Review of Liability Insurance Considerations in the Context of

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					   Review of Liability Insurance
   Considerations in the Context of
   Global Climate Change
   Presented at Stanford Law School:
   Spring 2007 Symposium: Climate Change Liability and the Allocation of Risk
   February 24, 2007



Christina Ross, M.S., LaCroix Davis LLC
Evan Mills, Ph.D., Lawrence Berkeley National Laboratory
Sean B. Hecht, J.D., U.C.L.A. School of Law

http://insurance.lbl.gov
Partial funding for this project provided by Ceres
Intersection of Climate Change with
Insurance, Liability, and Law


                   Liability
                  Insurance


                                         Law
                 Climate Change




      Property                    Life/Health
     Insurance                     Insurance
Climate Change Liability is a Rapidly
Emerging Issue:
New IPCC Report has reduced the uncertainties
 Landscape of Climate Change Liability
                          Business Atmosphere
                           Legal Atmosphere
                          Potential Precipitators
                         Climate Change Litigation



                           Insurance Sector


                                       In
Non-Climate Trends               Liability Risks                Climate Trends

• Distrust in Business                                    Impacts on:
                           Liabilities Associated with
• Rising Class-Actions      Potential Responses to        • Private Property
                                Climate Change
• Expanding Liability                                     • Business Operations
Boundaries
                                                          • Human Health
• Looming Regulation      Risk-Management Strategies
                          Can Avoid Claims & Litigation   • Natural Resources
• Upsurge in Legal
Activism
Sources of Climate-Change Related
Liability & Their Nexus With Insurance




   Hurricane Katrina Approaching Southeastern U.S.
   Photo: NASA
Why would insurers care about
climate change?
   Insurance Customer            In-House Liability Exposures
Exposure to Climate Change        to Causes & Consequences
        Litigation                    of Climate Change

 Burden of liabilities from      Direct
catastrophic losses, smaller,       • Handling of insurer
more diffuse extreme-weather        shareholder & customer
events, sea-level rise              interests

                                     • Underperforming in
 Corporate director & officer       disclosures to
liability for responsible            shareholders
management practices
                                  Indirect (payers of claims
 Carbon-intensive customers     faced by others)
including long-tail losses
predating pollution exclusions
Business Atmosphere

                                                          Business Value
                      Disclosure                          •Negative impacts on company
                 Increasing desire
                for full disclosure of                    value, reputation & brand caused
              company’s environmental                     by ignoring climate change
                        liability

  Regulation                           Accounting         Shareholder Demand for
  Regulation and        Company      Auditors assessing   Action
    enforcement           Risk        climate change
of shareholder laws    Management           risk

                                                          Shifting Regulatory
                                                          Environment
                    Fiduciary
                  Responsibility                          •Energy prices
                Ignoring climate-related                  •Carbon caps, etc.
               risks carries potential for
                breach of fiduciary duty                  •Compliance cost of “penstroke
                                                          regulation”

                                                          Note: non-business entities also
                                                          have liability insurance, e.g.,
                                                          local governments
Shareholder Resolutions Link Business
Atmosphere to Climate Change Liability
    45
         Global Warming
    40   Shareholder
         Resolutions Filed
    35
    30
                              2000-2006 Data:
    25                        ISS 2007
                              2007 Data (as of
    20                        02.06.07): Ceres
                              2007
    15
    10
     5
     0
    00

    01

    02

    03

    04

    05

    06

    07
  20

  20

  20

  20

  20

  20

  20

  20
Insurance Sector (Non)-Disclosure

 I nsurer Response Rates to Carbon Disclosure
              Project (CDP) Survey: 2006

70%
                                                  US - N=23
60%
                                                  Non-US - N=52
50%

40%

30%

20%

10%

0%
        Answered      Declined to     Provided       No Response
      Questionnaire   Participate   Information
                          Liability Insurance

  Commercial        Insures against negligence (where product was known to be hazardous to
   General          health), personal injury, business interruption & product liability
   Liability

Environmental       Emitters of GHGs: 1. Direct impacts from climate change
   Liability        2. Indirect consequences associated with toxic releases, mold & other
                    environmental disruptions from the physical impacts of climate change


 Professional       D&O liability for those involved as GHG emitters or arising from obligations
   Liability        to protect shareholder value from the impacts of climate change


   Political        New government policies (e.g., carbon levies, regulatory risks)
     Risk


