Update on Climate Risks and Insurer Responses

The risks posed by global warming have become a priority for both political and business leaders worldwide. Corporate policyholders and their insurers are facing new disclosure obligations and compliance costs as well as potential first-party losses and third-party liabilities resulting from climate change. This article provides an overview of recent developments of particular interest to corporate policyholders.

The Changing Regulatory Landscape

In April 2007, the U.S. Supreme Court held in Massachusetts v. EPA, 549 U.S. 497, 532 (2007), that greenhouse gases (“GHGs”) are air pollutants covered by the Clean Air Act. In its opinion, the Court stated that the U.S. Environmental Protection Agency (“EPA”) must determine whether emissions from motor vehicles threaten the public health and welfare (known as an “endangerment” finding), or alternatively, conclude that the science is too uncertain to make a reasoned decision. Id. at 534. In April 2009, the EPA released a proposed endangerment finding that the current concentration of six key GHGs ' carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, per fluorocarbons, and sulfur hexafluoride ' in the atmosphere “threaten[s] the public health and welfare of current and future generations.” See Overview of EPA's Endangerment Finding, April 17, 2009, available at http://epa.gov/climatechange/endangerment.html. This finding does not itself impose any new compliance obligations, but lays the groundwork for legislative and regulatory action.

In June 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009 (Waxman-Markey Bill). This was the first time the U.S. Congress had passed a bill imposing a cap on GHG emissions. John Broder, House Passes Bill to Address Threat of Climate Change, N.Y. Times, June 26, 2009, available at http://www.nytimes.com/2009/06/27/us/politics/27climate.html#. The bill establishes, among other things, an economy-wide GHG cap-and-trade system that is scheduled to begin in 2012 and which is designed to reduce emissions by 17% of the 2005 levels by 2020 and by 83% of 2005 levels by 2050. The bill will now be sent to the Senate for consideration, where it will have to be reconciled with several initiatives. Senate debate will be robust, and final passage of climate change legislation this year remains uncertain.

The EPA, in the meanwhile, is already moving ahead with proposed regulation. In March 2009, the EPA proposed a rule that would require suppliers of fossil fuels and industrial chemicals, manufactures of vehicles and engines, and facilities that emit 25,000 metric tons or more per year of GHGs to report their emissions annually to the EPA. The purpose of the rule is to collect accurate and comprehensive emissions data to help the EPA establish future climate change policy. See Proposed Mandatory Greenhouse Gas Reporting Rule, March 10, 2009, available at http://www.epa.gov/climatechange/emissions/ghgrulemaking.html. More onerous disclosure and compliance requirements can be expected in the future.

Disclosure Issues

Corporate policyholders already have experienced greater demand for and closer scrutiny of their climate-related disclosures. In June 2009, members of the Investor Network on Climate Risk (“INCR”) and other leading global investors sent a letter to the U.S. Securities and Exchange Commission (“SEC”) to request formal guidance on disclosure of climate-related risks. See Investors with $1.4 Trillion in Assets Call on the SEC to Improve Disclosure of Climate Change and Other Risks, June 12, 2009, available at http://www.ceres.org/Page.aspx?pid=1106. To date, the SEC has not responded, and a recent speech by newly appointed SEC Chair Mary Shapiro highlighting the agency's regulatory priorities did not address climate change disclosure. See U.S. Securities Exchange Commission Chairman, SEC Speaks Program, Feb. 6, 2009, available at http://www.sec.gov/news/speech/2009/spch020609mls.htm.

