Mixing Oil and Water

Insurance is very much involved in issues of oil and water. Losses relating to oil, for example, often are excluded under property or liability policies. Unless a company has environmental impairment liability coverage, the typical oil spill escaping fumes, or leaking storage tank is excluded. One exception is the Business Auto Form (ISO CA00011001), which exempts from the pollution exclusion "fuels, lubricants, fluids, exhaust gasses, or other similar 'pollutants' that are needed for or result from the normal electrical, hydraulic, or mechanical function of the covered 'auto' or its parts if (1) the 'pollutants' escape, seep, migrate, or are discharged, dispersed, or released directly from an 'auto' part designed by its manufacturer to hold, store, receive, or dispose of such." In other words, if the spill occurs because the vehicle was in a wreck or tipped over, the oil spill is covered.

To a large degree, exclusion is true of water-related perils, as well. Unless one has flood insurance, when the rains fall, the rivers clog and back up, and the house washes away, property coverage does not apply. After all, whom can you sue? The guy who never should have built the house in a flood plain 30 years ago?

Water is a crucial factor in insurance claims in a variety of ways. Except for broken plumbing losses, most damage caused directly by water (mold, rust, sewer backup, rain, subsidence, wave wash, or riptide) is excluded. If the situation described in the latest horror movie, Day After Tomorrow, actually occurs, I doubt anyone will answer that 1-800-HOTLINE Claim Reporting number.

It is the lack of water that may cause an even more serious, and often insured, loss. The lack of rain causes fields and forests to dry out and become fire hazards. Hillside fires in California claim hundreds of homes annually. Forest fires burn our timberlands and any homes or businesses in their paths. Drought kills crops and, while that may not necessarily be a covered crop insurance loss, it affects the economy to the extent that prices rise and, therefore, premiums also rise.

Global Warming

Scientists debate the effects of global warming. Could the events predicted in Day After Tomorrow really happen? Dramatic change might occur. One scientist cited recently in National Underwriter suggests that a collision of an asteroid with the earth could cause all sorts of catastrophic events. One recently came within 250,000 miles of our planet.

The reality is that the polar ice cap is thinning. That changes weather patterns, with the jet stream rising into upper Canada rather than across the United States, leaving the West and Southwest in drought conditions. On one day in May 2004, hundreds of tornadoes tore apart the Midwest, from Iowa and Nebraska to Indiana. Heavy rains caused flooding around Chicago and elsewhere in the Midwest. Last winter, snowstorms crippled the Northeast; a few years ago drought plagued the same area. Yet, there was insufficient snow in the West. Flood today, drought tomorrow.

Who or what is to blame for these weather changes? Could the tree-huggers be right? Throughout South and Central America, Africa and Asia, timbering, burning, and stripping have reduced tropical rain forests. That affects climate. Home Depot has announced that it will not buy any wood products made from lumber in endangered forests.

Loss of rain forests is only one cause of global warming, however. In the Northern Hemisphere, the burning of hydrocarbon fuels – coal, oil, and those forest fires — creates carbon dioxide that leads to a greenhouse effect. Even before the age of oil, we were starting the process by burning our forests and mining coal that turned cities black with soot. (See my article, "The 1871 Chicago Fire," in the October 1999 issue of Claims. The same drought that led to the O'Leary fire also killed 1,200 people in a Wisconsin forest fire.) All this did not just start yesterday. It began with urbanization during the Industrial Revolution. That may be over in the North America, but it is just starting in China and Africa and other Third World nations, where hydrocarbon fuels will continue to pollute the skies and clog the clouds. Hence, we will continue to have droughts and floods.

A Matter of Distribution

My young nephews, when they were in high school, were thinking about careers. I suggested hydro-engineering. They thought I was nuts. So, they became lawyers and accountants and insurance salesmen instead. Hydro-engineering? What? They run the city water works? Well, yes, I suppose that is part of hydro-engineering, but water distribution is the key element of the profession.

Water actually is a more expensive commodity than oil. As this is written in late May, the price of gasoline is around $2 a gallon. It may, and probably will, go higher. But a 16-ounce bottle of water at the local gas station is $1. That's $8 a gallon! Thank goodness the car runs on gasoline.

