Source: http://climatelawyers.com/category/Insurance-.aspx?page=2
Timestamp: 2019-06-25 01:32:26
Document Index: 229916826

Matched Legal Cases: ['§ 27', '§ 19', '§ 27', '§ 27', '§ 129', 'art 2']

12 feet. Water that deep comfortably inundates the front office's front door and floats the boss's desk. And that is the predicted maximum storm surge for coastal Louisiana and Mississippi as Hurricane Isaac bears down. So there are likely to be a few problems in that part of the country by the time the sun goes down this afternoon. What can be done? At this late hour, very little unfortunately, other than heading for the hills; here the adage “an ounce of prevention is worth a pound of cure” says it all. Other than sand bags and plywood sheeting what preventive steps have some taken? We’d like to focus on some things lawyers and businesspeople can address ahead of time: modeling, insurance and contracting. Modeling – Besides wreaking record havoc, Hurricane Andrew in 1992 was the coming of age for catastrophe modelers. As reported by Business Insurance last week, when AIR Worldwide reported an estimated $13 billion in damage to its clients following the storm's passage, reaction ranged from “skepticism to outrage.” Now modeling is big business and well accepted. Indeed, modeling was approved by the Maryland Court of Appeals as an appropriate way to make business decisions in January of this year. See People's Insurance Counsel Division v. Allstate Insurance Co., 36 A.3d 464 (Md. 2012). There is no reason to believe that Maryland’s lead would not be followed elsewhere. Today the public can get the benefit of some of the modelers’ insight in email alerts from companies’ such as AIR, or simply downloading them from the internet. Those following Hurricane Isaac were able to learn that its ultimate effect was unsettled: Isaac reaching hurricane status tonight leaves 24 hours of time for additional development prior to landfall; within that window, Isaac could reach Category 2 intensity. How much stronger Isaac will become will depend in part on the storm's track—that is, how much time it will spend over the warm waters of the Gulf of Mexico. Further adding to the uncertainty around Isaac’s forecast intensity is the fact that the storm will be moving over some of the warmest waters it has encountered to date, so a period of rapid intensification that leads to even stronger winds cannot be ruled out. Subscribers to services offered by modeling firms can assess their exposures long before a hurricane makes landfall and take steps to diversify or minimize risks, can optimize their response to a looming hurricane by shifting production or scheduling a shutdown, and can make time-critical decisions as the catastrophe unfolds with the best data available concerning not only the storm’s effect on one’s own facility, but on the infrastructure and other plants on which one’s facility depends. Including such modeling in business planning leads to improvement of the bottom line. Insurance – It is well-documented that insurers don’t particularly care for flood risk, including storm surge. Following Hurricane Katrina dozens of cases sought insurance coverage for storm surge. The courts were not sympathetic; most found flood exclusions and anti-concurrent causation clauses valid and applicable. For example, where homeowners did not purchase flood insurance through the National Flood Insurance Program after being told by their carrier “Your policy does not cover flood loss. You can get protection through the National Flood Insurance Program,” the Fifth Circuit affirmed the trial court’s ruling and stated, among other things, “The omission of the specific term "storm surge" does not create ambiguity in the policy regarding coverage available in a hurricane and does not entitle the Leonards to recovery for their flood-induced damages.” Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419, 438 (5th Cir. 2007). Commercial insureds fared no better. E.g., Northrop Grumman Corp. v. Factory Mut. Ins. Co., 538 F.3d 1090, modified, 563 F.3d 777 (9th Cir. 2008). All of which is not to say that flood coverage is not available, but one has to actively seek it out, and pay for it. This has important implications for supply chain coverage because if one's policy does not cover flood, and one's key supplier (scheduled under the contingent business interruption coverage) is shut down (as happened to many last year with Thailand's epic flooding), then there will be no coverage. In other words, flood risk must be assessed at all relevant locations, not simply the insured's locations. Contracting away risk – Considering storm surge, one researcher has written: "In many places, only inches separate the once-a-decade flood from the once-a-century one; and separate the water level communities have prepared for, from the one no one has seen. Critically, a small change can make a big difference, like the last inch of water that overflows a tub." Ben Strauss et al., Surging Seas 4 (Mar. 14, 2012). We saw just above that insurance may not be available for a storm surge. Is there any other path to recovery? Some that have purchased properties that have subsequently suffered flood damage have pursued their transaction professionals for the loss based on the theory that there should have been some disclosure. They have had some success. See, e.g., Perri v. Prestigious Homes, Inc., Docket