The states are also increasing pressure on companies to make climate-related disclosures. In August 2008, the Attorney General of the state of New York, Andrew Cuomo, reached an agreement with Xcel Energy, a supplier of natural gas and electricity, that required the company to disclose “material financial risks” associated with global warming. Nicholas Confessore, Xcel to Disclose Global Warming Risks, N.Y. Times, Aug. 27, 2008, available at http://www.nytimes.com/2008/08/28/business/28energy.html. The agreement commits Xcel to a variety of climate change disclosures including: 1) current carbon emissions, 2) projected increases in emissions from planned coal-fired plants, 3) strategies for managing emissions, and 4) corporate governance actions (including executive compensation decisions) related to climate change. A similar agreement was reached with Dynegy in October 2008, and negotiations are continuing with other power companies. See Cuomo Reaches Landmark Agreement, Aug. 27, 2008, available at http://www.oag.state.ny.us/media_center/2008/aug/aug27a_08.html.

The National Association of Insurance Commissioners (“NAIC”) also has addressed the need for disclosure guidelines. In March 2009, the NAIC announced a model rule requiring insurance companies with annual premiums greater than $500 million to report to state regulators their financial exposure to climate change risk. See NAIC Insurer Climate Risk Disclosure Survey, available at http://www.naic.org/documents/committees_ex_climate_climate_risk_disclosure_survey.pdf. If adopted by individual states, this measure will require eligible insurance companies to complete an annual survey, beginning on May 1, 2010. Among other things, the survey asks about plans to reduce emissions and the impact of climate change on investments. The survey also directs insurers to disclose steps they have taken to encourage their policyholders to reduce climate-related losses, a question that undoubtedly will place pressure on policyholders to incorporate climate change risks into their business decisions.

Several voluntary disclosure initiatives are available to help companies disclose climate-related information. Since 2000, the Carbon Disclosure Project (“CDP”) run by CERES has collected information on corporate greenhouse gas emissions. The CDP also produces a Climate Leadership Index that rates companies based on, e.g., emissions reductions. The number of companies that choose to participate in the CDP continues to grow. In 2008, 77% of all S&P 500 companies participated in the survey, compared with 55% of S&P 500 companies in 2007. See CDP 2008 Quick Facts, CDP S&P Report 2007, available at http://www.cdproject.net/reports.asp. The CDP also acts as a secretariat to the newly formed Climate Disclosure Standards Board (“CDSB”), which released a draft in May 2009 of a Global Reporting Framework designed to assist directors in the inclusion of climate-related information in companies' annual reports. See The Climate Disclosure Standards Board Reporting Framework, May 2009, available at http://www.cdsb-global.org/uploads/pdf/CDSB_Reporting_Framework.pdf.

Insurance Coverage Issues

Litigation concerning climate-related liabilities and associated insurance recoveries is in its early stages. During the past few years, several suits have been brought against companies that emit GHGs, seeking to impose liability for personal injury and property damage caused by global warming. To date, most of these suits have been dismissed. However, a complaint filed by the village of Kivalina, AK, Native Village of Kivalina, et al. v. ExxonMobil Corp., No. CV08-1138 (N.D. Cal. filed Feb. 26, 2008), is still pending. The Kivalina plaintiffs allege that several energy companies are responsible for a substantial portion of the GHG emissions that have contributed to the melting of the Arctic sea ice that protects their village from winter storms, which batter the coastline and cause erosion. Id. at 1-2. To support their claim for damages, the plaintiffs rely on the conclusion of the U.S. Army Corps of Engineers and the U.S. Government Accounting Office that the village must be relocated due to erosion problems, at a cost ranging from $95 to $400 million. Id. at 46.