Drinking water is not that expensive out of my faucet at home, although it is not cheap. It costs at least a dollar a day and, since we have been in a drought and I have to water the yard to keep the expensive plants we have purchased alive, it runs even higher. Legally, I can water only on even numbered days because my house number is 670.

Meanwhile, up in Chicago, the Des Plaines and the Fox Rivers, and, to the west, the Mississippi, are all in flood stage. Lakes Powell and Mead on the Colorado River are at their lowest levels since they were created; the Colorado supplies water for many Utah, Arizona, Nevada, and California cities. Is it not evident that we need some hydro-engineer to design a way to pump all that excess water from the Midwest down to the Southwest? If we can send a man to the moon and robots to Mars, why can't we pump water from Illinois to California? After all, we pump gas and oil from Texas all across the nation, and oil from Prudhoe Bay to Valdez, Alaska, a couple thousand miles over mountains.

What effect would an adequate supply of water have on the Southwest? Arizona residents have been advised not to water their lawns; in Nevada, they pay homeowners by the square foot to dig them up. Lawns sop up the needed water. Pumping water into those areas for agriculture also might create the humidity needed to trigger some rain on the forests that would help to prevent fires. There was once even a plan to tow an iceberg from Antarctica to the Sahara, but it never was accomplished. Why not?

Desalination of the Oceans

Distribution of the excess water from one area to a dry area is one solution. Another is desalination. Currently, it is an expensive process. Seawater is boiled and the evaporated water is used for drinking, irrigation, and other applications. We cannot boil the whole ocean, however. It takes fuel to heat the water to the boiling point. Of course, we could use the steam to produce electricity but, so far, the process has proven to be cost inefficient. As the value of water increases, it is very likely that cheaper methods of producing heat to boil seawater may be found or, better yet, some new chemical way of removing the salt from it might be discovered. Imagine the royalties for the hydroengineer or chemist who comes up with that formula.

With cheap desalination, the Sahara could bloom, Central Africa could return to a tropical paradise full of food for all its starving people, and the economies of the world could be prosperous.

Otherwise, water will become the "oil" of the balance of the 21st century. Those who have it will prosper; those who do not will wither and rebel. Half the cowboy movies I remember from my youth dealt with fights over water rights.

Consider the Middle East, which has adequate oil, but insufficient water to grow its own food supplies. It is the hotbed of terrorism. Multiply that by every other water-poor nation, and it becomes evident that water as a source of war is much more likely than oil as a source of war. Europe and North America always have had adequate water, and have prospered as a result. That no longer may be the case if global warming changes weather patterns and drought becomes epidemic.

A Role for Insurance?

It is not likely that the insurance policies with which we are familiar today will change radically over the next few years. There still will be coverage for the house burned in a wildfire, and exclusions for the house damaged by flood, but 10, 15, or 20 years from now, that situation might change. Just as insurers encouraged use of smoke alarms by providing discounts, and used underwriting as a tool to control costs through rating of hazardous risks, it could use similar techniques for water-related hazards.

For example, if a policyholder wanted his home in a forested area where fires might destroy it, high premiums might be offset by requiring wide borders of stripped land (no plant growth) or water-filled ponds. If the policyholder wanted a nice waterfront home on the river, requiring it to be much higher than the hundred year flood plain level might be the key to insuring it.

These things would not be popular. Look at the way that the auto industry fought safety devices like seat belts, air bags, safety glass, and padded dashboards. Government had to step in. Same with motorcycle helmets and other common-sense safety devices. It makes no sense, but we often are our own worst enemies when it comes to loss prevention. Hence, we will continue to spend fortunes to climb hazardous mountains or buy dangerous dogs, and we will not quit smoking or go on diets.

Perhaps, safety and pleasure are like oil and water. They don't mix well. Yet, both are necessities and both have a way of interacting with each other in positive and negative ways. Too much is as bad as not enough. Market alone is insufficient to control the world's consumption and needs. Somewhere within that mess is a role for insurers.

Do you have a comment on this month's topic? The Iconoclast would like to hear from you. Contact us at Claims, 5081 Olympic Blvd., Erlanger, KY 41018 e-mail: editor@ claimsmag.com

Ken Brownlee, CPCU, is a former adjuster and risk manager, based in Atlanta. He now authors and edits claim adjusting textbooks.