Turning Up the Heat

Is it just me, or is it getting hotter in here? Recent scientific studies about global warming indicate that the Earth's temperature may rise anywhere between two degrees and 11 degrees Fahrenheit. This would increase both the frequency and severity of floods and droughts. Rising sea levels would accelerate and trigger beach erosion, more powerful body surges, and ecological degradation. Oceans could warm and acidify. Heat waves could kill large numbers of people. The potential damages resulting from global warming are enormous.

Global warming is a much debated phenomenon. Some say it is a myth, while others believe it is an imminent threat to mankind. Putting aside the respective debates — to which we could not do justice here — we can explore the risk management implications of global warming. Liability exposures loom for companies and risk managers as the climate heats up. An article titled, “Global Warming Litigation Heats Up,” in the April 2008 issue of Trial magazine, points to signs of a potential tsunami.

Regardless of the perceived size of the risk, it is crucial for risk managers to consider the perils of global warming. How will global warming affect your business; products and services; markets; and production/service facilities? What scenarios are plausible? What options do you have planned if the scenario materializes? Risk management means being prepared to deal with risks. This includes the future.

The Core Issue

Certainly every risk manager should assess his organization's carbon footprint and its size. Risk managers working for manufacturing organizations will have different worries and concerns than risk managers who work for, say, the service sector or the financial industry. Companies engaged in manufacturing may be more prominent targets for liability claims and lawsuits.

One concern is that plaintiffs will eventually target specific companies or industries, alleging that their negligence caused or contributed to global warming. Electric utilities are responsible for 40 percent of all carbon dioxide emissions in the U.S. Experts estimate that 48 companies are responsible for 75 percent of all U.S. electricity emissions of carbon dioxide. Broken down further, just 19 companies are responsible for 50 percent of U.S. electricity emissions of carbon dioxide.

Liability claims are not purely theoretical concerns. In 2006, the state of California filed a lawsuit against six major car manufacturers, seeking damages for the manufacturers' alleged contributions to global warming and the damages to the state's economy, public health, and environment. Therefore, potential plaintiffs in global warming litigation include not only individuals but also government entities subrogating on behalf of their citizens.

A company need not be an electric utility or an Exxon Mobil in order to have risks related to global warming. The risks pertain not only to potential liability claims but also to challenges confronting businesses facing losses from droughts, catastrophic weather, and heat waves. Such events can pose extensive property damage risks as well as supply chain interruptions. Therefore, risk managers must not stick their heads in the sand and think that they have nothing about which to worry. Just because risk managers' companies happen not to be in the electric utility, manufacturing, or energy sectors does not indicate a lack of risk. D&O claims may proliferate as shareholders and others sue management for not being proactive in environmental affairs and thus allowing the company to contribute to global warming.

The Mother Lode

If and when plaintiffs file liability claims against companies or industry sectors based on environmental impact, plaintiffs still face multiple legal hurdles. However, even unsuccessful claims related to global warming liabilities may force companies to shoulder monstrous legal defense costs. Therefore, the impediments to successful plaintiff recovery are no reason for risk managers to feel a false sense of security when assessing exposure to global warming risks.

Alleged damages could easily run into the multimillion or billion range of exposure. Claim scenarios could include class-action lawsuits against individual companies and industries. When and if financial losses occur because of climate changes wrought by global warming, there will be a frantic search for deep pockets. The first stop in that search for deep pockets will be corporations.

The second wave of activity will be a nearly equal frantic search by those corporations to shift the cost of such claims to their insurance carriers. Whether such efforts will be successful is a separate issue and hinges on insurance policy and coverage interpretation.

Risk managers can take various proactive measures right now to mitigate potential losses. Some actions include:

• Assess an organization's carbon footprint.
• Sensitize upper management to the potential perils that may exist to the organization from global warming and emphasize the need to address these perils long before claims and lawsuits arise.
• Collaborate with operational managers about how to reduce the organization's carbon footprint and make a compelling case that the organization is a good, environmentally conscious corporate citizen.
• Consider “what-if” scenarios regarding global warming liability claims and determine whether the organization's current portfolio of insurance policies has any exclusions that would negate coverage. The insurance broker may be able to assist in this regard.

Insurance Coverage Wrangles

One reason the last factor is key is because insurance coverage will be a major battleground created by global warming. For example, there may be controversy about whether liability claims for damages are covered under conventional insurance policies. One coverage attorney in representing policyholders confided to me (off the record) that he thinks there is a solid case for coverage under a standard CGL policy. Take, for example, a situation where the global warming liability is based on alleged harm to the environment that has occurred over years or decades, until the harm finally manifests. In such a situation — the attorney argues — each of the CGL policies in place during the period of the alleged time span is triggered by the global warming liabilities.

First-party property policies may also be the subject of coverage tussles. To the extent that global warming causes floods, there may be coverage disputes about whether floods addressed by property policies were excluded. What is certain is that there will be a massive effort on the part of businesses to shift the costs of any global warming damages to primary insurance carriers. It is likely that such carriers will resist these attempts. In turn, primary carriers who are tagged with the cost of global warming liabilities will, in turn, seek to cede these liabilities to reinsurers. As a result, we can expect reinsurers to insert exclusions in their treaties for losses triggered by global warming.

It would seem that global warming is one of those risk management problems that may be important but not urgent. It does not tug at the risk manager's sleeve like that upcoming property renewal. The problem is that if or when global warming becomes an urgent issue, it may be too late to do much. Now is the time for risk managers to be proactive and formulate strategies to cope with this phenomenon.

Kevin Quinley is an insurance claim expert and author. He can be reached at kquinley@cox.net. Visit his blog, The Claims Coach, at http://claimscoach.blogspot.com.