The Summit

Beacon Hill Associates A publication of Beacon Hill Associates
Cover Feature

How Natural Disasters are Changing the Way We Think About Insurance

In 2017, the country saw unprecedented destruction due to natural disasters. How has this affected the way businesses evaluate their exposures and purchase coverage?

The natural disasters that ravaged North America in 2017 are a stark reminder that businesses face many environmental exposures that are out of their control. 

Whether it is wind and rain, rising tides, drought, or fire storms, nature’s wrath can significantly impact the security of a business, and lead to unforeseen environmental exposures.

Specific examples of changing exposures are easy to find. Hurricane Harvey devastated the Texas coast in late August 2017, dropping unheard of amounts of water in a short period of time. The impacts were broad and significant, including massive fuel releases from storage facilities, failure of infrastructure leading to failure of all electronic containment controls, and more. At one point the New York Times reported on over forty petrochemical facilities that drastically exceeded their air emissions levels due to failure of control systems as a result of the storm’s effects.

Massive flooding also led to property damage from water intrusion, which often leads to mold claims. The management and settling of those claims will take many months to resolve.

Hurricane Irma, although less devastating from a flooding perspective, had similar impacts on Florida. One report details the release of twenty-nine million gallons of sewage across the state. This stemmed from the flooding of septic systems and waste water treatment plants, as well as the failure of electric lift stations to move the material for proper disposal. The long-term health effects of this bacteria-ridden material will be carefully monitored in the communities affected.

Irma’s rains and wind also impacted areas with current pollution issues, including landfills, chemical processing facilities, battery storage and disposal sites, and even Superfund sites. Many of these sites have pollution control measures in place, but no one was prepared for the sheer scale of water these storms brought with them.

And by no means the least impactful, Hurricane Maria devastated Puerto Rico, leading to many of the same problems.

Wild fires in the western states present a different but no less dangerous scenario. A fast moving fire that hits a chemical storage facility will lead to the release of toxic fumes into the atmosphere. Fuel storage facilities will have the same impact. On October 13, 2017, CNN reported that the wildfires across Northern California released into the environment in one day as much harmful particulate matter as cars did in all of California for the entirety of 2014.

Drought obviously exacerbates the occurrence of wildfires, but it carries its own challenges as well. Dropping levels in aquifers increase the concentration of chemicals in the water, making what is drawn out for use potentially more toxic. This could lead to regulatory change in action levels, potentially causing closed pollution clean ups to be reopened.

Rising sea levels also pose significant environmental concerns. Even now, during “King Tides” in Miami, sea water covers the streets, potentially backing up storm sewers across the city. For a service station with an oil water separator to control contaminated runoff from their lots, backed up storm drains can cause these separators to fail, leading to significant pollution releases.

All of these situations, while dramatic and not at a scale generally seen before, are being thought of as the new normal. Companies are working hard to build plans to address the impact on their businesses from these exposures, as well as the impacts their businesses might have on their neighbors and the broader environment.  

Insurance agents and brokers can help their clients with these concerns in several ways. The first is to determine what environmental exposures the business has, and the availability of coverage for those exposures. A good first step is to spend time reviewing an insured’s disaster preparedness plan as a tool for assessing their pollution exposures. What is the insured’s plan in the event of a catastrophic flood? Who do they need to call in the event of a fire? What is their contingency if the roof is blown off? What is their water intrusion or mold management plan? All of these are insights into where significant environmental exposures lie.

For example, a manufacturer might be worried about a release of product from their site into the atmosphere from a fire or windstorm, or runoff from a flood. The operator of an apartment building might be more concerned with indoor air quality issues impacting their tenants, or a release from a back up generator fuel tank. Some of these exposures will require them to have written safety plans on file with a regulatory agency, and others are simple common sense measures that management might communicate to employees as part of a training program. Regardless, they are a great starting point for an exposure review.

The next step is to look at the events of the last year and discuss the impact an event like that would have on the business. The discussion should not be limited to the few examples provided here, but should include earthquakes, tornadoes, excessive snow fall, and other natural events. There is not a part of the country that is not exposed to the changing weather patterns and the potential for a natural disaster. What would happen if an earthquake or tornado knocked down a fuel storage tank? What are the insured’s plans to address the problem, and what might the exposures be if it happened?

Once an agent has had this conversation, the next component is to reach out to the insurance marketplace to see if coverage can be purchased for the exposures identified. This can be done in several ways, and the most effective path is to work with a specialist.

Once the scope and cost of available coverage has been determined, it becomes a simple risk management conversation. Is the cost of transferring the risk identified worthwhile, or is it better to retain the exposure and “self-insure”?

At one time, businesses planned for “hundred year” events with a degree of comfort that they were never really going to happen. We have now had several “thousand year” floods, and there is no reason to think the future will be different.

Over the last decade insureds have become far more proactive about insuring their environmental exposures. Coverage is available and affordable, and can be constructed to address pressing everyday exposures. Carriers are willing to write policies today that can protect insureds against these common catastrophic events in addition to addressing their everyday coverage needs.  These risks, while terrible in their impact, can be modulated through purchasing the correct insurance coverage, which includes the appropriate environmental policy. 

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