Historically, AIR has focused on extreme events causing insured losses to property. Typically, this meant estimating property losses from natural disasters. However, the insurance impact of natural disasters, such as this season’s hurricanes Harvey and Irma, could extend beyond property insurance to result in significant casualty losses. The ability to assess such risk presents an ongoing challenge to the insurance industry and AIR is rising to meet this need.
The unprecedented flooding from Hurricane Harvey devastated homes and businesses in and around Houston. But it also led to a catastrophic explosion at the Arkema chemical plant in Crosby, Texas, more than 25 miles away. Arkema is now being sued by surrounding homeowners, as well as by police and other first responders for not taking the necessary precautions to prevent this incident.
Natural disasters that result in commercial liability span a wide range of commercial sectors. In the last few months, in addition to the Arkema explosion, 13 Superfund sites have been flooded. If they are leaking harmful contaminants into the water supply as a result, there could be very expensive implications.
Looking back at the aftermath of Hurricane Katrina’s assault on the Gulf Coast in 2005, we can perhaps gain insights into what to expect by observing how events played out more than a decade ago. Faced with a liability situation similar to the Arkema explosion, Murphy Oil Corporation agreed to pay USD 330 million to those affected by oil released from a storage tank at their Meraux refinery in New Orleans.
Industrial accidents such as the Arkema explosion and the Murphy Oil spill are examples of a phenomenon known as Natech. Short for Natural-Technologic, Natechs refer to instances when natural hazards have triggered technological disasters. The resulting large-scale environmental clean-up costs; compensation claims from first responders or residents living near the release; and long-term business interruption could all lead to hundreds of millions of dollars in losses to a company found liable for the loss. Natechs can have major implications for the casualty insurance industry.
For a Natech event to cause significant insured casualty losses, three important factors must coincide.
- Some sort of hazardous material must be present—this can include potentially harmful chemicals as well as other pollutants, such as fuels, coolants, or other toxic materials.
- There must be a sufficiently dense population exposed to the hazardous material (and typically that population must feel sufficiently wronged to pursue legal action).
- The population must have been exposed to the harmful material as a result of a natural hazard, such as a hurricane, flood, or earthquake.
Above all, the losses must be, at least partially, due to improper or negligent behavior on the part of those handling the hazardous material, e.g., failing to follow proper safety procedures, conduct regular maintenance, or heed published advanced warnings.
The potential for Natechs to occur are found throughout the densely populated coastlines of the Gulf, particularly in Texas, Louisiana, and Florida, where the effects of Harvey and Irma were felt most acutely. These storms will likely lead to significant environmental clean-up costs, and some of these costs may be borne by parties found to have mishandled toxic substances.
While the future is unknown, we can expect the frequency and severity of Natechs to increase as expanding urban populations encroach on areas of industrial activity. Therefore, we’ll be keeping a close eye on Natechs and similar events and periodically writing about those with potential liability implications . If you would like to be notified when AIR publishes information about future Natechs, please let me know.