Why Snow, Hail and Wildfire Are Expensive for Insurance Industry

Leslie Kaufman | Insurance Journal

If you’re having trouble wrapping your mind around the spree of natural catastrophes currently plaguing the world—from deadly July floods in Germany and China to the wildfires still burning in Greece, California and Siberia —you may be interested to know the professional risk calculators are too.

Climate change is exacerbating extreme and freak weather events so rapidly that even the insurance industry is struggling to keep up.

Late last week, reinsurance giant Swiss Re AG released its mid-year insurance losses and the figures were the second-highest on record. Insurers had to cover $40 billion in losses caused by natural catastrophes. The previous ten-year average for the first half of the year is $33 billion.

The insurance losses increased despite the fact that total economic losses from the natural disasters that they were based on actually decreased to $74 billion, which is down 31% from the year earlier.

Martin Bertogg, head of catastrophic perils at Swiss Re, said that the industry had been challenged by what is known as “secondary perils.” That is, while the insurance industry has historically done a good job of modeling relatively rare but potentially devastating events such as earthquakes and hurricanes, it’s battling to keep up with risks posed by snow storms, hail, tornadoes and wildfires. Those used to cause relatively minor damage but are increasingly morphing into something more costly. And that is a problem for companies, since many Americans have coverage for such events.

Winter Storm Uri, which pounded Texas in February with snow and subfreezing temperatures, is a good example. Uri caused $15 billion in losses, making it the largest loss from a winter event in U.S. history, Swiss Re said.

While the jury is still out on whether climate change is to blame directly for Uri—the idea that warming makes the polar vortex unstable is not conclusive— the safest bet when the climate’s changing is that weird things are going to happen a lot more. Severe weather including hail and tornados in Central Europe in June accounted for about $4.5 billion in losses and have been linked to climate change.

Swiss Re thinks that this type of event is a trend they need to get on top of. “The insurance industry needs to upscale its risk assessment capabilities for these lesser monitored perils to maintain and expand its contribution to financial resilience,” Bertogg said in its report on the losses.

Of course, that’s easier said than done, said Erdem Karaca, who overseas catastrophic perils in the Americas for Swiss Re. “Models are less mature for secondary perils,” he said, “a peril like wildfire is also impacted by humans. Ninety percent of ignitions are caused by humans so it is difficult to quantify through models.”

Still, the industry is determined to get better. Over recent years modelers have gotten much more sophisticated at predicting flood risk, Karaca said. In the U.S., more sophisticated flood modeling has caused the Federal Emergency Management Agency, which handles 95% of residential flood insurance, to initiate its first new flood rate model in 50 years. Private insurance companies are also racing to deploying better models for fire prediction out West. For many people, better information will translate into higher premiums.

In the meantime, catastrophic weather keeps happening. Those losses from Germany’s floods aren’t counted in this recent report, which covered January through June. They could be as much as $6.5 billion, Swiss Re estimated. And hurricane season has hardly hit its peak; in the Northern hemisphere that comes in the third quarter of the year. Tropical Storm Fred, which is passing over the Florida Panhandle, is expected to do comparatively little damage. But Grace and other storms are on their way, and losses are sure to mount.

No Allocation for Defense Costs Incurred in Lawsuit Comprised of Covered and Uncovered “Claims”

Emily Hart | Wiley Rein

The U.S. District Court for the Northern District of California, applying California law, has held that, under a duty to defend policy, an insurer was required to pay defense costs incurred in a lawsuit where the lawsuit contained both covered and uncovered “claims.” Stem, Inc. v. Scottsdale Ins. Co., 2021 WL 3271265 (N.D. Cal. July 30, 2021). 

The insured, a technology company, sought coverage under its directors and officers policy for a shareholder lawsuit (“2017 Lawsuit”) based on a 2013 stock financing round (“2013 Stock Financing”) and a 2017 loan to the company by a member of the board of directors (“2017 Loan”).  The court concluded that the interrelated wrongful act exclusion barred coverage for the 2013 Stock Financing “Claim,” but that coverage was available for the 2017 Loan “Claim” because it did not relate back to an earlier dispute.

