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By DAN REYNOLDS, senior editor of Risk & Insurance®

Whether you thought the climate change bill passed by the U.S. House of Representatives in late June was a good thing or a bad thing really doesn't matter at this point. For that matter, whether you believe global warming is occurring is also of little consequence right now.

"I think the insurance industry will respond, and I think the underwriting community will figure out how to underwrite the exposures. But the proverbial train has left the station. It's not like we're going to go back and say, 'Oh, climate change doesn't really exist,' " said David Orleans, a San Francisco-based vice president for Willis Group Holdings Inc.

Along with the Environmental Protection Agency's April ruling that greenhouse gases are pollutants that endanger public health, the climate change bill passed by the U.S. House represents new ammunition for plaintiffs' attorneys, and those companies they target better have insurance policies that can absorb or fend off the legal salvos.

In personal lines, such as automobile, according to Joel Ario, the insurance commissioner for the state of Pennsylvania and the chairman of the National Association of Insurance Commissioner's climate change task force, the insurance industry is already finding ways to respond. Pay-as-you-drive policies, for example, are already popular in Europe. They are starting to find traction here.

Those policies, designed to reward drivers who are doing their part to create a smaller carbon footprint, charge smaller premiums for drivers who use their cars less. The amount a driver drives isn't the only factor insurers in Europe are using to underwrite, but it is a major one.

"Typically, when insurers come upon new risks like this, they pretty quickly begin to ask what they can do to help mitigate those risks," Ario said.

The 100 NAIC members have also voted unanimously to survey insurers and require them by May 2010 to report their climate change risks to the insurance regulator in the state in which they are domiciled.

That information-gathering process could be the first step in giving the proposed Office of National Insurance a database to help it keep better track of insurance climate change exposures on a national level.

"The federal government does need to have more information about the insurance marketplace, and I think that office is a targeted way to achieve that collection of information," Ario said.

CAP PRODUCTS

June's climate change bill, which calls for caps on carbon emissions, will also create markets for new insurance products should it become law, according to Rick Hawkinberry, a leader in Willis' environmental insurance practice.

"We've already seen a lot more people inquiring about carbon credit emission insurance, and interest in that, just wanting to learn about it, is really beginning to heat up," Hawkinberry said.

However, a provision in this summer's House bill that 85 percent of carbon emission permits be given away rather than auctioned will initially limit the size of the insurance market for carbon credits.

"I think it delays somewhat how much activity there is going to be," Hawkinberry said.

THE LIABILITY

In terms of liability, according to Orleans and Hawkinberry, what the insurance industry is going through now with climate change is very similar to what it faced in earlier generations with coverage for such things as tobacco, pollution and mold, although this change will likely be occurring on a far larger scale.

For plaintiffs to establish liability, they first needed to build a scientific connection. Using the tobacco example, even though it was generally accepted that smoking was bad for you, it wasn't until enough research had been done proving the connection between tobacco use and lung cancer that plaintiffs' attorneys had something they could sink their teeth into.

"And the tobacco companies never thought that anyone would bring them down on those theories, but they did," Orleans said.

The same thing is happening now, with plenty of prelitigation research in the works, according to Orleans, to build the case to connect chemical manufacturers, fuel makers and other industrial companies to global warming.

"A lot of people are paying a lot of experts today, engineers and environmental scientists, to provide better connections and show what they believe (to be) the direct causation between the emissions and the incidents of natural disasters," Orleans said.

The exclusions, followed by policies that provide climate change coverage once a few cases are tried, would be the next step.

"I think we are about there, maybe a few negotiations in Congress more and we will start to see language coming out of the insurance carrier," Orleans said.

July 6, 2009

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