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What the Farmers Insurance Suit Tell Us About Climate Change

Rob Moore, Senior Policy Analyst, Chicago

A lawsuit filed in Illinois by Farmers Insurance claims that the Metropolitan Water Reclamation District (MWRD), the City of Chicago, and 101 other municipalities and county offices has gotten attention recently from the Chicago Tribune, the Washington Post, Marketplace , and  E&E News.  Farmers Insurance claims that MWRD and the municipalities are liable for damages resulting from a storm in April 2013 because they knew that their stormwater infrastructure was insufficient to deal with extreme precipitation brought on in part by climate change.

Flooding in Chicago area, April 2013.  Image courtesy of dan4kent by dan4kent is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.Setting aside the merits of the case or whether MWRD and the cities named in the complaint are at fault or not, rest assured that you’ll be seeing more cases like this one.  Litigation is a symptom of what happens when the response to a recognized problem is insufficient.  The system breaks down when remedies are not evident and parties take their claims to court to find relief. That’s certainly the situation when looking at preparedness for climate impacts.

Federal, state, and local governments clearly have a responsibility to identify the future impacts of climate change, the risks posed by those impacts, and to plan and prepare accordingly.  This is starting to happen at all levels of government, but not at the pace we need if we are to keep ahead of the curve.

We are in the middle of the biggest risk management exercise of all time.  And so far, we’re not moving fast enough to deal with risks of flooding, drought, sea level rise, etc. that will continue to grow in scale, frequency, and complexity.  Our systems for managing stormwater, wastewater, and drinking water are not designed with the future impacts of climate change in mind.  Neither are our energy or transportation systems. 

There is a real role for the industry to advocate for solutions and use their clout to help advance them. But the insurance industry has not been particularly vocal about the need to deal with climate change, with the exception of the big re-insurance companies like Munich Re, Swiss Re, and Zurich Re (the companies that sell insurance to insurance companies and cover their losses). Nor has the industry in general factored in the risks climate change poses to its business.

According to a climate risk disclosure survey of 184 insurance companies compiled by Ceres, very few primary insurers (the companies you and I deal with for insurance) are factoring climate change risks into their operations. “Out of 184 companies, only eleven provided disclosure of sufficient quality and detail to tally more than half the eligible points in two of the four domains,” covered by the survey. It’s worth noting that Farmers was among those eleven, as were some of the biggest re-insurance companies on the planet including Munich Re, Swiss Re, and Zurich.

We all need to get ready for what the future is already serving up.  Extreme precipitation events that cause flooding, sea level rise, the increasing risk of drought and water scarcity.  We are going to be dealing with a lot of new challenges from here on out and we are going to be dealing with them far more frequently.  Those that are smart enough to look ahead and start preparing for our climate future are going to find it a lot easier to deal with those challenges.

For the insurance industry, it is time to get cracking. Beyond trying to find others to pay the price for inaction, they should be more engaged in the solutions discussion. That means looking at the properties they insure, the investments they make to hedge against losses, and even their active support for actions to on preparing for climate impacts and to slow climate change, such as the Obama administration’s upcoming carbon pollution standards for power plants. It’s not just the right thing to do for their bottom line; it’s the right thing to do.

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Lewis Perelman on May 30, 2014 11:18 pm GMT

From the Christian Science Monitor report on this:

“Chicago says it is already spending heavily on infrastructure to adapt to changing weather and has a comprehensive Climate Action Plan.

“But the city’s foresight may have made it a target, said Verchick, since Farmers cites the document as evidence officials were aware of the risks.”

In other words, this kind of litigation could have the effect of discouraging communities from making plans to cope with climate change.

Moreover, Washington-based climate adaptation specialist Bill Rohring has pointed out: “…the rainfall was within the current 100-year plan and the system should have been able to handle it. If that is true, then that points to a ‘simple’ negligence case.” (He also notes that in court, ‘simple’ can get complicated.)

Note further that it is impossible to predict local impacts of AGW (other than maybe SLR), or to attribute particular weather events to AGW. Actuarial risk is based on historical data, and the assumption that statistical trends will continue. Insurers purchase reinsurance to protect them against unusual events outside the norm. Insurers are supposed to set their premiums at a level that will enable them to cover the costs of their actuarial risks. If Farmers failed to charge adequate premiums to meet its obligations, the fault for any deficit would seem to be with insurance company, not with the local governments.

Insurers normally give premium discounts to customers who undertake risk-mitigation measures — such as installing sprinklers in a factory to deter fire damage. But the insuree is not obligated to do so. Again, the premiums are supposed to reflect the actual risk, not the ideally mitigated risk. It also is normal practice for insurers to deny policies to customers who pose excessive risk.

Per Rohring’s observation though, if the local governments failed to provide proper infrastructure protection in accordance with their own plans, and moreover failed to accurately communicate the efficacy of the flood control infrastructure to the public and to insurers, they might be considered negligent. However, they may be immune from legal liability. For instance, following Hurricane Katrina, investigation revealed the flood walls that failed to protect New Orleans were improperly constructed and other infrastructure was not properly maintained — a failure attributed to a combination of bureaucratic incompetence and endemic corruption. Nevertheless, a federal judge eventually dismissed the many lawsuits against the US Army Corps of Engineers, upholding the latter’s claim of immunity.

Addressing the general question of whether governments can be held liable for failure to adapt to climate change, Prof. J.B. Ruhl, Vanderbilt U., has written:

On the other hand, when public authorities have already provided protective infrastructure at some scale, their knowledge that the infrastructure is inadequate to protect against known increased risks has in some cases led to liability for negligence, though some courts have held there is no inherent duty to upgrade facilities. See e.g., City of El Paso v. Ramirez, 349 S.W.3d 181 (Tex. App. 2011) (city aware of potential for overflow from retention pond was negligent in not taking measures to prevent such overflows); Coleman v. Portage County Engineer, 2012 WL 3734459 (Ohio Aug. 29, 2012) (failure to upgrade is different from failure to maintain and is subject to local immunity). One recent example is Livingston v. Virginia Department of Transportation, 2012 WL 2036936 (Va. June 7, 2012), in which the court held the state transportation agency could be held liable for flooding during an extraordinary storm event based on its failure to maintain a dredge channel it had modified. As with the federal flood liability litigation discussed above, federal and state sovereign immunity law will be an important factor in determining the scope of public liability in such “failure to adapt” cases.”

Either way, any liability in the Minnesota case should be considered a matter of normal risk management, not related to climate change.

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