mall before making his way into the nearby restaurant. He killed five, including restaurant workers and patrons.
“There was no ideological or political motivation behind it. He was just deranged.” Gibbs said. “Our workplace violence coverage can handle the loss of life benefits for both the employees and patrons killed in situations like this one.”
In the best cases, though, violence can be prevented altogether.
“If an employee reports a stalking threat, the policy would cover the expense of security guards,” Gibbs said. “In this case, it’s more of a pre-workplace violence coverage. It would de-escalate the situation.”
Attacks can also be non-physical.
Cyber extortion in particular is on the rise. Phishing scams lead employees to click on malicious links, unknowingly downloading ransomware onto their internal networks. The cyber criminals then hold companies’ networks ransom, asking for a sum of money in return for the release of data or to prevent a business interruption. The ransoms can be low — amounts that organizations can afford to pay.
“The hackers don’t want to attract the attention of law enforcement or regulatory agencies,” said Annamaria Landaverde, National Cyber Practice Leader & Professional Liability Underwriting Manager, Starr Companies. Landaverde specializes in the cyber component of the CTR coverage. “The FBI may not get involved if someone asks for $5,000. They are more likely to get involved if someone asks for $5 million.”
Since companies are not required by law to report cyber extortion —like they are for data breaches — many choose simply to pay the ransom and move on without generating any negative news headlines.
“The hackers don’t want to attract the attention of any law enforcement or regulatory agencies. The F.B.I. won’t get involved if someone asks for $5,000. They will get involved if someone asks for $5 million.”
— Annamaria Landaverde, National Cyber Practice Leader & Underwriting Manager, Professional Liability Division, Starr Companies
“A California medical center recently had an incident like this where the hackers asked for $17,000 in ransom,” Landaverde said,” but the amounts can vary.”
While the ransom itself may seem manageable, many companies fail to recognize other costs associated with the identification and removal of the malware from their system. There may also be costs associated with forensics investigations, legal experts, public relations firms, third party lawsuits, and notification and credit monitoring.
“The cyber arm of the CTR coverage extends to liability that an organization would suffer as a result of a breach, or failure of security of the insured’s network,” Landaverde said. That includes not just cyber extortion, but outright data theft or denial-of-service attacks.
Crisis Management Services
“We don’t just want to indemnify the security risks our clients face; we want to help them actively manage them,” Gibbs said.
The fourth component of Starr’s CTR solution – crisis response — provides two outside consultants to insureds, with one specializing in “hard” security services like guards or instances of cyber extortion, and another focusing on crisis communications.
Without these outside services, there is only so much insurance can do in the aftermath of a crisis. Experienced consultants provide a range of security preparedness and response services to complement coverage and help insureds recover from an episode of violence or cyber event.
“From a communications perspective, our consultants can manage the public relations front to create clear and consistent messaging, but they can also stay in touch with families after a terror or other violent attack to make sure everyone stays informed,” Gibbs said.
They also serve as a first point of contact for insureds immediately after an event. If they need guidance quickly, consultants await at the ready.
“When a client purchases the product, they get a 24-hour hotline set up with one of our consultancies,” he said. “They can report an incident at any time, and our consultant will help either resolve a situation or deal with the aftermath in whatever way they can.”
While the Cyber and Terror Response package provides a comprehensive solution tailored for mid-size companies, Starr also offers standalone cyber liability and crisis management coverage on a primary and excess basis.
“For companies with greater exposure to a particular type of risk, or who simply want higher limits or greater customization, we have those standalone polices.” Landaverde said.
For more information on Starr Companies’ Cyber and Terror Response solution, visit https://www.starrcompanies.com/Insurance/CyberAndTerrorResponse.
Starr Companies is the worldwide marketing name for the operating insurance and travel assistance companies and subsidiaries of Starr International Company, Inc. and for the investment business of C. V. Starr & Co., Inc. and its subsidiaries.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Starr Companies. The editorial staff of Risk & Insurance had no role in its preparation.