The Kivalina case, in turn, has led to claims against insurers. Steadfast Insurance Company filed suit in Virginia state court seeking a declaration that it is not obligated to provide either a defense or indemnity coverage to AES, a defendant in the Kivalina case that owns and operates power plants around the world. Complaint at 2, Steadfast Insurance Co. v. The AES Corp., No. 2008-858 (Va. Cir. Ct. filed July 9, 2008). Steadfast raises three defenses based on the general liability policy it issued to AES. First, Steadfast claims that the Kivalina complaint does not allege property damage caused by an “occurrence.” The policy defines occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” Id. at 6. Because the Kivalina plaintiffs base their claims on AES's alleged long-standing knowledge that it emits GHGs, Steadfast argues that the claims do not arise from an accident, and thus are not covered under the policy. Id. at 9. Recent case law suggests that, under Virginia law, an insurer would have to satisfy a heavy burden to show that a policyholder expected or intended the damage for which it seeks coverage, in this case, the erosion. See Erie Ins. Exch. v. Sipos, 64 Va. Cir. 55, 58 (2004) (stating that although the defendant's debris removal actions were intended, the facts did not indicate that the defendant intended to cause any harm while performing the debris removal, and thus finding coverage for the defendant).

Steadfast's second defense involves the “loss in progress endorsement,” which states that the insurance policy “does not apply to: (1) any injury or damage which incepts prior to the effective date of this policy '” Steadfast Complaint at 9. Steadfast argues that this endorsement applies because some of the damages claimed by the Kivalina plaintiffs occurred prior to September 2003, the earliest effective date of AES's coverage. Id. at 10. Here, too, the insurer has a heavy burden under Virginia law, which bars coverage only when the policyholder had actual knowledge of the specific loss in question prior to the policy period. See S.W. Heischman, Inc. v. Reliance Ins. Co., 30 Va. Cir. 235, 240-241 (1993) (stating that “the 'loss-in-progress' rule bars only those losses which have already begun and are therefore known to the insured.”).

Third, Steadfast claims that the pollution exclusion in the policy bars coverage. Although the Supreme Court held in Massachusetts v. EPA that GHGs are “air pollutants” under the Clean Air Act, the language in AES's pollution exclusion only applies if that pollutant is considered an “irritant or contaminant.” Steadfast Complaint at 8. It will likely be difficult for the insurers to categorize carbon dioxide, a component of the air humans safely breathe, as an “irritant or contaminant.”

The Steadfast case is being watched closely. Despite the new issues raised in climate change litigation, the ultimate question presented in these cases resembles the issue that confronted courts dealing with cases involving coverage for Superfund liabilities in the late 1980s and early 1990s. At that time, insurers argued that standard-form general liability policies did not cover costs associated with cleaning up hazardous waste sites under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”). 42 U.S.C.S. ' 9601 et seq. As one court explained, although Congress created new forms of liability through Superfund, the crucial issue in determining whether such types of liability were covered was whether “in view of the reasonable expectations of the insured, policy language [could] be interpreted to embrace the liability that may accrue under new statutory schemes.” AIU Ins Co. v. Superior Court, 51 Cal. 3d 809, 832 n.8 (1990). Numerous state and federal courts addressed the issue as Superfund litigation became commonplace and the decisions generally held that costs related to Superfund cleanups were “within the insured's reasonable expectations” and were thus covered. Id.

New Products

It is not uncommon for insurers to disclaim coverage of a newly emerging liability under historical policies and to seize the opportunity to sell new products to cover those liabilities. A 2008 report by CERES highlights some of these new products and services. See generally Evan Mills, From Risk to Opportunity: 2008 Insurer Responses to Climate Change, at 29-39 (Ceres, April 2009) (“Ceres Report”). For example, in 2008, Munich Re introduced products that would insure income shortfalls from solar photovoltaic plants and wind farms, and exploration-risk insurance for geothermal energy companies. The same year, AXA began offering a 10% premium discount for buildings that were renovated to reduce GHG emissions, and Lexicon, a member company of AIG, introduced the first green building insurance product for residential customers. To date, more than 20 companies are offering specific policies relating to green building.