The insured then moved for partial summary judgment on the measure of damages. The insured argued that, pursuant to the insurer’s duty to defend, the insurer was required to cover all defense costs incurred in the 2017 Lawsuit, even though the lawsuit contained both covered and uncovered “claims.” The insurer argued that the court should apply the policy’s allocation provision to cover only defense costs related to the 2017 Loan.

The court held that the insurer was required to cover defense costs incurred for the entire 2017 Lawsuit. The court reasoned that, even if an allocation provision applies where there is a duty to defend, in the instant matter, there was not “undeniable evidence of the allocability of specific expenses because the 2017 [L]awsuit is ongoing” and the insured had “taken steps to defend against the [2017 Loan Claim]” for which the insurer’s “proposed allocation does not account.”

Insurer Motion to Intervene in Underlying Case Denied

Tred R. Eyerly | Insurance Law Hawaii

    The Colorado Supreme Court determined that the insurer defending under a reservation of rights could not intervene in the underlying case after the insured assigned its rights to any bad faith claim against the insurer. Auto-Owners Ins. Co. v. Bolt Factory Lofts Owners Ass’n, Inc., 2021 Colo. LEXIS 365 (Colo. May 24, 2021).

    Bolt Factory initiated a construction defects lawsuit against various contractors. Several defendants filed third-party complaints against subcontractors, including Sierra Glass Company. Auto-Owners agreed to defend its insured, Sierra Glass, under a reservation of rights. Auto-Owners declined to settle with Bolt Factory for $1.9 million, within policy limits. Sierra Glass then retains independent counsel and entered into a settlement with Bolt Factory. The settlement allowed Sierra Glass to assign its bad faith claims to Bolt Factory in exchange for the right to pursue the insurer for payment of the excess judgment rather than Sierra Glass. Instead of entering into a stipulated judgment, Bolt Factory and Sierra Glass proceeded to an abbreviated trial.

    The parties submitted proposed findings of fact and conclusions of law. Sierra Glass did not present a defense. Auto-Owners sought to intervene to protect its interest in the non-adversarial trial. The lower court denied Auto-Owner’s motion. The court entered judgment in favor of Bolt Factory and against Sierra Glass in the amount of $2.4 million. The court of appeals affirmed. The Supreme Court granted Auto-Owners’ petition for certiorari review.

    The Colorado Supreme Court found that the agreement between Sierra Glass and Bolt Factory was permissible under Colorado law. Faced with Auto-Owners’ refusal to settle within policy limits, Sierra Glass took steps to protect itself by entering into an agreement with Bolt Factory – an agreement that included both an assignment of claims and a covenant not to execute. The lower court had discretion of requiring the parties to agree to a stipulated judgment or proceed to an uncontested trial where the court itself determines damages.

   Auto-Owners was not allowed to intervene because its interests in the litigation were not impaired. Auto-Owners could sufficiently protect its interests in a subsequent declaratory judgment action regarding coverage. Auto-Owners could also raise its claims and defenses in any bad faith action that Bolt Factory might bring against Auto-Owners pursuant to the assignment of claims.

    The judgment of the court of appeals was affirmed. 

Arbitration Demand Letter Constitutes a Claim Requiring Timely Notice

Katelyn Cramp | Wiley Rein

Applying Arizona law, a federal district court has held that an insured’s failure to provide notice of an arbitration demand letter barred coverage for the arbitration later filed against the insured.  Supima v. Philadelphia Indem. Ins. Co., 2019 WL 6770061 (D. Ariz. June 16, 2021).

The insured non-profit purchased eleven directors and officers liability insurance policies from October 2007 to July 2018.  The relevant policies defined Claim to include an “arbitration proceeding . . . which subjects an Insured to a binding adjudication of liability for monetary or non-monetary relief for a Wrongful Act.”  The claims-made policies also provided that “[i]n the event that a Claim is made against the Insured . . . the Insured shall, as a condition precedent to the obligations of the Underwriter under th[e] Policy, give written notice of such Claim . . . as soon as practicable to the Underwriter during th[e] Policy Period . . . but, not later than 60 days after the expiration date of th[e] Policy.”

