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While climate change may still be a disputed topic in the political realm, insurers have been aware of the risks posed by it for years.
More than half of U.S. state insurance regulators believe that climate change will likely have a high or extremely high impact on both the future scope of insurance coverage and the related underwriting assumptions, a Deloitte Center for Financial Services survey found.
In addition, the National Oceanic and Atmospheric Administration estimates that U.S. residents experienced 20 separate major weather and climate disasters in 2021, at a cost of $145 billion. The American Meteorological Society, which publishes an annual review of extreme events and their connection to climate change, has found that many extreme weather events have been affected by climate change.
Although climate change poses several threats, rising water levels is the most pressing facing many communities. Higher sea levels bring more storm surge, higher risks of flooding, saltwater intrusion and other destructive consequences. Meanwhile, as our atmosphere warms, it can hold more moisture, meaning more rain during a rainstorm. Combine those more intense rainfalls with the non-permeable surfaces that characterize modern towns and cities, and we see increased flooding.
Rising sea levels have received much of the focus in climate change discussions. While the global sea level rose approximately 6.7 inches in the 20th century, compared with the previous century — with an evident acceleration since the early 1990s — regional sea level rise was more or less than that average depending on several factors. In parts of the Northeast, sea levels have already risen up to 16 inches in the past century, with that rise expected to continue.
Nor are inland areas immune from climate change-related water damage. The Third National Climate Assessment from the U.S. Global Change Research Program reported that rainfall events have become heavier and more frequent. These increases have been greatest in the Northeast, Midwest and upper Great Plains — with an increase in flooding in those same areas. The past two years have demonstrated the unfortunate new reality we face, as heavy rainfalls first devastated Tennessee, where flooding killed 28 people. Hurricane Ida was the second most damaging hurricane to make landfall in the United States, causing at least $75 billion in damage and 95 deaths and shutting down much of the New York City subway and nearby public transit systems. The recent tragic flooding in Kentucky is yet another example of what is becoming a far too common experience for too many people. Inland flooding is also estimated to be the most costly of severe weather events, with an average price tag of $6.9 billion per year. Most building codes are not equipped to handle climate change’s financial consequences. They set the minimum requirements, are updated infrequently and are based on historical climate data instead of future climate estimates. Likewise, flood maps issued by the Federal Emergency Management Agency are based on historical flooding data. Such flood maps ignore the importance of evaluating and disclosing future flood risks. These failures not only increase the risk of damage to lives and buildings but may also affect buildings’ values. A 2020 study concluded that homes vulnerable to flooding are currently overvalued by $34 billion, potentially impacting the future stability of real estate markets.
Until there are binding government requirements, it is up to project developers, engineers and contractors — along with their insurers — to understand the financial risks projects face due to climate change. Planning with future climate estimates in mind and incorporating resilience above and beyond what building codes require will be crucial.
Building designs, especially for new structures, should not just be based on historical climate data but also on future climate projections. Mitigation strategies exist and are not complex; they also provide a return on investment after a disaster. A few examples include elevating critical equipment to mitigate flood damage, building thicker building envelopes to deal with extreme heat, and incorporating power and water redundancy to better deal with utility interruptions.
Failure to prepare for climate change-related consequences can also increase the likelihood of construction-related litigation, which can be time-consuming and costly.
A recent study by design consultancy Arcadis found that the value of construction disputes in North America doubled from 2019 to 2020, jumping from $18.8 million to $37.9 million. The study found that the leading cause of disputes remained the same in 2020 as in 2019: a failure by the parties to the construction relationship — owners, contractors, subcontractors, etc. — to understand and/or comply with their contractual obligations.
In construction dispute cases, there is typically at least one insurer — and usually multiple insurers — that has been brought into the case. Parties to construction litigation often look to their insurers for coverage — both to cover the cost of legal fees and to pay any potential damages. On top of the usual disputes over insurance coverage for construction cases comes the challenge of whose coverage will insure construction issues related to climate change and extreme weather.
Insurers are preparing for the potential financial ramifications of climate change and, as part of that, are focusing on their clients’ potential liability for negligence related to climate change issues. This new focus means incorporating climate risk considerations into underwriting for their clients — demanding that clients incorporate risk mitigation efforts into their projects.
Uncertainty regarding which party to a lawsuit bears responsibility for a problem increases the costs of litigation. As these extreme weather events continue, and until there is certainty as to which construction party bears the burden of planning for such future events, weather-related construction litigation and its ever-increasing costs will only become more of a problem for insurers.
To address this problem, a key mitigation effort insurers should demand is the incorporation of resilience into construction projects.
While some developers may hesitate about adding costs to a project to address climate risk, there is enough data available to justify initial costs associated with resiliency efforts and to make evident the consequential benefits such as business continuity, minimized building repairs, occupant safety and comfort, and reputation.
Some Texas businesses did just that when they invested in measures to keep water out of sensitive equipment prior to Hurricane Harvey in 2017. Keeping resiliency in mind allowed those businesses to avoid the fate many Houston companies faced after Tropical Storm Allison in 2001, which dumped over 40 inches of rain on the city. At that time, sensitive materials and electrical equipment were kept in basements, with the rain and flooding causing serious damage as a result.
As extreme weather becomes more prevalent, prudent insurers must ensure that their clients are acknowledging and evaluating their climate change-related risks and incorporating resiliency into their projects. With all the available data and resources today, paying no attention to climate change and resiliency during the design phase is tantamount to asking for a lawsuit.
Jessica Mederson is managing partner of Hansen Reynolds LLC’s Madison, Wisconsin, office. She can be reached at firstname.lastname@example.org. Mónika Serrano is resilience program manager at Turner Construction Co. in New York. She can be reached at email@example.com.