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

• Jurisdiction: United States,Federal
• Citation: Vol. 2 No. 2
• Publication year: 2022
• topic: Contracts,Insurance Law,Civil Procedure

Nicholas M. Insua and Joseph Vila ^*

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

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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.

Variations on a Theme

There are a variety of percentage-based deductibles that an insurance company can include in a given insurance policy. A few of the most common percentage deductibles include (but are not limited to) flood, hurricane, named storm, and windstorm. Although the language of these deductibles can vary from policy to policy, ISO CP 03 21 03 94 ("Windstorm or Hail Percentage Deductible") provides a great example of the kind of language policyholders can expect to encounter when an insurance company includes a percentage-based deductible in their insurance policy:

The Windstorm or Hail Deductible, as shown in the Schedule, applies to loss or damage to Covered Property caused directly or indirectly by Windstorm or Hail, regardless of any other cause or event that contributes concurrently or in any sequence to the loss or damage. If loss or damage from a covered weather condition other than Windstorm or Hail occurs, and that loss or damage would not have occurred but for the Windstorm or Hail, such loss or damage shall be considered to be caused by Windstorm or Hail and therefore part of the Windstorm or Hail occurrence.
In determining the amount, if any, that we will pay for loss or damage, we will

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