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Shifting Climate Change Risks Will Force Insurers To Adapt

INTRODUCTION

Whether naturally occurring or caused by human activity, it is now generally accepted that the Earth is warming. Climate change is already producing more extreme weather events and adversely impacting communities across the world, from the expedited melting of the polar ice caps to the desertification of previously-habitable regions. With such a vast and diverse geography, Canada is already observing at first hand the impact of climate change.

The 2013 floods in Calgary and Toronto as well as the 2016 Fort McMurray fires are three among many recent examples of unprecedented weather events in Canada. The insured losses stemming from the Fort McMurray fires, for example, have been estimated at approximately $4 billion, making it the greatest insured loss in Canadian history. Insurers struggled to keep pace with the tens of thousands of claims which had been tendered seeking coverage for fire losses. Meanwhile, the global losses stemming from natural catastrophes in 2016 estimated at $210 Billion were one of the highest annual losses on record.

While the extent to which climate change is a factor in extreme weather events is impossible to determine with certainty, such events demonstrate the challenges that climate change will pose to Canada's insurance industry with respect to indemnity exposure, liability and coverage.

CLIMATE CHANGE & EXPOSURE

Weather is one of the great catalysts of insurance claims. Increasingly severe and unpredictable weather is expected radically to change the frequency and nature of claims made to Canadian insurers. Property policies are most likely to face exposure from climate change. In the face of larger floods, faster-spreading fires and stronger winds, property insurers will be called upon more frequently for indemnity. Business interruption coverages will also be particularly susceptible to climate change-related losses as businesses find themselves unable to operate as weather disrupts supply chains, transportation infrastructure and communications networks.

The placing of environmental liability policies is expected to multiply in the era of climate change. As global warming progresses, businesses will face an increased risk in the conduct of otherwise routine operations. For example, businesses handling hazardous materials may face exposure if stronger winds exacerbate the spread of harmful vapours, while coastal businesses will be at a greater risk of polluting waters. At a more localized level, climate change is expected to increase the frequency and severity of personal injury claims as dangerous weather disrupts driving conditions, causes increased icing on municipal properties, floods parking lots and causes employees heat stroke during their employment.

Novel professional errors and omissions claims are also expected. Engineers and architects may face exposure for failing to design living spaces and office towers which appropriately address increasingly severe weather. Similarly, product liability claims are expected to increase as businesses fail to redesign products, such as commercial-use steel and concrete, to withstand more volatile temperatures and more severe wind and precipitation.

CLIMATE CHANGE & LIABILITY

More frequent and novel insurance claims will compel more frequent and novel litigation. While there has yet to be a meaningful "climate change" lawsuit in Canada, "global warming litigation" has already emerged in the United States. In the "Comer" 3 litigation, residents and landowners filed a class action against American energy and chemical companies seeking damages on the basis that their operations contributed to global warming and, in turn, the strength of Hurricane Katrina and its destructive force. The trial court noted that the climate change debate did not have a place in the courtroom absent legislation outlining standards to measure conduct. The Fifth Circuit Court of Appeals held that the plaintiffs' claims were traceable and found that they had standing to advance claims of nuisance, trespass, and negligence. This finding was later vacated and the Supreme Court denied the plaintiff's subsequent petition for a writ of mandamus.

In Native Village of Kivalina v. ExxonMobil Corp.4 an Alaskan village sued energy utilities, oil companies and a coal company. The plaintiffs asserted that the defendants were responsible for emitting greenhouse gases which contributed to global warming and resulted in the slowed formation and expedited melting of arctic sea ice. This

was alleged to have, in turn, expedited erosion caused by winter storms. The plaintiffs sought redress in the form of the costs of relocating their village. The Ninth Circuit Court of Appeals reviewed the American common law of nuisance and the doctrine of displacement and held, inter alia, that "Congressional action, not executive action, is the touchstone of displacement analysis."

The Comer and Kivalina litigation suggest that until governments enact legislation containing standards to measure conduct and statutory causes of action, climate change lawsuits are unlikely to be successful. In this regard, in 2016 Ontario passed the Climate Change Mitigation and Low Carbon Economy Act and two associated regulations, which established a cap and trade regime designed to reduce greenhouse gas emissions and hasten Ontario's shift to a low-carbon economy. The regime includes a number of provisions to increase emissions accountability and mandates public emissions reporting. The regime also mandates participation for many of Ontario's businesses, which are then required to submit emissions "allowances" and "credits". As the regime is currently in its infancy, it remains to be seen how the province, and other potential plaintiffs, will respond to those emitters which violate the Act.

