While the many effects of climate change are complex or difficult to measure, one important change has become abundantly clear—as global temperatures increase, polar ice caps have begun to melt and sea levels around the world have begun to rise. According to the National Oceanic and Atmospheric Administration (NOAA), “global mean sea level has risen about 8–9 inches (21–24 centimeters) since 1880, with about a third of that coming in just the last two and a half decades.”
Rising sea levels, coupled with population growth along coastlines, mean that more people and infrastructure along coastal geographies are at risk for more frequent flooding. In addition, a higher mean sea level makes hurricanes and other strong storms that push water inland—like Hurricane Sandy, and, more recently, Hurricane Michael—deadlier and more destructive.
There are concerns that sea level rise’s impacts on property could begin to impact liability insurance. Lawsuits have already been filed in the U.S. alleging, in part, that rising sea levels have led and/or will lead to an increased frequency and severity of flooding and storm surges. The lawsuits, typically brought by municipalities or other jurisdictions, generally allege that one or more major oil and gas companies (i.e., one of the “Big 6”: Exxon Mobil, Royal Dutch Shell, British Petroleum, Chevron, Conoco Phillips, and Total) should be held liable for public nuisance because they have contributed to these rising sea levels through their business practices, such as promoting the use of their carbon-intensive products. Some of these lawsuits also allege that oil and gas companies misled the public by issuing deceptive statements about climate change. The lawsuits therefore seek compensation from these companies for, in part, costs associated with flood infrastructure construction to mitigate against expected increases in flooding events.
As of this writing, none of the aforementioned lawsuits has been successfully litigated; nor have there been any reported settlements or awards. However, while substantial liability losses do not currently seem imminent, the risk should not be entirely dismissed due to several factors:
- Attribution science: “Attribution science” seeks to determine whether a certain type of event—or even a specific event—has been made more severe and/or more frequent because of climate change. As attribution science becomes more robust, it may play an increasing role in adjudicating liability for climate change-influenced types of events or for specific events themselves.
- Philanthropic motivations: Much of the current climate change-related litigation is driven by philanthropic rather than financial motivations. As such, even if lawsuits remain unsuccessful for a time, the motivation to hold companies liable for alleged contributions to climate change may continue. Unsuccessful lawsuits may not result in damage awards, but they may still lead to significant defense costs for defendants and insurers. In addition, companies may face significant reputational risks because of this litigation, which can impact company performance.
- Political pressure on jurisdictions: Constituents in communities affected by sea level rise may begin to exert pressure on their political leaders to address current and future exposures. This pressure could lead these communities to recoup costs to build flood prevention infrastructure through litigation against oil and gas companies, particularly if such communities have few or no other financial resources to pay for mitigation.
- “Floodgate” theory: Assuming this type of litigation remains within the states (rather than falling under federal jurisdiction), there remains the possibility that some lawsuits advance beyond the initial phases of litigation. If that were to happen—and if a case were decided on the merits with awarded damages—there are concerns that this might “open the floodgates” of litigation, wherein many more municipalities and other jurisdictions begin to file suit for damages and more, and potentially greater damages are awarded.
If litigation were to evolve in this way, additional lawsuits could be triggered along the global supply chain, as the original defendants (major oil and gas companies) seek to pass on damages by bringing third-party claims against other companies that more directly contribute to carbon emissions, such as utilities, carbon-intensive manufacturing industries, and even other non-manufacturing carbon-intensive industries, such as transportation or agriculture.
Arium has developed a scenario that can help (re)insurers quantify an organization’s potential liability and exposure to this event if it were to emerge. This scenario estimates the potential losses from sea level rise liability to major oil companies in the U.S. going forward. Given the uncertainty around how the risk may develop, the scenario provides a range of potential estimated losses, from no losses incurred if no lawsuits are successful to tens of billions of dollars in liability damages.
Arium is also developing additional versions of this scenario to estimate the potential losses to other carbon-intensive industries, as well as scenarios for other types of climate change liability risks.