Insurance Companies Face Increased Risks from Warming

If the damages related to climate change mount in the coming decades, insurance companies may face the prospect of paying larger disaster claims and being dragged into global warming lawsuits. But many firms, especially in the U.S., have barely begun to confront the risks.

Given that insurers are likely to be among the first companies affected by climate change, you might expect the industry to be better prepared than most.

But that is not how it appears to many analysts, regulators, and industry representatives, who say insurers are showing a lack of urgency on the twin threats of massive future damage claims from weather-related events, and the prospect of growing climate change-related litigation.

A report published last September by Ceres, a Boston-based coalition of investors and environmental groups, puts it starkly. Surveying the disclosures of 88 U.S. insurance companies to the National Association of Insurance Commissioners (NAIC), it found that only 11 had formal climate change policies and that just 60 percent were assessing climate risks.

Insurers are central to how we deal, or don’t deal, with climate change. They price the risk facing property owners, and others, from weather events —

Insurers are central to how we deal, or don’t deal, with climate change.
effectively sending a signal to the rest of the economy about how seriously to take the threat. And with $23 trillion in global investments, insurers are also systemically important. If these companies fail to properly account for the risks they face from climate change, they could become financially vulnerable, with serious repercussions for the global economy.

As the Ceres report puts it: “With the world still reeling from the devastating impacts of an economic crisis triggered by hidden risks in the banking sector, we can ill afford a new problem triggered by hidden risks in another.”

The report revealed a growing divide between U.S insurers and their European counterparts, who have been some of the strongest business advocates for taking action to slow global warming. European insurance executives also have been critical of the U.S industry for not being more proactive.

“It is frustrating to see that it’s so extremely difficult to include this huge risk of climate change into current business,” says Andreas Spiegel, senior climate change adviser at Swiss Re, a large reinsurance company. “There is a bit of a short-term view on the benefits, risks, and costs.”

Regulators are also concerned. Three state insurance commissioners — in California, New York, and Washington State — last month said they would require about 300 insurers to file an NAIC survey, raising the number of insurers for which public disclosure is compulsory. (One other state, Pennsylvania, requires a smaller number of insurers to publicly disclose how they are managing climate change; three others, plus Puerto Rico, do not require disclosure to be public, while the rest require no disclosure at all).

“The essence of insurance is the analysis of risk,” said Robert Easton, New York’s lead insurance regulator. “We are asking insurers to share their views of the risk of climate change so that we can be sure that the industry and regulators are appropriately prepared.”

That risk takes two main forms. The first is damage claims, which could rise significantly as a warmer atmosphere — which holds more moisture — is expected to generate more extreme weather, including more powerful
Could climate-related damage payouts eventually match those in asbestos and tobacco litigation?
hurricanes and increased flooding. The damage wrought by rising sea levels, which some experts forecast could increase by three to six feet this century, could also create massive liabilities for insurance companies.

In addition, Ceres says that insurance companies face a growing risk of litigation from individuals or groups seeking to hold power companies and other major greenhouse gas emitters liable for causing global warming in the first place.

“Climate change has also become the subject of significant litigation in recent years, a trend which is likely to grow as the physical impacts of climate change become more pronounced and affected parties seek redress in the courts,” Ceres says.

In 2010, 132 climate-related cases were filed in U.S courts, according to Deutsche Bank Climate Change Advisors. The majority of these involved activists or state governments trying to prod the federal government into climate action, or industries arguing that federal agencies had over-reached in regulating climate change.

In recent years, however, some groups have brought cases against historical emitters, such as energy companies. And insurers could one day find themselves on the hook both for legal costs in these cases, as well as the liability from legal rulings, some experts contend. Plaintiffs face a daunting array of legal challenges in trying to prove that individual greenhouse gas emitters are liable for damages from global warming, including the fact that the major sources of greenhouse gas emissions — oil companies, coal companies, utilities — are global and number in the many thousands. Still, some analysts have wondered whether climate-related damages could eventually match the size of payouts in asbestos and tobacco litigation.

“In recent years, the insurance industry has been closely monitoring attempts to base liability claims for damages on greenhouse gas emissions,” says Ina Ebert, leading liability and insurance law expert at Munich Re, a large German reinsurer.

“Climate liability is considered one of the emerging risks that could gain in importance for the insurance industry in coming years.”

Insurers could be sued both by emitters that are trying to pass on liability, or by investors claiming they did not adequately disclose risks to the market. In 2010, the U.S. Securities and Exchange Commission (SEC) asked companies to report how climate change may affect profitability, potentially opening the
The courts have yet to rule on whether greenhouse gas emitters can be tied to climate events.
way for investor lawsuits.

