2007 International 2007 International ConferenceConference

Washington, D.C. ~ November 7-9, 2007

Climate Change:Climate Change:Whose Ox is Gored?

Whose Ox is Gored? Panel Whose Ox is Gored? Panel MembersMembers

• MODERATOR: Fred Perez, Vice PresidentMcLarens Young International

• Ken Berger, Executive Vice PresidentZurich NA

• Sonia HamelClimate Protection Consultant

• William Stewart, MemberCozen O’Connor

OverviewOverview

• Global Climate Change

• Global Warming Litigation

• US States and Regions: Laboratories of Climate Action

• How the Climate Change Debate is Affecting Liability for Professionals

Global Climate ChangeGlobal Climate Change

Global Climate ChangeGlobal Climate Change

Global Climate ChangeGlobal Climate Change

Climate Change: The BasicsClimate Change: The Basics

THE GREENHOUSE THE GREENHOUSE GASESGASES

• Carbon Dioxide (CO2)

• Methane

• Nitrous Oxide

• Chlorofluorocarbons

Greenhouse Gas EmissionsGreenhouse Gas Emissions

Equilibrium Global Equilibrium Global Mean TemperatureMean Temperature

Expectations Agreed Upon By Expectations Agreed Upon By the International Panel on the International Panel on

Climate ChangeClimate Change

• Results of Rise in Temperatures Increased storms Higher sea levels Widespread increase in flooding Aggravated Water Scarcity Increased range of malaria carrying

mosquitoes Large Scale Famine Massive Population Movement Would likely provoke armed conflict

U.S. States and Regions:

Laboratories of Climate Action

Overview

• The Context for State and Regional Action• Key State Climate Plans & Policies• Regional Greenhouse Gas Initiative (RGGI)• Western Climate Initiative (WCI)• Other Notable Efforts:

Emerging Efforts in Southeast & Midwest US The “National Climate Registry” Applying State Lessons in the Federal Debate

Signs of Progress at Signs of Progress at Sub-National Level in U.S.Sub-National Level in U.S.

• Governors Announcing Bold Targets

• States Enacting Mandatory Caps on Emissions

• Regional Agreements

• Adoption of Clean Cars Programs to Limit Vehicle GHG Emissions

• Local Governments Stepping Up

US Emissions: An US Emissions: An International ContextInternational Context

State Climate Action PlansState Climate Action Plans

Governors are Committing to Governors are Committing to Real Caps on EmissionsReal Caps on Emissions

• In July, FL Governor Christ established a statewide goal to In July, FL Governor Christ established a statewide goal to reduce global warming emission to 2000 levels by 2017, 1990 reduce global warming emission to 2000 levels by 2017, 1990 levels by 2025, and 80 percent below 1990 levels by 2050. levels by 2025, and 80 percent below 1990 levels by 2050.

• CA Governor Schwarzenegger committed to 80% below 1990 CA Governor Schwarzenegger committed to 80% below 1990 levels by 2050 and signed a bill to reduce emissions to 1990 levels by 2050 and signed a bill to reduce emissions to 1990 levels by 2020 (a 25% reduction from current levels).levels by 2020 (a 25% reduction from current levels).

• NM Gov. Richardson - 2000 levels by 2010, 10% below 2000 NM Gov. Richardson - 2000 levels by 2010, 10% below 2000 levels by 2020 and 80% below 2000 levels by 2050.levels by 2020 and 80% below 2000 levels by 2050.

• Governors Gregoire (WA), Kulongoski (OR), Napolitano (AZ) Governors Gregoire (WA), Kulongoski (OR), Napolitano (AZ) and Blagojevich (IL) have all recently made similar and Blagojevich (IL) have all recently made similar commitments. commitments.

• New England Governors agreement - 1990 levels by 2010, New England Governors agreement - 1990 levels by 2010, 10% below 1990 levels by 2020 and 75-85% “in the long-10% below 1990 levels by 2020 and 75-85% “in the long-term”term”

Binding CapsBinding Caps

• Early Efforts in Massachusetts and New Hampshire on power plants

• The Northeast Regional Greenhouse Gas Initiative (RGGI) on Power Plants December 2005

• California Economy-Wide Cap, AB 32 Summer 2006

• Emerging Western Climate Initiative (WCI)

NE Regional Greenhouse Gas NE Regional Greenhouse Gas InitiativeInitiative

• 10 States• > 650 Power Plants• Stabilizes

emissions through 2014; 10% Reduction by 2018

• 13% Below 1990 Levels by 2019

RGGI is Coming RGGI is Coming Into PlaceInto Place

• Legislation in 5 of 10 States

• Rulemakings underway

• Program Launches January 2009

• First Auction in 2nd Quarter 2008

The Western Climate The Western Climate InitiativeInitiative

• 6 U.S. States + 2 Canadian Provinces--AZ, CA, NM, OR, WA, UT, BC & MB

• Observers include: Alaska, Colorado, Kansas, Idaho, Nevada, Wyoming, Ontario, Quebec

• August 2007: regional reduction goal: 15% below 1990 levels by 2020 across all sectors.