No. A-0403-10T1 (N.J. Super. Ct. App. Div. Jan. 13, 2012) (suing broker for flood damage); Stonacek v. City of Lincoln, 782 N.W.2d 900 (Neb. 2010) (suing realtor, developer, engineer and city for ensuing water damage from flood); Loya v. Howard Hanna Smythe Cramer Co., 2009 Ohio 448 (Ohio Ct. App. 2009) (suing realtor for ensuing water damage from flood); Potter v. First Real Estate Co., 844 So. 2d 540 (Ala. 2002) (suing realtor based on flooding); Clay v. Walden Joint Venture, 611 So. 2d 254 (Ala. 1992) (referring to suit against realtor for flood damage). It is relatively easy, however, to inoculate oneself against that kind of suit: make the disclosure in the contract. Realtors and sellers in Norfolk, Virginia apparently already do that. For a more detailed discussion see J. Wylie Donald, Getting Ahead of Storm Surge, Especially in an Era of Climate Change. Sand bags and plywood sheeting are irreplaceable as a hurricane roars in. Maybe one should start including other preventive steps as equally necessary in order to avoid the proverbial several pounds of cure.
Tomorrow is June 1, the official start of the Atlantic Hurricane Season, which is predicted by NOAA to be near normal. It comes almost as an afterthought this year because already we have had two named storms. In mid-May Tropical Storm Alberto appeared and quickly disappeared. It was followed shortly after by Tropical Storm Beryl, which made landfall at Jacksonville, Florida with record winds for a May storm. Some undoubtedly have the view that the season's early arrival is further evidence of climate change. That conclusion may be premature. According to a report by the Miami Herald, single named storms in the pre-season are not that unusual, but to have two, that has happened only thrice in the 150 years of official recordkeeping. The science too does not support increased frequency of tropical storms as a result of climate change. In a 2010 article, Tropical cyclones and climate change, Dr. Thomas Knutson with many others set forth what they perceived as the state of the science: Frequency. It is likely that the global frequency of tropical cyclones will either decrease or remain essentially unchanged owing to greenhouse warming. .... Current models project changes ranging from −6 to −34% globally, and up to ±50% or more in individual basins by the late twenty-first century.Intensity. Some increase in the mean maximum wind speed of tropical cyclones is likely (+2 to +11% globally) with projected twenty-first-century warming, although increases may not occur in all tropical regions. The frequency of the most intense (rare/high-impact) storms will more likely than not increase by a substantially larger percentage in some basins.Rainfall. Rainfall rates are likely to increase. The projected magnitude is on the order of +20% within 100 km of the tropical cyclone centre. This may not be nearly as dire as some have suggested, but we point out that ignoring a substantial increase in the frequency of storms like Hurricanes Katrina and Andrew is done at some peril. People in harm's way are paying attention and using this kind of analysis to make decisions on how to insure the billions of dollars of at-risk property in Florida. We have written before of the "life on the edge" of Florida's insurer of last resort, Citizens' Property Insurance Corporation. In trying to get off the edge and get closer to financial stability, Citizens this spring made the insurance record books when it became the ceding insurer on the largest reinsurance catastrophe bond1 ever placed: $750 million. So where does climate change fit in? The CAT bond's offering document doesn't mention climate change at all. But one should not be fooled. The modeler for the bond is AIR Worldwide. AIR is all over climate change risks. In fact, just this March AIR published a literature review regarding extratropical cyclones (aka North Atlantic winter storms). • The frequency of ETCs may diminish with increasing global temperatures• The intensity of the more extreme ETCs may rise• ETC tracks are expected to shift poleward in both hemispheres One can see parallels with the conclusions reached by Dr. Knutson et al. regarding tropical cyclones. Accordingly, we think it would be naive to conclude that AIR did not model for climate change. We also expect that the negotiators for Citizens wanted to insure that climate change risk was applied. As did the investors. So climate change matters to the people with real skin in the game - like three-quarters of a billion dollars. As such, one can bet all involved are paying close attention to the official opening of the Atlantic Hurricane Season, and also to what occurs before and what occurs after. 1This is not the financial instruments blog but for those who want a quick explanation try this from BusinessWeek: "An insurance company issues bonds to financial investors, such as hedge and pension funds, that are willing to place a bet on the probability of a disaster occurring at a particular location and during a specific time frame. During the life of the bond, the insurer pays investors a coupon interest rate. If nothing happens, the insurer returns the money when the bond matures. If the fates are cruel, cat bond investors kiss off all or part of the principal." What investors especially like is that there is no correlation between cat bond risk and stock market or corporate bond risk.