  Personal &
 Commercial         Increased roadway accidents related to adverse weather
Vehicle Liability
                 Legal Claims of Relief

  Nuisance      Air pollution – liability for an unreasonable injury to a right (public, health, life)
   Claims       common to the general public or private interests


  Sarbanes-     D&O liability; potential application by SEC for environmental disclosure
  Oxley Act     enforcement


Fraud-related   Sources of mis-information on climate change
   Claims


 Public Int’l   Indigenous peoples adversely impacted from climate change; environmental
 Law Claims     refugees



Other Avenues   Endangered Species Act; National Environmental Policy Act
Liabilities Associated with Potential
Responses to Climate Change
                         Adaptation – efforts to
                          decrease vulnerability
                              Levees, water-pumping
                               systems
                              Risk of mal-adaptation
                                  Water desalinization
                                   plants: energy-intensive
                                   and vulnerable to
                                   coastal hazards
                         Mitigation – emissions
                          reductions
                         Supply- and demand-side
                          energy choices
                              Green Buildings
                              Nuclear energy
                              Hydrogen energy
                              Renewable energy
                              Carbon Capture & Storage
Carbon Capture and Storage (CCS)

   Lake Nyos - 1986
    (Cameroon): Natural
    CO2 leak killed 1800
    people, 3500 farm
    animals
   Potential Roles for Insurers to Proactively
   Manage Risks - Mitigating the Causes 1
                                  Risk-Management Strategies



Mitigating       Reducing                Limiting                  Disclosing            Raising
   The       Greenhouse Gases            Exposure                    Risks           Energy-Efficiency
 Causes


               Bottom line/cost           Controls              Effectiveness/Risk     Value Creation


              Reducing             Decreasing                 Disclosing risks     Designing energy-
Strategies
               greenhouse gas        operational exposure       to investors as        efficient, low-
               emissions by          to energy price            precursor to           emissions
               establishing a        shocks, disruptions,       identifying loss-      products
               management            or emissions               prevention            Developing
               program               regulations by             strategies             emissions-offset
                                     minimizing                                        activities
                                     emissions through
                                     improved supply or
                                     end-use efficiency
                                     and distributed
                                     generation
   Potential Roles for Insurers to Proactively
   Manage Risks - Mitigating the Causes 2
                                      Risk-Management Strategies



Mitigating       Performing                 Increasing             Rebalancing          Developing
   The            Analyses                 Investments              Portfolios           Products
 Causes


               Bottom line/cost          End-use efficiency      “Decarbonizing”       Value Creation


              Performing                Increasing             Rebalancing         Developing new
Strategies
               analyses of positive       investments in          asset portfolios     insurance
               and negative risks         end-use efficiency      to reduce            products (e.g.,
               associated with            or improved land        vulnerability of     Carbon emissions
               nuclear power,             mngt to sequester       investments o        credit guarantees)
               carbon capture &           carbon to carry far     severe weather      Contingent cap-
               storage, hydrogen          less liability than     losses.              forward for
               energy & renewable         supply-side                                  emissions
               energy systems             investments                                  reduction trades
              Examining demand-         Focusing on                                 Engineering
               side responses             investments in                               quality assurance
                                          adaptation & loss-                          Mileage-linked
                                          prevention                                   vehicle insurance
    Potential Roles for Insurers to Proactively
    Manage Risks - Adapting to the Impacts
                                    Risk-Management Strategies



Adapting      Improving Land              Managing           Ensuring Business            Fostering
 To The        Management             Hazardous Materials       Continuity              Responsibility
Impacts


                  Planning               Public Health         Loss Prevention             Good-faith


              Improving land          Improving siting     Developing &             Fostering
Strategies
               management with:         and safeguarding      establishing              scientific
              Drought-resistance       of hazardous          business continuity       responsibility
               agricultural             materials             (BCM) plans as a         Peer-review of
               practices               More rapid            prerequisite for          documents &
              Curbing                  response to           adding on business        communications
               development in           damages               interruption coverage     related to climate
               high-risk areas                                to a company’s            change hazards
              Flood defenses                                 commercial general       Good-faith
              Advancing land-use                             liability insurance       information
               planning                                                                 disclosure
            From Risk to Opportunity
                  for Insurers


         Risk                    Opportunity
 Customers’ causes of       Application of insurers’
  and responses to            expertise in proactive
  climate change can be       risk management
  distinguished by their      towards helping their
  potential for enhancing     customers avoid
  or reducing liability.      liabilities.