• August 2008: design of a “regional market-based, multi-sector mechanism”

• All participants committed to CA vehicle tailpipe standards

State Legislatures are Taking Action

• July 2007, NJ Governor Corzine signed the Global Warming Response Act, requiring NJ to reduce it’s global warming pollution to “at or below” 1990 levels by 2020 and to 80% below current levels by 2050.

• June 2007, Hawaii enacted the Global Warming Solutions Act requiring a redution of global warming emissions to “at or below” 1990 levels by 2020.

• CA Gov. Schwarzenegger signed into law the Global Warming Solutions Act (AB 32), the first-ever statewide cap on global warming pollution. The law reduces annual global warming emissions in CA by 25 percent by 2020 (equivalent to 1990 levels).

Vehicle Tailpipe StandardsVehicle Tailpipe Standards

• California Statute being adopted by other states

• Approximately 30% Reduction by 2016

• Saves more than 8 billion gallons of gasoline (more than Florida uses in a year)

• States (14) that have adopted or are poised to adopt: AZ, CA, CT, MA, MD, ME, NJ, NM, NY, OR, PA, RI, VT, WA

U.S. Mayors’ Climate Protection Agreement

• Commitments to reduce emissions 7% below 1990 levels by 2012 (Kyoto Agreement level)

• Led by Seattle Mayor Nickels• 691 mayors• All 50 States, DC and Puerto Rico• Represents 74 million Americans

Building a Framework for Action

• There is a solution-oriented vision that is beginning to take root

• A politically sustainable constituency for global warming solutions is building & will continue to happen from the ground up

• Solutions are coming into place as we build the political constituency for federal efforts

Developments to WatchDevelopments to Watch

• Multi-state “national” climate registry--”The Climate Registry”

• Midwest Regional Potential

• State efforts informing the federal debate in Washington, DC

How the Climate Change How the Climate Change Debate Is Affecting Liability for Debate Is Affecting Liability for

ProfessionalsProfessionals

Growth in customers looking for product Growth in customers looking for product options or companies options or companies

aligned with their aligned with their environmental beliefs environmental beliefs

• Environmental movement – “mainstream” culture.

• A recent pulse of books, movies and even a worldwide concert indicate a generation crying louder for green solutions.

• Climate change is no longer a subject found solely in National Geographic, but appears in current issues of Snowboarder Magazine, Radical Philosophy, The Economist, The Wilson Quarterly, the Harvard Business Review and a multitude of current periodicals.

• The global marketplace desperately requires remedies to environmental issues and looks to businesses, scientists, and governmental leaders to provide sustainable products, services, and policy.

Business Executives Are Business Executives Are Paying Attention – Paying Attention – PWC Survey 2007PWC Survey 2007

1 Too much regulation 12 Managing technolgy 23 Corporate governance2 Natural catastrophes 13 Equity markets 24 Demographic trends3 Management quality 14 Risk management techniques 25 Contract wording4 Climate change 15 Back office 26 Capital availability5 Managing the cycle 16 Political shocks and pressures 27 Security of reinsurance6 Distribution channels 17 Pricing new risks 28 Availability of reinsurance7 Long-tail liabilities 18 Terrorism 29 Business continuation8 Actuarial assumptions 19 Complex instruments 30 Fraud9 Longevity assumptions 20 Retail sales practices 31 Merger mania10 New types of competitors 21 Pollution 32 Too little regulation11 Investment performance 22 Interest rates 33 Asbestos

List of the Other Top-33 Concerns

Source: Centre for the Study of Financial Innovation and PricewaterhouseCoopers survey: 2007

Potential regulatory targets – due Potential regulatory targets – due to energy consumption to energy consumption and pollution patternsand pollution patterns

• Energy and power production• Educational institutions• Chemical producers• Landfills• Cement manufacturers• Manufacturers (general)• Agriculture• Land use• Health care• Construction• Transportation• Shipping / goods movement

Also see “Green as Houses”, the Economist, September 15-21, 2007

Climate change will change Climate change will change the way we use energy to the way we use energy to power buildings . . . and power buildings . . . and

buildings themselvesbuildings themselves

Potentially changing property risks

Climate change will change the way Climate change will change the way we use energy to power buildings . we use energy to power buildings .