The Maryland Court of Appeals Looks at Models and Likes What it Sees - People's Insurance Counsel Division v. Allstate Insurance Co.: Affirmed
January 28, 2012 21:59
Notwithstanding that millions tune in to the long-running reality TV show America's Next Top Model, the real modeling action is not in Hollywood. Instead, it is on computer mainframes churning out annual simulations of 100,000 years or more of catastrophes such as hurricanes, earthquakes and terrorist attacks. Such analysis drew the attention of the Maryland Court of Appeals in its seminal opinion last Wednesday in People's Insurance Counsel Division v. Allstate Insurance Co. (attached), which affirmed the appropriateness of modeling in an insurer's decision to issue, or not, homeowners' insurance policies. The facts in Allstate were relatively simple. In 2006 Allstate determined that it would no longer write homeowners' policies on Maryland properties within one mile of the Atlantic Ocean. It subsequently extended that decision to completely exclude from new policies five Maryland counties, and portions of an additional six counties (all identified by zip code). It relied on a model developed by Applied Insurance Research, Inc. (AIR), which showed that the hurricane losses Allstate would suffer in the identified zip code areas were too high. Dutifully Allstate filed the appropriate papers with the Maryland Insurance Administration. The Administration found nothing exceptional about the application. The People's Insurance Counsel Division (PICD) (a part of the Office of the Attorney General) did, however, and requested a hearing. It lost before the Commissioner of Insurance, then before the Circuit Court and again before the Court of Special Appeals (see our post). PICD then appealed to Maryland's highest court and argued before the Court of Appeals that Allstate had failed to meet its burden of showing that its decision was not "arbitrary, capricious or unfairly discriminatory." See Md. Ins. Code § 27-501(a)(1). Following from that, PICD further argued that the designation of areas by zip code did not have an objective basis and therefore was arbitrary and unreasonable. See Md. Ins. Code § 19-107(a). Allstate's proofs consisted primarily of computer modeling evidence, which the Commissioner found sufficient. Much of the opinion is directed to the parsing of Maryland's Insurance Code and its legislative history to determine whether § 27-501 even applied (the Court of Special Appeals had found it did not, and the Court of Appeals reversed that portion of the decision). We leave it to the insurance blogosphere to address that further. What is of interest to this readership is how modeling came into the decision and where modeling stands as a result. In the proceeding Allstate offered a model that simulates hurricanes from genesis to decay and the damages that would be suffered. Basically, AIR modelers "developed mathematical functions that describe the interaction between buildings and their contents and the local intensity to which they are exposed." PICD at 7. Allstate established with expert evidence that catastrophe risk is not diversified ("adding additional catastrophe risk does not reduce overall risk because of pooling but actually increases the overall risk") and that historical loss data is incomplete and outdated "making it difficult to estimate losses." PICD at 7. Accordingly, "it has become standard practice for insurance companies to use catastrophe models to anticipate the likelihood and severity of potential future catastrophes before they occur." PICD at 5-6. The advantages of modeling are substantial; (1) It was able to capture the effects on catastrophic loss distribution of changes over time in population patterns, building codes, amounts insured, and construction costs;(2) It provides a complete picture of the probable distribution of losses rather than just estimates of probable maximum losses; (3) Because simulation models can be tested more easily than other approaches, it leads to greater stability in estimating expected annual losses;(4) It provides a means to determine the impact of new scientific information; and(5) It provides a framework for performing sensitivity analyses and “what if” studies. PICD at 6 As the Court noted, "By using computer models, they can get 100,000 years of simulated loss experience, which is good not just for State-wide pricing but also for loss characteristics related to hurricanes down to the ZIP Code level." PICD at 7. PICD retained an actuary to rebut Allstate's proofs; he testified with respect to "actuarial science." He was hampered, perhaps fatally, when the Commissioner refused to allow him "to express any opinion with respect to the model that formed the basis of Allstate's amended filing." PICD at 11. We were not there but the Court of Appeals paints a picture of a non-committal expert. He offered that the decision to not write