Insurance for Climate Change Events - Examining the Insurers New Tool for Shifting Costs Back to Policyholders

Journal of Emerging Issues in Litigation

PUBLISHED ON: February 25, 2022

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Abstract:  In this article the authors—who dedicate their legal practices to representing large commercial policyholders—tackle a sliver of a larger subject that is certain to dominate the legal landscape for decades. The devastating impacts of catastrophic events—exacerbated by our warming planet—is already increasing tension between policyholders and their insurers, tension that is spilling into the courts as companies debate the meaning of their agreements. These interpretations come with enormous consequences that will likely dwarf coverage battles of the past. Here, the authors examine the effects and interpretations of insurance policies sold with “percentage deductibles,” an alternative to regular deductibles with simple dollar limits. The authors focus on two cases: one favorable to an insurer, the other favorable to an insured. Read more about policy language that the authors maintain is an attempt by insurers to shift substantial cost burdens to policyholders contending with the accelerating destructive impacts of climate change.

The effects of climate change are here. Stronger and more frequent natural disasters, for example, are destroying homes and businesses at record-breaking rates. As assumers of both property and liability risks, the potential for significant losses resulting from climate-linked events has led insurance companies to undertake certain actions to minimize their exposure.

One way in which insurance companies have sought to limit their exposure for catastrophic losses from natural disasters (such as hurricanes) is by selling insurance policies with percentage deductibles from storm damage instead of the traditional dollar deductible. Percentage deductibles are generally higher than regular deductibles because they convert the policyholder’s deductible from a fixed amount to a percentage of the insured property value. Most percentage deductibles are between 1 and 5 percent, but in high-risk areas, deductibles can reach as high as 10 percent. These percentages are usually taken from the insured value of the property, not merely the amount of damage, so when triggered the deductible can result in a substantial increase in the out-of-pocket cost for the policyholder.

To read the full article, please click here.

 

Joseph Vila (jvila@andersonkill.com) is an insurance recovery attorney in Anderson Kill’s New Jersey office.