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Climate Change Liability

The Emerging Tort Storm

Greenhouse gas emissions could follow tobacco and asbestos as the next mega-tort.
By: | February 18, 2014 • 5 min read
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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.

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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.

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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.”

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at riskletters@lrp.com.
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Aviation Woes

Coping with Cancellations

Could a weather-related insurance solution be designed to help airlines cope with cancellation losses?
By: | April 23, 2014 • 4 min read
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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.

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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.

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“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.”

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at riskletters@lrp.com.
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Sponsored: Liberty International Underwriters

A Renaissance In U.S. Energy

Resurgence in the U.S. energy industry comes with unexpected risks and calls for a new approach.
By: | October 15, 2014 • 5 min read
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America’s energy resurgence is one of the biggest economic game-changers in modern global history. Current technologies are extracting more oil and gas from shale, oil sands and beneath the ocean floor. Domestic manufacturers once clamoring for more affordable fuels now have them. Breaking from its past role as a hungry energy importer, the U.S. is moving toward potentially becoming a major energy exporter. “As the surge in domestic energy production becomes a game-changer, it’s time to change the game when it comes to both midstream and downstream energy risk management and risk transfer,” said Rob Rokicki, a New York-based senior vice president with Liberty International Underwriters (LIU) with 25 years of experience underwriting energy property risks around the globe. Given the domino effect, whereby critical issues impact each other, today’s businesses and insurers can no longer look at challenges in isolation one issue at a time. A holistic, collaborative and integrated approach to minimizing risk and improving outcomes is called for instead.

Aging Infrastructure, Aging Personnel

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Robert Rokicki, Senior Vice President, Liberty International Underwriters

The irony of the domestic energy surge is that just as the industry is poised to capitalize on the bonanza, its infrastructure is in serious need of improvement. Ten years ago, the domestic refining industry was declining, with much of the industry moving overseas. That decline was exacerbated by the Great Recession, meaning even less investment went into the domestic energy infrastructure, which is now facing a sudden upsurge in the volume of gas and oil it’s being called on to handle and process.

“We are in a renaissance for energy’s midstream and downstream business leading us to a critical point that no one predicted,” Rokicki said. “Plants that were once stranded assets have become diamonds based on their location. Plus, there was not a lot of new talent coming into the industry during that fallow period.”

In fact, according to a 2014 Manpower Inc. study, an aging workforce along with a lack of new talent and skills coming in is one of the largest threats facing the energy sector today. Other estimates show that during the next decade, approximately 50 percent of those working in the energy industry will be retiring. “So risk managers can now add concerns about an aging workforce to concerns about the aging infrastructure,” he said.

Increasing Frequency of Severity

SponsoredContent_LIUCurrent financial factors have also contributed to a marked increase in frequency of severity losses in both the midstream and downstream energy sector. The costs associated with upgrades, debottlenecking and replacement of equipment, have increased significantly,” Rokicki said. For example, a small loss 10 years ago in the $1 million to $5 million ranges, is now increasing rapidly and could readily develop into a $20 million to $30 million loss.

Man-made disasters, such as fires and explosions that are linked to aging infrastructure and the decrease in experienced staff due to the aging workforce, play a big part. The location of energy midstream and downstream facilities has added to the underwriting risk.

“When you look at energy plants, they tend to be located around rivers, near ports, or near a harbor. These assets are susceptible to flood and storm surge exposure from a natural catastrophe standpoint. We are seeing greater concentrations of assets located in areas that are highly exposed to natural catastrophe perils,” Rokicki explained.

“A hurricane thirty years ago would affect fewer installations then a storm does today. This increases aggregation and the magnitude for potential loss.”

Buyer Beware

On its own, the domestic energy bonanza presents complex risk management challenges.

However, gradual changes to insurance coverage for both midstream and downstream energy have complicated the situation further. Broadening coverage over the decades by downstream energy carriers has led to greater uncertainty in adjusting claims.

A combination of the downturn in domestic energy production, the recession and soft insurance market cycles meant greatly increased competition from carriers and resulted in the writing of untested policy language.

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In effect, the industry went from an environment of tested policy language and structure to vague and ambiguous policy language.

Keep in mind that no one carrier has the capacity to underwrite a $3 billion oil refinery. Each insurance program has many carriers that subscribe and share the risk, with each carrier potentially participating on differential terms.

“Achieving clarity in the policy language is getting very complicated and potentially detrimental,” Rokicki said.

Back to Basics

SponsoredContent_LIUHas the time come for a reset?

Rokicki proposes getting back to basics with both midstream and downstream energy risk management and risk transfer.

He recommends that the insured, the broker, and the carrier’s underwriter, engineer and claims executive sit down and make sure they are all on the same page about coverage terms and conditions.

It’s something the industry used to do and got away from, but needs to get back to.

“Having a claims person involved with policy wording before a loss is of the utmost importance,” Rokicki said, “because that claims executive can best explain to the insured what they can expect from policy coverage prior to any loss, eliminating the frustration of interpreting today’s policy wording.”

As well, having an engineer and underwriter working on the team with dual accountability and responsibility can be invaluable, often leading to innovative coverage solutions for clients as a result of close collaboration.

According to Rokicki, the best time to have this collaborative discussion is at the mid-point in a policy year. For a property policy that runs from July 1 through June 30, for example, the meeting should happen in December or January. If underwriters try to discuss policy-wording concerns during the renewal period on their own, the process tends to get overshadowed by the negotiations centered around premiums.

After a loss occurs is not the best time to find out everyone was thinking differently about the coverage,” he said.

Changes in both the energy and insurance markets require a new approach to minimizing risk. A more holistic, less siloed approach is called for in today’s climate. Carriers need to conduct more complex analysis across multiple measures and have in-depth conversations with brokers and insureds to create a better understanding and collectively develop the best solutions. LIU’s integrated business approach utilizing underwriters, engineers and claims executives provides a solid platform for realizing success in this new and ever-changing energy environment.

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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.


LIU is part of the Global Specialty Division of Liberty Mutual Insurance.
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