new policies was unreasonable "'because there is no showing that it is reasonable.'" And he "declined to choose" the method Allstate should have chosen to reduce its risk. PICD at 11. In a post-hearing submission PICD argued that "Allstate was required to produce valid statistical data demonstrating the probability of a hurricane sufficiently strong to cause catastrophic damage actually making landfall in Maryland and that it failed to do so." PICD at 23. The statistical standard was based on dicta in an earlier Court of Special Appeals decision, Crumlish v Ins. Comm'r, 520 A.2d 738 (1987), which the Commisioner and the Court distinguished. First, Crumlish's requirement for statistical evidence was not a universal requirement. PICD at 25. More significant was the "catchall" exception added to § 27-501 which established a "standard approved by the Commissioner that is based on factors that adversely affect the losses or expenses of the insurer under its approved rating plan and for which statistical validation is unavailable or is unduly burdensome." PICD at 25. "That is what the Commissioner did in this case." PICD at 25. In other words, the Commissioner found Allstate's evidence met its burden of demonstrating that its use of modeling as the basis to stop writing policies in certain areas was reasonably related to its business and economic purposes and was not discriminatory. The dissent would have adopted the Crumlish dicta and required Allstate to offer statistical evidence concerning the landfall of destructive hurricanes in Maryland. PICD, dissent at 5. Such an assessment was either to be based on the historical record (an impossibility as no hurricane had ever made landfall in Maryland) or "climate science" (which one would think would include modeling). PICD, dissent at 9, 10. According to the dissent, all Allstate provided was a computation of the "relative risk" of a hurricane landfall in Maryland as once in 25,000 years based on the worst 5% of hurricanes that made landfall in North Carolina, Virginia, and Delaware. Allstate justified its decision based on hypothetical hurricanes, i.e., a model. PICD, dissent at 7. The Court properly rejected this distinction. The use of probabilistic catastrophe risk modeling came of age following the destruction caused by Hurricane Andrew in South Florida in 1992. As stated by modeler RMS in its 2008 A Guide to Catastrophe Modeling (p6): "It became clear that a probabilistic approach to loss analysis was the most appropriate way to manage catastrophe risk. Hurricane Andrew illustrated that the actuarial approach to managing catastrophe risk was insufficient; a more sophisticated modeling approach was needed." Another modeling firm, EQECat, put it this way: "The main concern for all users is the uncertainties in the models. Some time ago, the only way to estimate a probable loss was to trust few statistical studies of past losses from some historical events and or on the experience of the underwriter. The uncertainty in these models was quite large as confirmed once a new event [such as Hurricane Andrew] took place. The main problem is that there is not enough historical data, and the standard actuarial techniques of loss estimation are inappropriate for catastrophe losses." One of the purposes of catastrophe modeling is to assist the user (often an insurer) in avoiding the alliteratively named "risk of ruin." If all the industry is using a tool that can minimize the risk of run, it would ill-behoove a court to take away that tool. In Allstate the Maryland Court of Appeals agreed. Nevertheless, if one is looking for guidance on how modeling will be received in the courts, there is one significant question left unresolved by this decision: how will competing models be treated? PCID's expert seems to have been completely out of his league. Whatever his actuarial credentials, if the issue is modeling then a modeling expert is needed. And at the very least the AIR model was subject to challenge. In a review published just this month, Assessing US Hurricane Risk: Do the Models Make Sense?, AIR takes on its competition, RMS, and states: "with this latest round of updates, we [modelers] find ourselves more divergent in our views of risk than ever." (p5) As one example of this divergence, "Catastrophe modeling companies have vastly different views on what influence sea surface temperatures (SSTs) in the Atlantic Ocean have on U.S. hurricane landfall risk." (p12). If AIR is correct, perhaps application of the RMS model would have altered the list of excluded zip codes. More fundamentally, does the uncertainty established by competing models (and that is inherent in modeling) impose an unavoidable and unacceptable arbitrariness in application? That is for another day. For the moment, modeling companies and those who use them likely will proceed full speed ahead. Post scriptum - Climate change seems to have been a subject not to be discussed. As noted by the dissent, if Allstate was worried about the science of climate change, it didn't bring it up. Nevertheless, the dissent did bring it up and asserted that meteorological change occasioned by climate change could be a legitimate basis for Allstate's decision. The modeling firms think otherwise. Eqecat's CEO Bill Keogh has stated because of the uncertainty associated with climate change's effect on hurricanes, " it has no role in catastrophe risk modeling." Peoples Insurance Counsel Division v Allstate Insurance Company.pdf (78.07 kb)
