How do you insure New York against climate change?
Climate change is a major issue for insurers. The industry underwrites a wide range of risks that are likely to be exacerbated by climate change. For example, property insurance and personal accident insurance will normally cover injury to people and damage to land and property caused by extreme weather and flooding, along with some business losses arising out of those events. Crop insurance may have to pay out in the event of failed crops as a result of droughts.
Acknowledging the significant risk posed by extreme weather events, Lloyds of London, the world’s oldest and biggest insurance market, published a report earlier this month on the need to incorporate climate change into catastrophe models used to calculate risk. The report noted, for example, that the approximately 20cm of sea-level rise at the southern tip of Manhattan Island increased superstorm Sandy’s surge losses by 30% in New York alone. Last month, Farmers Insurance started legal proceedings against Chicago and nearly 200 surrounding municipalities for allegedly failing to prevent flooding that may have been exacerbated by rising temperatures.
However, the insurance industry also underwrites another type of risk, namely “liability” risk. Liability insurance indemnifies the insured person in the event that they cause a loss to a third party which is covered by the policy. Company directors take out directors’ and officers’ liability insurance (or “D&O insurance”) to cover them in the event that legal claims are made against in their capacity as directors of companies. Those claims might arise due to errors or omissions in company reports, or failures by the directors to adhere to the legal duties they owe a company. The insurance will sometimes cover criminal cases as well as civil claims.
This week, a coalition of NGOs consisting of WWF, CIEL and Greenpeace have written to the directors of major fossil fuel companies and their D&O insurers asking whether the insurance policies held by those directors would cover them in the event the directors are found to have misled the public, investors or regulatory authorities regarding the risk associated with burning fossil fuels, or engaged in campaigning to discredit climate science or lobbying to disrupt climate policies. If the insurance policies do cover those activities, the insurance companies will want assurance that the directors they cover are not engaging in those activities. If the policies do not cover those activities then the directors will need to ask themselves whether they are putting themselves at risk of having to pay claims out of their own personal assets. Either way, the letter should encourage a thorough assessment of the risks by both insurers and directors to determine whether they are at risk and if so, what changes they need to make to mitigate it.