New micro-insurance policies offer an opportunity to tap into emerging markets, many of which are located in areas of the world that are expected to suffer the worst effects of climate change. Swiss Re has created the Climate Change Adaptation Program, a micro-insurance product for villages in Kenya, Mali, and Ethiopia. The contracts protect farmers in these countries against drought-related losses. In 2008, AXA introduced a rainfall derivative product to protect farmers in Ethiopia against catastrophic crop losses. Using a rainfall index as a benchmark, the coverage is triggered when the amount of rainfall predicted is below a certain level. Program participants estimate that $7 million of insurance claims paid before a drought could substantially reduce the $1 billion of conventional aid that would be required to respond to such a catastrophe after the fact. The product was purchased by the United Nations World Food Program as the first-ever insurance for humanitarian emergencies.

The emergence of carbon markets, expected to be valued at $550 billion by the end of 2012, see Ceres Report at 39, has also created opportunities for new products. Many insurance companies have already begun offering services such as Credit Delivery Guarantees (“CDG”), which provide coverage for non-delivery of carbon emission credits due to certain specified events. Other products provide coverage for risks associated with Clean Development Mechanisms (“CDMs”) and Certified Emissions Reductions (“CERs”), two project financing mechanisms used under the Kyoto Protocol, an international agreement that sets binding GHG emissions targets for 37 countries. See generally http://unfccc.int/kyoto_protocol/items/2830.php. New insurance product activity is now concentrated in Europe, but the increased likelihood that the United States will implement GHG emission limits and a cap and trade system are likely to shift some of the activity to the U.S. market.

Conclusion

Insurers have been at the forefront of the climate change debate since its early stages. As the legislative and regulatory framework evolves, corporate policyholders can expect their insurers to become more involved in their management and disclosure of climate-related risks. Insurers also are likely to challenge claims for coverage of climate-related losses and liabilities under existing policy language, and to offer new products covering traditional losses and liabilities, as well as new exposures arising from carbon trading and clean development.

Marialuisa S. Gallozzi is a partner in the policyholder insurance coverage practice of the Washington, DC, office of Covington & Burling LLP and a member of this newsletter's Board of Editors. Paula Domingos is a summer associate at the firm. The views expressed in this article are those of the authors and are not attributable to Covington & Burling LLP or its clients.

The risks posed by global warming have become a priority for both political and business leaders worldwide. Corporate policyholders and their insurers are facing new disclosure obligations and compliance costs as well as potential first-party losses and third-party liabilities resulting from climate change. This article provides an overview of recent developments of particular interest to corporate policyholders.

The Changing Regulatory Landscape

In April 2007, the U.S. Supreme Court held in Massachusetts v. EPA , 549 U.S. 497, 532 (2007), that greenhouse gases (“GHGs”) are air pollutants covered by the Clean Air Act. In its opinion, the Court stated that the U.S. Environmental Protection Agency (“EPA”) must determine whether emissions from motor vehicles threaten the public health and welfare (known as an “endangerment” finding), or alternatively, conclude that the science is too uncertain to make a reasoned decision. Id. at 534. In April 2009, the EPA released a proposed endangerment finding that the current concentration of six key GHGs ' carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, per fluorocarbons, and sulfur hexafluoride ' in the atmosphere “threaten[s] the public health and welfare of current and future generations.” See Overview of EPA's Endangerment Finding, April 17, 2009, available at http://epa.gov/climatechange/endangerment.html. This finding does not itself impose any new compliance obligations, but lays the groundwork for legislative and regulatory action.

In June 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009 (Waxman-Markey Bill). This was the first time the U.S. Congress had passed a bill imposing a cap on GHG emissions. John Broder, House Passes Bill to Address Threat of Climate Change, N.Y. Times, June 26, 2009, available at http://www.nytimes.com/2009/06/27/us/politics/27climate.html#. The bill establishes, among other things, an economy-wide GHG cap-and-trade system that is scheduled to begin in 2012 and which is designed to reduce emissions by 17% of the 2005 levels by 2020 and by 83% of 2005 levels by 2050. The bill will now be sent to the Senate for consideration, where it will have to be reconciled with several initiatives. Senate debate will be robust, and final passage of climate change legislation this year remains uncertain.