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Climate Change | Climate Change Effects | Insurance | Regulation
Tags: modeling, computer models, AIR, EQECat, RMS, PICD, Crumlish, catastrophe, risk of ruin
September 19, 2011 05:15
This is the last of three parts concerning Ceres’ recently released Climate Risk Disclosures by Insurers: Evaluating Insurer Responses to the NAIC Climate Disclosure Survey. We already have looked at the first two Recommendations to Regulators. Today we finish with number 3: more clarity in disclosure expectations. Id. at 51. It is always easier to make apples-to-apples comparisons when everyone is speaking the same language. Uniform and detailed disclosure requirements would help achieve that goal. However, the down side of specifying what will be disclosed is that it assumes the specifier knows all that needs to be identified. The scariest part of climate change is that we probably do not yet know how all the changes will interact. Correlated risk is a prime example. IRMI describes “correlated risk profiles” as those “that move in concert when affected by the same set of stimuli.” Insurers run from correlated risk and the Ceres report rightly poses a troubling concern in that regard: “If … climate change has the potential to introduce correlated risks across previously uncorrelated assets and to drive market values in ways that cannot be predicted from historical trends, the insurance industry may be poorly positioned to meet its investment objectives.” Climate Risk Disclosures at 39. According to the report, few companies recognize the potential for correlated losses across their business. Id. at 43. And the ones that do say no more than that climate change will increase insured losses and may negatively impact the businesses in which insurers invest. Id. We don‘t think that this is news to those who did not specifically mention correlated risks in their submissions. What we take from all this is that no one yet knows in a meaningful way where the climate change correlated risks lie. Or they are keeping mum (see our first posting on the Ceres report concerning competitive advantage). So the question for a regulator is the following: Is one better off with answers that are less-constrained and potentially more revealing, or is more specificity in the guidance more helpful? If one is a regulator who knows all the questions that should be asked, one should opt for more specificity. But if one does not, then one might support providing unstructured disclosure opportunities. The Ceres report, of course, is not all about recommendations, but we have gone on for too long to delve further. Before we close, however, we did want to address the need for stronger research. The Corporate Liability section attracted our particular focus, as climate change liability suits and their insurance have been a central feature of the blog. Those of us following this subject drop the names of the three liability damages suits, Comer, General Motors and Kivalina, and the insurance suit, Steadfast, like they were business cards. The statement that got our dander up was this: "Since the first suits were filed in 2003, their numbers have rapidly proliferated—more than 120 suits were filed in 2010 alone, nearly two-thirds of them in the U.S." Id. at 11. This is an accurate paraphrase of its source, a sentence in a short article published by the Geneva Association. The problem is that the source, at best, is misleading. While there may have been 120 climate change suits filed in 2010, as demonstrated by the comprehensive set of charts kept by the Climate Change group at Arnold & Porter LLP there were none filed that were seeking damages under common law theories. Those suits continued to be the three: Comer, GM and Kivalina. We will be the first in line to agree that the insurance industry should be concerned about climate change liability suits. But that concern has not yet had to focus on 120 climate change liability suits, because they have not been filed yet. That being said, the Ceres report brings to the fore statements by representatives of a multi-trillion dollar industry that is in the eye of the climate change storm. Those statements otherwise might languish in some regulator’s dark bottom drawer. The report is a valuable resource; we look forward to next year’s reprise.