The risks of litigation are already evident. This spring, Virginia’s Supreme Court reheard AES Corporation v. Steadfast Insurance Co., a first-of-its-kind case for the insurance industry. AES, an energy-generation company, argued that Steadfast should cover its legal fees, and potential losses, in a separate climate lawsuit. AES is one of more than 20 energy companies being sued by the coastal village of Kivalina, in Alaska, which alleges that the companies’ emissions caused its land to become uninhabitable because melting sea ice and rising seas are enabling storms to erode the town’s shoreline.

Virginia’s highest court ruled that Steadfast did not have to defend AES, because the claims for which it sought coverage were not “an occurrence” under the policy. But experts say other jurisdictions could be more sympathetic, potentially opening the way for emitters to be certain that their liabilities are covered by insurers. Sharlene Leurig, author of the Ceres report, says the decision to rehear the case “upset many insurers” who thought they had put the case behind them last year.

The Steadfast-AES case is just one of a slate of climate change-related legal battles with ramifications for insurers, emitters, and the wider debate about climate change, particularly in the U.S. For example, the Kivalina case — with ExxonMobil Corporation as one of the main defendants — was brought by the same lawyers behind the 1990s tobacco litigation. That case is currently before a federal appeals panel in San Francisco, having been dismissed by a district court in 2009 for being a political rather than a legal matter.

Several cases so far have foundered on the “political question doctrine,” where courts have decided that regulating greenhouse gas emissions is something for the U.S. executive branch or Congress. That assertion was part of the lower court ruling in the Kivalina trial, as well as in the case of “Connecticut vs AEP,” in which eight states, New York City, and three non-profits claimed that six power companies had caused “public nuisance” by releasing greenhouse gases. The U.S. Supreme Court ruled last summer that the U.S. Environmental Protection Agency had the authority to regulate greenhouse gas emissions.

“Several cases found that the issue of climate change liability raises political questions that are more appropriately confronted by Congress and the
Look at any U.S. insurer’s Web site, and you will be hard-pressed to find a mention of anthropogenic climate change.
executive than by the courts,” says Michael Gerrard, director of the Center for Climate Change Law at Columbia University.

Thus far, the courts have yet to rule on the crucial question of “causation”: whether greenhouse gas emitters can be tied to climate events. That could be a high bar. “How are you going to show proximate cause from these events that took place years ago that cumulatively, with other entities generating greenhouse gases, led to these results that, in turn, caused damage?” asks Scott Seaman, partner at Meckler Bulger Tilson Marick & Pearson, in Chicago.

Legal experts say the question in the next few years is whether U.S. courts may be more willing to hear the cases if Congress pares back the executive’s regulatory authority or takes no legislative action to reduce greenhouse gas emissions. San Francisco attorney Kevin Haroff says they may be. “If you really believe the political action defense, then you have to take it both ways,” he said. “If it’s legitimately a political question, then it should be resolved by regulation and legislation. If not, the political arguments have to carry less weight.”

Adding further grist to the idea that plantiffs may eventually win a climate change case is that it also took a long time for arguments in the tobacco and asbestos litigation to stick, and that climate change litigants may, in fact, never have to prove a causation link. The tobacco torts turned on evidence that cigarette companies suppressed evidence of the dangers of smoking, while knowing it was harmful.

In a 2009 report, Swiss Re argued “that climate change-related liability will develop more quickly than asbestos-related claims and [we] believe the frequency and sustainability of climate change-related litigation could become a significant issue within the next couple of years.”

The asbestos claims took about 40 years from the first lawsuits in the 1950s to the eventual payouts, of up to $265 billion, in the 1990s, according to Swiss Re. The first climate change lawsuits were filed in 2004. But whatever the time frame or outcome, the threat of litigation is already having an impact by making companies more cautious about talking about climate change, according to several observers.

“Acknowledging climate risk would be a risk for [any] company in an American context,” says Andreas Spiegel, at Swiss Re. “There is the risk that the company or the managers would be held liable for their actions in relation to that.”

Leurig, at Ceres, says the threat of litigation “makes it very much less likely [that they would speak up], and I’ve heard that explicitly from a number of legal counsels. They are being advised to avoid any sort of attribution language between man-made emissions and damages.”


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Look at any U.S. insurer’s web site, and you will be hard-pressed to find any mention of anthropogenic climate change. And, leading companies have tended to shy away from policy questions. For example, in 2010, Marsh McLennan, a reinsurance company, left the U.S. Climate Action Partnership, a group of businesses and environmental groups that lobbies for a reduction in carbon emissions. A spokesperson now says it did so “in order to make room for new members who had a more direct and immediate business interest in the outcome of the climate change discussion.”

Andreas Spiegel, at Swiss Re, says European insurers have tried to persuade U.S. companies to take a more public role — but so far to little avail. “We try to reach out a lot to our clients and partner organizations in the U.S.,” said Spiegel. “But we haven’t been very successful. There seems to be a fear and a great opposition to tackle the topic, and we’re not quite sure how to overcome that and make sure the sector speaks as one voice on a political level.