Much has been written in the past few weeks about the International Court of Justice (ICJ)’s advisory determination that nation states are responsible for the emissions that emanate from their countries – and potentially liable to other countries for the climate change damages that those emissions cause.
This is of course an extremely significant development that will catalyse many other claims, and provide a source of ‘soft law’ pressure on nations to escalate emissions reduction policies. But I have also been thinking about a much less ‘shiny’ development. One that may be just as significant as the ICJ’s decision in driving a fundamental shift in market approaches to climate adaptation. One prompted by a random case in South Africa – that doesn’t even mention the term ‘climate change’. One relating to insurance.
To provide some context. With global mitigation action falling far short of what is required to limit the trajectory of global warming to date, extreme weather events have become far more frequent and intense. Prudential regulators and actuaries are issuing ever-more dire warnings about the physical risks associated with climate change, and the primary, secondary and tertiary (systemic) economic damages associated with their impacts. And (re)insurers are not only warning about the potential for assets (and whole regions) to become uninsurable, but have already started to pull out of regional markets (including, in the case of Allstate and State Farm, withdrawing new paper from California and Florida). Of course – if you can’t get insurance, you can’t get finance. And, as prudential regulators and central banks the world over have increasingly recognised, that is where the risks to financial stability can really kick in.
So back to this South African case. Japanese insurer Tokio Marine & Nichido Fire Insurance (subrogating the rights of its insured, Toyota Motor Corp) has filed [paywall] a claim in the High Court of South Africa suing Transnet SOC Ltd., the KwaZulu-Natal Department of Transport and eThekwini Municipality for 6.5 billion rand (A$600 million) in compensation. The insurer alleges the defendants were negligent in their failure to maintain drainage systems and waterways, which contributed to flooding at Toyota Prospecton plant near Durban in 2022, following an extreme rain event that claimed more than 500 lives and displaced tens of thousands of residents in Kwa-Zulu Natal. The flooding caused the Toyota plant to shut for four months, causing 4.5 billion rand in repair costs and over 2 billion rand in business interruption losses. While the claim does not mention ‘climate change’ directly, scientific attribution studies of the rainfall event that led to the flooding concluded that the rainfall was 40% to 107% heavier than it would have been in a cooler, pre-industrial climate. More broadly, it is an inescapable proposition that, as the climate changes, so too does the range of operating conditions that infrastructure operators should reasonably foresee.
And similar claims are piling up – two further claims by other insurers for damages against the Department of Transport, Transnet, and the eThekwini Municipalities have since been filed.
So I have been thinking. What if Tokio Marine loses (ie. the South African municipalities are not liable for damages associated with the flood loses caused to the Toyota plant)? It seems logical that the insurance industry would respond by significantly tightening its physical risk due diligence in both policy issuance and renewals, leading to a sharp increase in insured’s burden to demonstrate adaptation/resilience.
What if Tokio Marine wins (ie. the municipalities are liable for failure to maintain the flood infrastructure)? What is that going to mean for the liability exposures of critical infrastructure owners around the world – including government instrumentalities – and pressure to ensure that assets remain resilient to the ‘new normal’ of extreme weather events? What pressure would that place on budgets? How would that flow through to credit ratings? How would governments seek to manage that risk by tightening municipal planning requirements? Of course, governments are currently subject to opposing political pressures to facilitate development to stimulate economic growth and relieve housing affordability. But at what point will these important concerns be overwhelmed by the direct economic pressures of adaptation and ‘insurer of last resort’?
Either way, it ultimately signals increasing pressure on business and government to proactively adapt real assets to the ‘new normal’ of environmental exposures – both within their four walls, with surrounding infrastructure and in their value chains. So, with apologies to the ICJ, perhaps the role of insurers as the critical drier of climate action has been hiding in plain sight all along…
This article offers just a glimpse into our thinking on this issue. We provide a range of tailored Insights services to support our clients. For more information or to discuss how we can support you, please reach out Pollination Law Managing Director Sarah Barker, or Head of Knowledge & Insights Kate Hilder, to discuss.
