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Wet Suit: Insurers Seek Damages From Towns Over Climate Change

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Farmers Insurance has filed nine class action lawsuits against dozens of municipalities around Chicago, and everyone from local governments to other insurers has taken notice. The charge? Failing to prepare adequately for heavy rains and flooding caused by increasingly warmer temperatures—in short, by climate change.

The insurer, a subsidiary of Zurich Insurance Group, says that the municipalities should pay for damage that was caused by a massive April rainstorm back in 2013 that was so heavy it overwhelmed the storm drain and sewage systems, resulting in evacuations, sewage backups into more than 600 homes and other damage. Why should they do that? Farmers says that the municipalities should have anticipated the downpour and taken action in advance of the storm.

The municipalities are expected to argue that they cannot be held liable because of government immunity. However, the insurance company has cited in its suit the Chicago Climate Action Plan as an example that municipalities “should have known that climate change in Cook County has resulted in greater rainfall” volume, intensity and duration than pre-1970 rainfall history.

Because of the existence of the Chicago Climate Action Plan, the Farmers suit claims, the onus was on municipalities to act more aggressively. In fact, Farmers says the Climate Action Plan indicates that the reclamation district was cognizant of the risks posed by climate change; it has also characterized the damage as “completely preventable.”

In 2009, Swiss Re issued a report that compared the potential financial damage to the insurance industry from future claims for climate change losses to that from asbestos claims. In suits brought against the industry regarding asbestos, one argument was that because insurers had handled so many asbestos claims, that gave them expert knowledge of its risks. Therefore they should have issued warnings about how dangerous the substance could be.

Whether or not the lawsuits are won by Farmers, they could affect not just the industry, but also the public, municipalities, any business that might be exposed to climate change and, in the long run, even the federal government.

With insurers seeking to protect themselves against future damage claims from climate change-related events, coverage could be unavailable or claims denied, leaving property owners and policyholders to seek redress elsewhere—or perhaps bear the costs of losses themselves.

Municipalities could be compelled to look farther into the future as they seek to adopt different strategies for coping with extreme weather events. That could change everything from zoning to construction to property tax bills as they seek to limit exposure in areas prone to damage, require structural upgrades to residential and business properties to guard against losses, change their approaches to infrastructure development and maintenance, and look for additional revenue to implement necessary changes.

Businesses would have to look harder at everything from supply chains to disaster recovery plans, and base business plans on more forward-looking projections—since climate events are expected to escalate in years to come—as well as consider actions to take in the event insurance coverage is declined or damages are exempted from coverage due to climate issues.

The federal government would have to better plan for disaster relief and identify additional sources of compensation for victims of climate change-based catastrophes. This would add to the burden already borne by the flood insurance program, unless other ways are found to deal with the matter.

More aggressive and forward-looking infrastructure strategies are already available from architects and engineers to safeguard against at least some of the damage from catastrophic weather events. However, those methods add to the cost of a project. Still, even if the Chicago-area municipalities win when they have their day in court, experts say that other suits will likely follow—and defending against charges of failing to prepare adequately in advance of preventable damage is costly, too.

It remains to be seen how this will play out, but one way or another, it’s probably going to cost more.