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Property / Liability Clash: Emerging Liability Exposures Resulting from Natural Catastrophes

Imagine a major category 3 hurricane bearing down on the coast of North Carolina. Coastal defenses have been erected, residents of the Outer Banks have either evacuated or are preparing to shelter in place, and property insurers are readying their response for what is likely to result in losses totaling several billions of dollars. But, for some insurers, losses won’t stop there. As the hurricane moves inland, new consequences beyond property damage become apparent. Heavy rains drench the interior of the state, flooding hog farms1 and coal ash sites2. As floodwaters reach these sites and carry dangerous pollutants toward sources of drinking water, a new kind of disaster begins to unfold. Residents left unable to drink the water from these contaminated sources look for legal remedies, seeking compensation from the multi-billion-dollar corporations3,4 responsible for maintaining these sites.

Emerging Liability

As the impacts of these severe weather events become more pronounced, there is a greater possibility that insurers may face losses not only from the resulting property damage, but also from liability claims as a result of their insureds failing to prepare or mitigate against known risks.

More than ever before, natural catastrophes are not only having a significant impact on insurers’ property portfolios, but have also increasingly begun to spill over to impact their liability lines of business. When natural catastrophes responsible for significant property losses also become major liability events, insurers can experience meaningful clash events, threatening profitability and putting serious strain on their balance sheets.

These types of clash events can arise across many different natural hazards – in recent years the industry has experienced liability claims arising out of winter storms5, wildfires6, hurricanes7, and even earthquakes8. But how can commercial insureds be held liable for the results of an Act of God? Consider the two main ways this type of clash could occur:

  1. If a so-called “Act of God” isn’t actually one at all – in other words, if a commercial insured actually caused or contributed to the so-called “natural” hazard, then the company could be exposed to liability for the damages caused by these hazards.
  2. The other way that a commercial insured could be liable for damage from natural hazards when they did not directly cause the natural event, is if that organization did not prepare for, or failed to properly mitigate the impacts of a known and foreseeable natural hazard. In these cases, it can be argued that their negligence led to subsequent damages from the natural hazard that might not otherwise have occurred (or would have been significantly less severe). In other words, while the insureds did not cause the natural event, their negligence related to the event caused subsequent harms to third parties, which they could be held liable for.

    To illustrate the first case, consider some of the recent California wildfires. Commercial insureds can be held liable for damage from wildfires resulting from negligence by these insureds in causing, contributing to, or failing to adequately plan and prepare for wildfires9. Over the past few years, utility companies responsible for the upkeep and maintenance of power lines crossing forests have allegedly failed to ensure their systems were operating safely and, as a result, have been held liable for the resulting deaths, third-party bodily injuries, property damage, environmental damages, and more. In some cases, governments may also attempt to recoup the resources they spent in fighting the fires10. Primary insurers may also subrogate11 claims against the utilities (i.e., the insurer will pay out claims to their insureds for property damages, and then sue the utilities for having caused those damages). These companies have paid out billions in settlements as a result.

    Furthermore, other companies can also be implicated in these events – for example a telecommunications12 company can be liable if their transmission lines and other equipment fails, logging/timber13 operations or railroads14 can be liable if their equipment emits sparks that then ignite a fire, and even that service providers and contractors15 can be found liable, if their work contributed to a significant wildfire event.

    For most other types of natural hazards, the commercial insured is less likely to be directly responsible for causing the event in question, and is, instead, much more likely to face liability from failing to adequately prepare for the impacts of the disaster.

    As illustrated in the example at the start of this article, storms and their resulting floods can cause significant pollution events, which can lead to liability for the commercial insureds involved. For example, an oil company ultimately paid over $300M to settle a class action filed by St. Bernard Parish, Louisiana residents following Hurricane Katrina16. The residents alleged that the company’s 250,000-barrel oil storage tank was negligently secured during the storm, leading to a major pollution event when it became unmoored17. Here, unlike wildfire liability events, the oil company did not cause the hurricane, but was negligent in preparing for or mitigating against foreseeable risks related to a hurricane – and thereby caused significant damages to third parties that it was ultimately liable for. This is not just limited to Katrina: there were also some high-profile cases in Texas following Hurricane Harvey, including lawsuits against chemical companies for pollution and chemical fires18.

    Hurricanes and floods can also result in liability concerns in the aftermath of these events as massive reconstruction efforts are undertaken. For example, after active hurricane seasons in Florida in 2004/5, there was a rush to rebuild and repair damaged structures, resulting in a housing boom. A significant number of properties were built using drywall imported from China that was defective and caused property damage and alleged health problems to those living in buildings where this drywall had been installed. The resulting litigation targeted many companies along the supply chain, including contractors and distributors, and ultimately resulted in over $1 billion in settlements19. So commercial insureds can even be exposed to liability as part of the response to a natural catastrophe.

    In the future, climate change may further exacerbate these types of situations, as different atmospheric perils become more frequent and more severe20. As the impacts of these severe weather events become more pronounced, there is a greater possibility that insurers may face losses not only from the resulting property damage, but also from liability claims as a result of their insureds failing to prepare or mitigate against known risks.  

    Looking beyond the atmospheric perils, earthquakes can also result in significant liability impacts beyond the massive property damage they can cause. First, consider the induced seismicity from fracking – these are human-caused earthquakes, so the potential liability from these events might be fairly clear if one of these earthquakes resulted in significant harm. However, natural earthquakes could also result in significant liability claims if architects, engineers, or builders were found to be negligent in planning, preparing, or mitigating for an event21. These natural earthquake events could result in the collapse of buildings where owners22 or construction companies may have failed in their duty of care, or they could result in damage to industrial operations that could lead to significant pollution from energy operations, chemical manufacturing, or other manufacturing plants. While this scenario is still conjectural, questions inevitably arise around whether these damages following natural earthquakes will trigger liability policies in a systemic way. There could also be significant liability events due to service failures – say, if hospitals, nursing homes, or other similar organizations are found to have been negligent in preparing for an earthquake or responding to the aftermath of an earthquake that resulted in harms to others.

    So, as the industry waits for the next natural catastrophe, insurers should examine their portfolios and consider how the impacts from natural catastrophes could potentially spill over into their liability business. These types of events can lead to significant clash across different lines of business, especially as organizations are increasingly targeted for their actions before, during, and after natural events. Verisk has tools to help companies quantify, plan for, and anticipate these types of events. In addition to traditional natural catastrophe property models that help companies understand potential impacts of disasters on property portfolios, Verisk has also developed an innovative liability modeling platform that can assess accumulations of risk, including for liability arising from natural catastrophes. The platform allows carriers to estimate the impact of these liability events on their portfolios before they occur or even as they are emerging. Armed with these insights, insurers can anticipate and manage their exposures and will not be caught by surprise if (and when) these types of property and liability clash events occur.

    Lucian McMahon

    Lucian McMahon is a principal analyst, senior manager in the casualty analytics group at Verisk. He leads development of Arium’s historical, emerging, and emergent risk scenarios. Prior to joining Verisk, Lucian conducted emerging risk research for the Insurance Information Institute and on another team at Verisk. He holds a BA from the University of Rochester.

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