Climate change is disrupting property and liability insurance in catastrophe-prone areas. This disruption is attributed to an influx of climate-influenced losses which are endangering the insurance industry’s sustainability. To counter the displacement, water utilities must invest in climate change mitigation measures. Such investments include line-item financial funding, compilation of credible risk-related data, and formulation of actionable climate change policies.

Forward risk management is the proper mechanism to address climate change because its resonance originates from governing body advocacy and organizational inculcation. An effective climate change strategy transcends advantageous insurance purchases and favorably influences one’s credit ratings and bond subscriptions because the foregoing pillars are inexorably linked to climate change. Funding, data, policy, and action are the required outputs of forward risk management. Its methodical implementation will enunciate the preferred risk characteristics of water utilities. Climate change success is achieved when water utilities demonstrate an ability to deliver safe and tasteful water reliably, efficiently, and reasonably to their communities. This achievement is a continuous and endless journey.

Introduction: 

The collection and documentation of risk-related data and actionable climate change policies are critical for water utilities to maximize the value of their insurance purchases. The insurance industry frequently utilizes basic commercial standards when assessing water utilities because the submitted data and documentation are often incomplete and not contemplative of the segment’s preferred risk characteristics. Consequently, underwriter decision criteria are constrained to one’s historical loss data and nondescript answers to various applications. The outcome is the offering of insurance terms where capacity, rate, and coverage are reflective of generic marketplace factors rather than a water utility’s hardened facilities, regulated operations, and governance structure. 

This paper will present the type of risk-related data and climate change policy documentation that must be assembled to leverage a water utility’s insurance purchases.1 Our discussion will be limited to the impact of climate change on property and liability insurance policies. We will also review the linkage between insurance purchases, credit ratings, and bond issuance as well as the role of one’s governing body in redefining organizational mission and culture to reflect climate change resiliency. Governing body action in manifesting this belief structure will be reinforced as an integral solution to delivering safe, dependable, affordable, and tasteful water. 

Property / Insurance: 

The effective negotiation of property insurance policies centers on the quality, scope, and integrity of one’s statement of values (SOVs).2 Most SOVs are prepared with a minimum baseline of required data. This approach saves time and allows one to secure insurance terms, but it prevents any meaningful leverage of capacity, rates, and coverage. A heightened time commitment to one’s SOV is necessary because property insurance terms are becoming more contracted and less customized due to climate-induced losses in catastrophe-prone areas. 

A comprehensive SOV comprises geocoding for each location, protection classes, elevation grades, flood zones, wildfire scores, convective storm ratings, and distance to streams, lakes, and rivers. Where applicable, distance to coast is similarly required. Aerial mapping should be included to provide an overview of each location and its surroundings. SOVs should encompass specific construction and occupancy details, including roofing materials and onsite auxiliary water sources, as well as square footage, plot maps, and separation distance per structure. Replacement cost valuations for all insurable assets must be evaluated annually. Locations in high flood zones should include documentation of structures that are wet floodproofed by a minimum of three feet. Locations susceptible to losses from convective storms and wildfires require details on roofing materials and ongoing mitigation measures. 

Once the foregoing information is assembled, the next step is to model your property utilizing an insurance-credible modeling system. It is important the model use a proxy code to reflect the hardened nature of your assets. The proxy code will allow your specialized occupancies and construction codes to be manually inputted into the model. Otherwise, the model will use default codes of general commercial occupancy and unknown construction. That will lead to an incorrect output because the vulnerability of risk will skew high and depict a water utility as an average commercial risk. Such results prevent any meaningful leverage to negotiate capacity, rate, and coverage. 

Business interruption (aka loss of income) also impacts the modeling output for water utilities because it distorts one’s average annual loss (AAL).3 This distortion occurs because the model automatically adds the business interruption limits to a water utility’s already high property limits. It is essential to cap the model’s output of the business interruption limit to a certain percentage such as 25%. This approach is defensible because water utilities4 have a much smaller exposure to loss of income than extra expense, with the latter negligibly impacting the modeling output. Applying a percentage cap to business interruption will lower one’s AAL, which will equate to more favorable insurance terms. 

Taken together, the preceding steps will expand the supply of interested underwriters because the risk-related data presented is impactful and credible. Such differentiation is important for water utilities in catastrophe-prone areas because climate change is exacerbating losses and curbing insurance availability. Although the time and financial investment is significant, these measures, coupled with a defensible loss record, will position water utilities to better control their property insurance purchases. 

