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Climate liability: A deep dive into managing liability risk

September 14, 2021

On a recent roundtable we explored climate liability risk. This article looks in detail at a key case study discussed
Climate|Risk Management Consulting
Climate Risk and Resilience

Willis Towers Watson recently hosted a roundtable in collaboration with Airmic and MinterEllison exploring climate liability risk. Attendees took part in group discussions on some of the key issues around businesses managing these risks. We summarise the experiences and opinions of participants:

Managing liability risks and the physical or transition risks on which they are based must now be the concern of every business, not just the big emitters. Demonstrating the importance of this is the recent case study of Stephens Ranch v Citi Energy1 involving frozen windfarms during extreme winter weather in Texas, US. The presiding judge’s opinion on the case was that the winter storms were not a force majeure event, citing increasing awareness of the impacts of climate change as a factor which made the winter storms sufficiently foreseeable. Stephens Ranch should have winterised the wind turbines to prepare for these climate-affected storms, following the recommendations of a FERC (2011) report prepared three years before Stephens Ranch commenced commercial operations in 2014.

Understanding your liabilities

Firstly, this case highlights how important it is for organisations to interrogate the cover they’re purchasing, or the contracts they’re entering into.

Organisations should be using scenarios and models to understand what events are now within the realms of predictable since severe weather events aren’t necessarily unforeseen. They then need to check the outcomes of these scenarios against their cover or contract, rather than finding out what they’re responsible for only when there’s a dispute.

Much of this comes into business continuity planning and risk management rather than insurance.

What’s considered predictable is changing

Severe weather events have always happened but as we’re seeing the increasing impacts of climate change, it’s not surprising that this example wasn’t covered as a force majeure event. It’s therefore critical that organisations understand what is considered a force majeure event, as it’s often not what you might think.

Organisations need to be increasing the frequency they assess risks as coverages may not be keeping pace with the world. Risks that were low probability, high impact may now be medium probability, high impact, so organisations must build in resilience by continuously assessing risks and their impact.

Is there a risk of climate change being used as a catch-all?

The key difference is about the severity and frequency of these extreme weather events, as opposed to just bad weather. Organisations need to be managing risks and ensuring they’re looking at decades of data to identify trends. However, the data and models are imperfect.

The key difference is about the severity and frequency of these extreme weather events

Can we use parametric risk transfer solutions?

Parametric, or index-based, insurance covers the probability of a predefined event, rather than covering the actual loss incurred. There is scope for these kinds of solutions to be used in combination with traditional insurance when covering risks relating to climate change.

For example, when the water levels in the Rhine drop too low for ships to pass, although very little property may be damaged, the business interruption is significant. A parametric cover based on water level could help protect against these losses.

Pragmatic solutions

Practical steps can be taken to minimise losses from extreme weather events. This requires analysis of past events being used to inform measures needed to reduce damage.

On the Mississippi River, as flooding becomes more common, farmers and government agencies are having to revaluate the flood management systems in place. By using hybrid solutions including levees set further back from the river, reconnecting the floodplains, and restoring the wetlands, damage from floods and the resulting claims can be reduced. However, this requires investment from several parties involved and often requires government incentives.

Other strategies include ensuring adequate sea defences are in place when building coastal properties, waterproofing flood-prone buildings, and rebuilding infrastructure to account for more turbulent weather patterns. By taking steps like these, organisations would be tackling the issues they’re facing imminently, until longer-term solutions can be found.

Final thoughts

Organisations must interrogate their contractual obligations and use data, scenarios, and modelling to understand risks as fully as possible. And they need to focus on building resilience into their infrastructure and physical assets.

Innovative solutions, such as parametric coverage, can help minimise losses, but longer-term business planning must be aligned with the findings of future weather predictions to be sustainable.

For further insight into climate liability risk, read our climate liability whitepaper.



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