CLIMATE CHANGE & COVERAGE

Insurers have responded to climate change in a number of ways. By way of example, Swiss Re recently agreed to modify its risk reporting and analysis to include in future annual financial reports losses that can be expected to result from weather catastrophes and descriptions of the risks from the changing frequency and intensity of weather. Intact has sponsored the Intact Centre on Climate Adaptation, a Canadian applied research centre that focuses on mobilizing practical and cost-effective solutions to address climate change and extreme weather events. The centre conducts research and promotes initiatives aimed at adapting to some of the risks and negative impacts which will result from climate change and extreme weather events.

One result from the insurance industry's focus on climate change has been the introduction of new coverages. Until recently, Canada was the only G8 member state not to offer overland flood insurance. This was the result of a number of factors, including the absence of comprehensive and accurate flood maps available to insurers. However, industry-led initiatives, such as the launch of a national flood mapping initiative by the Insurance Bureau of Canada in 2015, have altered Canada's insurance landscape and overland flood insurance can now be placed nationwide from several insurers. It is expected that Canadian insurers will respond in kind to other heretofore ignored risks now exacerbated by climate change.

New coverages and increasingly severe and unpredictable weather are also expected to compel novel insurance coverage litigation, as has been seen in the United States. AES Corp. v. Steadfast Insurance Co.5 was duty to defend litigation related to the Kivalina case discussed above. Steadfast had issued a series of CGL policies to AES Corporation, which had been named as a defendant in the underlying litigation. The allegations against AES were that it intentionally emitted greenhouse gases and knew or should have known of the impacts of its activities. AES was alleged intentionally and negligently to have violated federal and state laws. AES requested that Steadfast provide it with a defense pursuant to its CGL policies. Steadfast provided a defense under a reservation of rights and subsequently filed a duty to defend application. It was subsequently held that "Steadfast ha[d] no duty to defend AES in connection with the underlying Kivalina litigation because no "occurrence" as defined in the policies ha[d] been alleged in the underlying Complaint."

The Supreme Court of Virginia granted discretionary review. Steadfast argued that "occurrence" was defined as an "accident" and that Kivalina's complaint alleged intentional conduct with known consequences. AES asserted that the village's alternative allegation, that AES intentionally emitted greenhouse gases but only "knew or should have known" the consequences of its action, described an "accident". AES argued that because the village did not allege that the harm was solely a direct and certain consequence of these acts, the allegations constituted an "accident". In the first of two decisions, the Court held that Steadfast did not have a duty to defend on the basis that "[w]hen the insured knows or should have known of the consequences of his actions, there is no occurrence and therefore no coverage." On a rehearing, the Court held that because the village had alleged that the harm caused by AES's intentional acts was not simply foreseeable but instead a "natural or probable consequence" of the acts, the resulting alleged injury was not an "accident". Accordingly, there was no "occurrence" and Steadfast had no duty to defend.

CONCLUSION

Canadian municipalities, businesses and homeowners have already begun experiencing the impact of climate change. Traditional policies cannot be expected to provide comprehensive protection for "climate change" losses and insurers are adapting to this reality by introducing new coverages. Governments too are adapting by introducing regulatory and legislative guidelines respecting a low-carbon economy, which might well provide statutory bases for civil liability. In any event, climate change is expected to increase the frequency and complexity of claims and law suits, which the Canadian insurance industry will be forced to monitor closely.


  1. Dominic is a Partner at Blaney McMurtry LLP and practises principally in the area of insurance litigation encompassing both coverage and defence matters. He specializes in advising and representing insurers with respect to commercial general liability, directors' and officers' liability and commercial property policies.
  2. Zack is an Associate in Blaney McMurtry LLP's Insurance Coverage & Insurance Litigation practice groups. He provides insurers with advice on a diverse range of policies, with a focus on commercial general liability, professional errors and omissions and directors' and officers' liability. He also maintains a general insurance litigation practice.
  3. Comer v. Murphy Oil USA, 585 F.3d 855 (5th Cir.2009)
  4. Native Vill. of Kivalina v. ExxonMobil Corp., 696 F.3d 849, 867 (9th Cir.2012).
  5. AES Corp. v. Steadfast Ins. Co., 725 S.E.2d 532 (Va. 2012).