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Climate Change Litigation | Insurance | Regulation
Tags: correlated risks, Kivalina, Comer, General Motors, competitive advantage
This morning the Virginia Supreme Court decided the first climate change liability insurance coverage case: The AES Corp. v. Steadfast Ins. Co., Record No. 100764 (attached). It held that there was no covered “occurrence” and that therefore the trial court properly dismissed the insured’s claim for coverage. Followers of this blog are well familiar with Steadfast and the underlying Kivalina case. For those new to this subject, this coverage case arose out of the climate change nuisance damages case, Native Village of Kivalina v. ExxonMobil Corp., CV 08-1138 SBA (N.D. Cal.), in which claimants asserted that defendants' greenhouse gas emissions resulted in warmer winters, which lead to melting of sea ice and erosion of the shoreline around their community to the point that their village was set to fall into the sea. They brought suit against oil and gas companies, electric utilities and a coal company, seeking damages for an alleged nuisance. In Steadfast one of the Kivalina defendants’ insurers (Steadfast), after first defending under a reservation of rights, brought a declaratory judgment action against its insured (electric utility AES), seeking to avoid coverage under its general liability policies. Shortly thereafter Steadfast filed a motion for summary judgment asserting that there was no occurrence, and that coverage was barred by the loss-in-progress and pollution exclusions. AES initially prevailed and defeated Steadfast’s motion. AES then moved for summary judgment on the duty to defend and Steadfast cross-moved. This time Steadfast gained victory. The trial court issued a very brief opinion holding: “Steadfast has no duty to defend AES in connection with the underlying Kivalina litigation because no 'occurrence' as defined in the policies has been alleged in the underlying Complaint.” AES appealed. In most jurisdictions, including Virginia, an “eight corners” rule is applied: “only the allegations in the complaint and the provisions of the insurance policy are to be considered in deciding whether there is a duty on the part of the insurer to defend and indemnify the insured.” Opinion at 7 (citations omitted). Coverage under the Steadfast policies hinged on whether there was an occurrence, specifically defined to mean “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” In Virginia the terms “occurrence” and “accident” are synonymous and an “accident” is commonly understood to mean “an event which creates an effect which is not the natural or probable consequence of the means employed and is not intended, designed, or reasonably anticipated.” Id. at 9. There was no dispute that AES intentionally released carbon dioxide as part of the combustion process at its power plants. But intentional acts do not preclude coverage: “[W]hen the alleged injury results from an unforeseen cause that is out of the ordinary expectations of a reasonable person, the injury may be covered by an occurrence policy provision.” Id. at 10 (citing 20 Eric M. Holmes, Appleman on Insurance 2d § 129.2(I)(5) (2002 & Supp. 2009)). However, “If a result is the natural and probable consequence of an insured’s intentional act, it is not an accident” and coverage will be barred. Id. at 9. The Court summarized the rule it would apply: Thus, resolution of the issue of whether Kivalina’s Complaint alleges an occurrence covered by the policies turns on whether the Complaint can be construed as alleging that Kivalina’s injuries, at least in the alternative, resulted from unforeseen consequences that a reasonable person would not have expected to result from AES’s deliberate act of emitting carbon dioxide and greenhouse gases. Id. at 10-11. Notwithstanding that the Kivalina plaintiffs specifically alleged negligence, and that AES adduced evidence that the Kivalina plaintiffs were arguing on appeal before the Ninth Circuit that their claim sounded in negligence, the Court followed strict adherence to the eight-corners rule: Kivalina plainly alleges that AES intentionally released carbon dioxide into the atmosphere as a regular part of its energy-producing activities. Kivalina also alleges that there is a clear scientific consensus that the natural and probable consequence of such emissions is global warming and damages such as Kivalina suffered. Whether or not AES’s intentional act constitutes negligence, the natural and probable consequence of that intentional act is not an accident under Virginia law. Id. at 12. Further, “[e]ven if AES were negligent and did not intend to cause the damage that occurred, the gravamen of Kivalina’s nuisance claim is that the damages it sustained were the natural and probable consequences of AES’s intentional emissions.” Id. at 13. In sum, “If an insured knew or should have known that certain results would follow from his acts or omissions, there is no 'occurrence' within the meaning of a comprehensive general liability policy.” Thus, the trial court was affirmed. As noted at the outset, this is the first skirmish of what is certain to be a protracted battle between insurers and insureds. There are 50 other jurisdictions (including the District of Columbia) and this is only one issue based on one complaint and one insurer's policy language. There is a long way to go before we will have clarity here. Post scriptum: Many will recall that Steadfast argued in its papers and before the Court that the pollution exclusion also barred coverage; AES responded that it had not been properly raised. The Court did not even address the subject, apparently feeling that it was enough to cite to AES's grounds for appeal, which did not include the pollution exclusion. So even in Virginia, there are still coverage battles to be fought. AES Corp. v. Steadfast Ins. Co., No. 100764, slip op. (Va. Sept. 16, 2011).pdf (64.69 kb)