In May 2013, the insured received a demand letter notifying the insured that the claimant, a wholesale company, wanted to arbitrate a contract dispute pursuant to a license agreement between the insured and the claimant.  The insured and the claimant subsequently communicated regarding potential arbitrators and other issues throughout 2013.  Later, in September 2016, the claimant filed a Statement of Claim with the American Arbitration Association, and in May 2017, the claimant filed a second Statement of Claim with the AAA’s International Centre for Dispute Resolution.  The insured provided notice of the May 2017 Statement of Claim to the insurer which, after initially reserving rights under the 16-17 policy, denied coverage under all policies because the insured did not report the initial arbitration demand letter during the 12-13 policy period. 

The court held that the May 2013 arbitration demand letter constituted a “Claim” under the 12-13 policy.  The letter informed the insured of the claimant’s intent to arbitrate pursuant to the licensing agreement and, according to Arizona statute, “[a] person initiates an arbitration proceeding by giving notice in a record to the other parties.[]”  The court further held that the 12-13 policy’s notice provision was clear and unambiguous, and the insured should have been aware that notice of the arbitration demand letter was required.  Finally, the court held that the insurer need not show prejudice when notice is not timely provided under a claims-made policy because “requiring the insurer to show prejudice would constitute an extension of coverage not contemplated in the original policy.”

Construction Industry Trends And Predictions Through 2021 And Beyond: Insurance And Emerging Threats

Krista D. Warren | Brennan Manna & Diamond

A 2021 survey identified three key issues impacting the construction industry in 2021: (1) the financial health of contractors; (2) the continuing risk of the pandemic; and (3) technology driving productivity, but also increasing the risk of cybersecurity threats. With this backdrop, insurance premiums in the construction industry are generally on the rise in 2021.

Overmyer Hall Associates, as a Columbus-based commercial insurance broker, provided the following rate outlook for 2021:

Type of InsuranceRate Increase Outlook
Property+5% to 10%
Contractors EquipmentFlat to +10%
General Liability+5% to 15%
Builders RiskFlat to +5%
Builders Risk – Frame+10% to 20%
Umbrella/Excess+10% to 20%
Executive Risk – EPL, Crime, Fiduciary, Cyber+10% to 25%

Overmyer explained that builders risk insurance rates related to large frame projects (e.g. large hotels, multifamily complexes) have been on the rise because, generally, the number of carriers in the marketplace is shrinking. Moreover, there are an increased number of terms and conditions placed on larger frame projects by underwriters, such as specific and intensive security guidelines. Overmyer does not project the builders risk insurance in large frame projects will change anytime in the near future.

Another area of coverage with rates on the rise is cybersecurity. With the adoption and integration of technology in the construction industry, there has been an uptick in cyberattacks. For example, in early 2020, Bird Construction, a major Canadian Military Contractor, was a victim of a Maze ransomware attack in which hackers demanded approximately $9MM in exchange for a decryption key. Cyberattacks can result in, among other things: downtime on a project, breach of intellectual property, breach of bid data, and potential property damage. As these attacks become more widespread and sophisticated, cybersecurity insurance rates continue to rise at a higher rate.

To prevent cybersecurity threats and/or potential attacks, contractors are encouraged to have a risk assessment conducted by an IT professional, which can sometimes be coordinated through the contractor’s CPA. Other internal measures that contractors can take to defend against cybersecurity threats include: (1) providing training and information about cybersecurity to employees; (2) implementing multifactor authentication (MFA) to mitigate exposure when employees do make mistakes; (3) protecting sensitive data against back-end access in web applications; and (4) having a comprehensive, multifaceted strategy for addressing security needs. Even with the rise in rates, those in the construction industry should obtain and maintain cybersecurity insurance in the event of a potentially crippling cyberattack.