The EPA, in the meanwhile, is already moving ahead with proposed regulation. In March 2009, the EPA proposed a rule that would require suppliers of fossil fuels and industrial chemicals, manufactures of vehicles and engines, and facilities that emit 25,000 metric tons or more per year of GHGs to report their emissions annually to the EPA. The purpose of the rule is to collect accurate and comprehensive emissions data to help the EPA establish future climate change policy. See Proposed Mandatory Greenhouse Gas Reporting Rule, March 10, 2009, available at http://www.epa.gov/climatechange/emissions/ghgrulemaking.html. More onerous disclosure and compliance requirements can be expected in the future.

Disclosure Issues

Corporate policyholders already have experienced greater demand for and closer scrutiny of their climate-related disclosures. In June 2009, members of the Investor Network on Climate Risk (“INCR”) and other leading global investors sent a letter to the U.S. Securities and Exchange Commission (“SEC”) to request formal guidance on disclosure of climate-related risks. See Investors with $1.4 Trillion in Assets Call on the SEC to Improve Disclosure of Climate Change and Other Risks, June 12, 2009, available at http://www.ceres.org/Page.aspx?pid=1106. To date, the SEC has not responded, and a recent speech by newly appointed SEC Chair Mary Shapiro highlighting the agency's regulatory priorities did not address climate change disclosure. See U.S. Securities Exchange Commission Chairman, SEC Speaks Program, Feb. 6, 2009, available at http://www.sec.gov/news/speech/2009/spch020609mls.htm.

The states are also increasing pressure on companies to make climate-related disclosures. In August 2008, the Attorney General of the state of New York, Andrew Cuomo, reached an agreement with Xcel Energy, a supplier of natural gas and electricity, that required the company to disclose “material financial risks” associated with global warming. Nicholas Confessore, Xcel to Disclose Global Warming Risks, N.Y. Times, Aug. 27, 2008, available at http://www.nytimes.com/2008/08/28/business/28energy.html. The agreement commits Xcel to a variety of climate change disclosures including: 1) current carbon emissions, 2) projected increases in emissions from planned coal-fired plants, 3) strategies for managing emissions, and 4) corporate governance actions (including executive compensation decisions) related to climate change. A similar agreement was reached with Dynegy in October 2008, and negotiations are continuing with other power companies. See Cuomo Reaches Landmark Agreement, Aug. 27, 2008, available at http://www.oag.state.ny.us/media_center/2008/aug/aug27a_08.html.

The National Association of Insurance Commissioners (“NAIC”) also has addressed the need for disclosure guidelines. In March 2009, the NAIC announced a model rule requiring insurance companies with annual premiums greater than $500 million to report to state regulators their financial exposure to climate change risk. See NAIC Insurer Climate Risk Disclosure Survey, available at http://www.naic.org/documents/committees_ex_climate_climate_risk_disclosure_survey.pdf. If adopted by individual states, this measure will require eligible insurance companies to complete an annual survey, beginning on May 1, 2010. Among other things, the survey asks about plans to reduce emissions and the impact of climate change on investments. The survey also directs insurers to disclose steps they have taken to encourage their policyholders to reduce climate-related losses, a question that undoubtedly will place pressure on policyholders to incorporate climate change risks into their business decisions.

Several voluntary disclosure initiatives are available to help companies disclose climate-related information. Since 2000, the Carbon Disclosure Project (“CDP”) run by CERES has collected information on corporate greenhouse gas emissions. The CDP also produces a Climate Leadership Index that rates companies based on, e.g., emissions reductions. The number of companies that choose to participate in the CDP continues to grow. In 2008, 77% of all S&P 500 companies participated in the survey, compared with 55% of S&P 500 companies in 2007. See CDP 2008 Quick Facts, CDP S&P Report 2007, available at http://www.cdproject.net/reports.asp. The CDP also acts as a secretariat to the newly formed Climate Disclosure Standards Board (“CDSB”), which released a draft in May 2009 of a Global Reporting Framework designed to assist directors in the inclusion of climate-related information in companies' annual reports. See The Climate Disclosure Standards Board Reporting Framework, May 2009, available at http://www.cdsb-global.org/uploads/pdf/CDSB_Reporting_Framework.pdf.