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Tags: Steadfast, AES, Kivalina, summary judgment, nuisance, pollution exclusion, "natural and probable consequences", eight-corners-rule
September 16, 2011 05:09
We wrote yesterday to introduce Ceres’ report on the disclosure of climate risks by insurers and considered its first Recommendation to Regulators concerning mandatory and public disclosures. We address today the second recommendation in Climate Risk Disclosures by Insurers: Evaluating Insurer Responses to the NAIC Climate Disclosure Survey. Ceres’ second recommendation is to "[c]reate shared resources around the implications of climate trends on enterprise risk management." Id. at 51. In other words, more research should be made available concerning investment risks and opportunities, correlated risks, loss modeling, the potential for loss of health and life, and customer resilience (ability to resist extreme events). Id. Taking modeling by way of example, Ceres discusses modeling thoroughly in Part 2 and the discussion is thought-provoking. Several insurers are conducting climate change modeling internally. For the rest, they rely on third-party vendors, which invokes much criticism from Ceres. "The majority of insurers that report using catastrophe models describe them in terms that suggest their company does not have a clear understanding of how the models can or cannot be used to anticipate changing risk. Most of the industry relies on third-party catastrophe risk models that only marginally integrate changing extreme weather." Id. at 6. "[I]nsurers relying entirely on third-party models may be severely unequipped to adjust pricing to incorporate emerging climate risks." Id. at 31. "Insurers' disclosures suggest that the majority of insurers may be setting pricing based on flawed assumptions of how the industry's loss models incorporate changing climate trends." Id. at 32. Ceres lauds those companies that can do it in-house. But specialization and economies of scale are fundamental drivers of the market. Were every insurer to bring modeling inside, undoubtedly there would be some new insights not presently uncovered. But there would also be insurers who got the models grievously wrong and, in most cases, the resources spent on modeling would be more cost-effectively spent on other items necessary to delivering products or services. To be sure, reliance on EQECAT, AIR Worldwide and RMS as the sources for all climate change modeling has its flaws. One need only think back a few years to where another triumvirate dispensing financial ratings (allegedly) misled sophisticated investors around the globe. But in a world of constrained resources, or even an unconstrained one, third-party modelers are necessary and beneficial. Further, a disadvantage to society from in-house modeling is that the insights developed from proprietary work may remain just that: proprietary. Ceres acknowledges "it is ... possible that asymmetrical information can be used by individual companies to secure a competitive edge against their peers." Id. at 38. Indeed, "larger insurers more readily recognize the inherent limitations of current catastrophe models in light of changing climate than do their smaller competitors or clients. These players have a clear competitive advantage in deploying resources to build the latest climate science into their pricing models." Id. at 37. Third-party vendors, on the other hand, spread their best products across many insurers, in effect sharing their best research (but only to those willing to pay for it). We wrote yesterday of the need to recognize that intellectual capital is a business asset and criticizing a goal of making climate change disclosures public available. We think those comments apply likewise to the sharing of resources. Nevertheless, Ceres does great work in raising the bar for third-party vendors. By pointing out to insurer-users that they may not be getting what they really need from the modeling firms, we expect the modelers will have to go out and address Ceres’ criticisms. For example, insurers are exposed if (as Ceres asserts) "few insured perils are modeled by insurers, leaving the possibility for climate-affected perils to be underpriced." Id. at 35. More specifically, "recent years have demonstrated that climate change may be driving up aggregated losses from smaller events, including perils such as floods, snowstorms and hailstorms, in ways that erode insurer profitability." Id. Tomorrow we conclude our review with a look at Ceres’ third recommendation as well as sharing some concerns about research.
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Climate Change | Insurance | Regulation
Tags: modeling, models, aggregated losses, competitive advantage, EQECAT, AIR Worldwide, RMS, regulators