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.