Insurance Coverage Issues

Litigation concerning climate-related liabilities and associated insurance recoveries is in its early stages. During the past few years, several suits have been brought against companies that emit GHGs, seeking to impose liability for personal injury and property damage caused by global warming. To date, most of these suits have been dismissed. However, a complaint filed by the village of Kivalina, AK, Native Village of Kivalina, et al. v. ExxonMobil Corp., No. CV08-1138 (N.D. Cal. filed Feb. 26, 2008), is still pending. The Kivalina plaintiffs allege that several energy companies are responsible for a substantial portion of the GHG emissions that have contributed to the melting of the Arctic sea ice that protects their village from winter storms, which batter the coastline and cause erosion. Id. at 1-2. To support their claim for damages, the plaintiffs rely on the conclusion of the U.S. Army Corps of Engineers and the U.S. Government Accounting Office that the village must be relocated due to erosion problems, at a cost ranging from $95 to $400 million. Id. at 46.

The Kivalina case, in turn, has led to claims against insurers. Steadfast Insurance Company filed suit in Virginia state court seeking a declaration that it is not obligated to provide either a defense or indemnity coverage to AES, a defendant in the Kivalina case that owns and operates power plants around the world. Complaint at 2, Steadfast Insurance Co. v. The AES Corp., No. 2008-858 (Va. Cir. Ct. filed July 9, 2008). Steadfast raises three defenses based on the general liability policy it issued to AES. First, Steadfast claims that the Kivalina complaint does not allege property damage caused by an “occurrence.” The policy defines occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” Id. at 6. Because the Kivalina plaintiffs base their claims on AES's alleged long-standing knowledge that it emits GHGs, Steadfast argues that the claims do not arise from an accident, and thus are not covered under the policy. Id. at 9. Recent case law suggests that, under Virginia law, an insurer would have to satisfy a heavy burden to show that a policyholder expected or intended the damage for which it seeks coverage, in this case, the erosion. See Erie Ins. Exch. v. Sipos , 64 Va. Cir. 55, 58 (2004) (stating that although the defendant's debris removal actions were intended, the facts did not indicate that the defendant intended to cause any harm while performing the debris removal, and thus finding coverage for the defendant).

Steadfast's second defense involves the “loss in progress endorsement,” which states that the insurance policy “does not apply to: (1) any injury or damage which incepts prior to the effective date of this policy '” Steadfast Complaint at 9. Steadfast argues that this endorsement applies because some of the damages claimed by the Kivalina plaintiffs occurred prior to September 2003, the earliest effective date of AES's coverage. Id. at 10. Here, too, the insurer has a heavy burden under Virginia law, which bars coverage only when the policyholder had actual knowledge of the specific loss in question prior to the policy period. See S.W. Heischman, Inc. v. Reliance Ins. Co. , 30 Va. Cir. 235, 240-241 (1993) (stating that “the 'loss-in-progress' rule bars only those losses which have already begun and are therefore known to the insured.”).

Third, Steadfast claims that the pollution exclusion in the policy bars coverage. Although the Supreme Court held in Massachusetts v. EPA that GHGs are “air pollutants” under the Clean Air Act, the language in AES's pollution exclusion only applies if that pollutant is considered an “irritant or contaminant.” Steadfast Complaint at 8. It will likely be difficult for the insurers to categorize carbon dioxide, a component of the air humans safely breathe, as an “irritant or contaminant.”