. . and buildings themselves. . and buildings themselves

Climate change will change the Climate change will change the way we use energy to power way we use energy to power buildings . . . and buildings buildings . . . and buildings

themselvesthemselves

• Institute for Business and Home Safety

• Fortified for safer living standards

Wind resistant rigid foam panel walls and multi-glazed windows

Ice dam resistant Mold resistant Water resistant insulation

100 mpg

Growth in customers looking for Growth in customers looking for product options…product options…

drives product changedrives product change•Climate change will change the way we transport ourselves …

Transportation? Transportation? For professionals???For professionals???

• Land Use

Discuss San Bernadino litigation with CA Attorney General’s office

NEPA / CEQA violations alleged

Include GHG impacts in land use ?

How can public policy effect change How can public policy effect change in power usage QUICKLY?in power usage QUICKLY?

Power grid management ? • NO – short term• YES – long term

Tax incentives ? Maybe

Rebates ? Maybe

Building permits ? YES !!!!

Regulation is here ….Regulation is here ….Ex: CA state-level public policy Ex: CA state-level public policy

response to climate changeresponse to climate change

• AB 32 (CA H&S Code Section 38500 et seq.) CA Global Warming Solution Act

• SB 1368 (CA Public Utilities Code Section 8340 et seq.) GHG Emissions Performance Standard for Baseload Electrical Generation

• Enacted September 2006

• Designed to reduce GHG emissions and promote energy efficient technology and power sources

• Most affected parties and activities – large energy consumers

Impact to the professional liability Impact to the professional liability underwriting underwriting

practices areas ?practices areas ?

• Architects and Engineers• Increased demand for “green”

and “sustainable” buildings• New performance demands

for designs• Change in the standard of

care Do you need to offer a “green”

design if the client does not ask for same ?

• See building codes; additional changes

• Environmental Professionals:

Expansion of concerns for land use impacts – increased GHG emissions

Additional NEPA and CEQA study components

• Directors and Officers Financial risk ? Reputational Risk ? Where is the duty and, if there

is one, to whom does it extend ? What is due care ?

Disclosure ?• How much?• What are the applicable

standards ?• When is the “connection” too

remote ? Is “carbon” a liability or asset or

both ?• Lawyers

Notice ? Error ? Omission ? Environmental ? Pollutant ? Asset ? Liability ? Permitting ?

• Accountants Liability ? Asset ? ARO ?

Impact to professional Impact to professional consultancy areasconsultancy areas

• OPPORTUNITY and RISK – key is risk management• Due diligence protocol alterations – current and historical

exposure estimates !• Must consider change to advisory and scopes

Especially for land use / development / construction / power projects

• Carbon “baselines” Know what they are and how they vary Can you assess same ? How can you report ? Comparability ? What are benchmarks and are they relevant ? Know if this data must be disclosed like other

environmental data

TakeawaysTakeaways

• States and cities in the US are moving to make emissions reductions using a wide variety of regulatory approaches.

• These reductions are on a par with reductions made by many other countries and are creating a framework for a workable federal approach in the long run.

• Public policy actions are being taken with respect to climate change: new laws, new regulations and new actions from attorneys general and the like.

TakeawaysTakeaways

• The physical realities of climate change are such that increased incidence of property damage and bodily injury in many forms are expected to occur to people and businesses.

• Liability created by the public policy actions and property damages and bodily injuries may be covered within certain professional liability lines of coverage, intentionally or unintentionally. Other types of liability associated with climate change may not be insured within professional liability coverage or any other insurance coverage for that matter.

TakeawaysTakeaways

• Climate Change has the potential to drastically alter risk management during our lifetimes--and the first wave of insurance related litigation is likely to be professional liability claims.

• Because of its financial clout and expertise in risk assessment, the insurance industry will be at the cutting edge of the "green debate."

AudienceAudience

Q & AQ & A

Many thanks to . . .Many thanks to . . .

• Ken Berger

• Sonia Hamel

• Fred Perez

• William Stewart

Climate Change And Risk Climate Change And Risk ImpactsImpacts

Global Warming Global Warming LitigationLitigation

Natural Disasters Regulatory Inaction Public Nuisance