The Steadfast case is being watched closely. Despite the new issues raised in climate change litigation, the ultimate question presented in these cases resembles the issue that confronted courts dealing with cases involving coverage for Superfund liabilities in the late 1980s and early 1990s. At that time, insurers argued that standard-form general liability policies did not cover costs associated with cleaning up hazardous waste sites under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”). 42 U.S.C.S. ' 9601 et seq. As one court explained, although Congress created new forms of liability through Superfund, the crucial issue in determining whether such types of liability were covered was whether “in view of the reasonable expectations of the insured, policy language [could] be interpreted to embrace the liability that may accrue under new statutory schemes.” AIU Ins Co. v. Superior Court , 51 Cal. 3d 809, 832 n.8 (1990). Numerous state and federal courts addressed the issue as Superfund litigation became commonplace and the decisions generally held that costs related to Superfund cleanups were “within the insured's reasonable expectations” and were thus covered. Id.

New Products

It is not uncommon for insurers to disclaim coverage of a newly emerging liability under historical policies and to seize the opportunity to sell new products to cover those liabilities. A 2008 report by CERES highlights some of these new products and services. See generally Evan Mills, From Risk to Opportunity: 2008 Insurer Responses to Climate Change, at 29-39 (Ceres, April 2009) (“Ceres Report”). For example, in 2008, Munich Re introduced products that would insure income shortfalls from solar photovoltaic plants and wind farms, and exploration-risk insurance for geothermal energy companies. The same year, AXA began offering a 10% premium discount for buildings that were renovated to reduce GHG emissions, and Lexicon, a member company of AIG, introduced the first green building insurance product for residential customers. To date, more than 20 companies are offering specific policies relating to green building.

New micro-insurance policies offer an opportunity to tap into emerging markets, many of which are located in areas of the world that are expected to suffer the worst effects of climate change. Swiss Re has created the Climate Change Adaptation Program, a micro-insurance product for villages in Kenya, Mali, and Ethiopia. The contracts protect farmers in these countries against drought-related losses. In 2008, AXA introduced a rainfall derivative product to protect farmers in Ethiopia against catastrophic crop losses. Using a rainfall index as a benchmark, the coverage is triggered when the amount of rainfall predicted is below a certain level. Program participants estimate that $7 million of insurance claims paid before a drought could substantially reduce the $1 billion of conventional aid that would be required to respond to such a catastrophe after the fact. The product was purchased by the United Nations World Food Program as the first-ever insurance for humanitarian emergencies.

The emergence of carbon markets, expected to be valued at $550 billion by the end of 2012, see Ceres Report at 39, has also created opportunities for new products. Many insurance companies have already begun offering services such as Credit Delivery Guarantees (“CDG”), which provide coverage for non-delivery of carbon emission credits due to certain specified events. Other products provide coverage for risks associated with Clean Development Mechanisms (“CDMs”) and Certified Emissions Reductions (“CERs”), two project financing mechanisms used under the Kyoto Protocol, an international agreement that sets binding GHG emissions targets for 37 countries. See generally http://unfccc.int/kyoto_protocol/items/2830.php. New insurance product activity is now concentrated in Europe, but the increased likelihood that the United States will implement GHG emission limits and a cap and trade system are likely to shift some of the activity to the U.S. market.

Conclusion

Insurers have been at the forefront of the climate change debate since its early stages. As the legislative and regulatory framework evolves, corporate policyholders can expect their insurers to become more involved in their management and disclosure of climate-related risks. Insurers also are likely to challenge claims for coverage of climate-related losses and liabilities under existing policy language, and to offer new products covering traditional losses and liabilities, as well as new exposures arising from carbon trading and clean development.

Marialuisa S. Gallozzi is a partner in the policyholder insurance coverage practice of the Washington, DC, office of Covington & Burling LLP and a member of this newsletter's Board of Editors. Paula Domingos is a summer associate at the firm. The views expressed in this article are those of the authors and are not attributable to Covington & Burling LLP or its clients.