Special Commentary / Wildfire: 

Water utilities in wildfire areas must include their wildfire protocol in their insurance submission. Such protocol must be expansive and deliberative because the default rule for the insurance industry is to offer less coverage, lower limits, and more rate in these areas. The following list is actionable and will mitigate wildfire losses. It will also favorably influence your property insurance purchases:5 

▪ Prepare and adopt a Local Hazard Mitigation Plan (pursuant the Federal Disaster Mitigation Act of 2000). You must submit to FEMA for approval to be eligible for Hazard Mitigation Grant Funds. 

▪ Enroll in a mutual aid and assistance program. One example is CalWARN: https://www.calwarn.org/. These programs offer mutual aid when there is a named wildfire. 

▪ Perform annual disaster/emergency response drills. 

▪ Create an Emergency Response Plan and update annually. 

▪ Establish a documented routine to schedule and perform annual brush clearance. Schedule the clearance by a firm date every year and contract to perform the work. 

▪ Strengthen communications and partnerships with local and regional fire authorities. Examples include municipal and county fire departments. Critical to this endeavor is one’s relationship with battalion chiefs and Fire Prevention Bureaus.6 Water utilities should invite battalion chiefs and bureau representatives to visit their major facilities to inspect and record hazards such as chemicals and flammable materials. After inspection, it is incumbent to address and mitigate the identified hazards. 

▪ Implement good housekeeping at critical facilities. Examples include not storing materials or supplies near the buildings. 

▪ Review landscaping choices for defensible space around facilities and use fire resistant landscaping in these areas. Equally important, remove landscaping that presents a fire risk. 

▪ Select building materials for facilities that are fire resistant (i.e., masonry construction with standing seam metal roofing). Pay particular attention to roof eaves (where the walls meet the roof), as this is one of the most vulnerable parts of the building for fire. 

▪ Develop Standard Operating Procedures (SOPs) for locations/areas that are susceptible to fire. An example would be instructions to deploy fire blankets during red flag warnings to envelop grates where woodchip amendments enter a compost facility (highly combustible). This measure will prevent fire embers from penetrating the facility. 

▪ Institute routine procedures and response measures for red flag conditions (i.e., alert staff, maintain higher water levels in storage tanks, etc.). 

▪ Provide backup power for critical water facilities. Stationary generators should be situated in fire-resistant buildings with automatic switchgears (gold standard). If unavailable, invest in portable, trailer-mounted generators to be activated and positioned on-site as needed. 

▪ Develop relationships with one’s local power provider. Examples are Pacific Gas & Electric (PG&E) and Southern California Edison (SCE). These relationships are important because communication will be more forthcoming as to timelines and prioritization of critical circuits when power is restored. 

▪ Establish fill locations and/or facilities to support aerial fire resources. The following link provides details into this initiative: https://69bravo.com/. Discussions should involve county and state agencies. 

▪ Embed a trusted employee at the Incident Command Post. When critical facilities are threatened, contact the employee to convey information to the liaison officer so she is aware of the impact to the endangered facility (i.e., raw sewage dumping into natural resources). The incident commander has authority to deploy or redeploy resources. Fixed wing aircraft can stop the progress of the wildfire. 

This list must be codified and included in one’s insurance submission because underwriters are more inclined to utilize their capacity and credits for insureds with documented protocols to mitigate losses from wildfire. This detail will lead to more advantageous insurance purchases. 

Liability / Insurance: 

Liability from climate change is an emerging exposure for water utilities. The insurance industry is mindful that climate change is intensifying traditional general liability claims arising from water intrusion of storm sewer systems, overflow of impoundments and conveyances, and failure of public improvements to perform as engineered. The outcome is an increase in frequency and severity from these contemplated claims, with higher inflationary costs adding to the problem. 

The concerns associated with climate change are not confined to exacerbated general liability claims. There are reliable signs of systemic contagion involving novel legal theories asserting governing body misfeasance and nonfeasance. Shareholder derivative suits, which are unique to investor-owned and publicly traded water utilities, assert similar allegations. These suits allege monetary damage from falling stock prices because of inadequate governing body policies and decisions related to climate change. Allegations center on the impact these policies and decisions have on damaged infrastructure and revenue loss. The spread of such theories is being carefully monitored and conditioned on macroeconomic factors, governing body inaction, and jury embracement. 

Inverse condemnation7 is a similar climate change concern for water utilities in select states, including California, because it links governing body decisions to the failure of public improvements to protect as intended. Governing body decisions in not planning for alternative water sources is another climate change concern, as is the failure to invest in new treatment technologies to remediate water quality standards from overconsumption, contaminated aquifers, and lowering water tables. 

Underwriters will seek confirmation of the governing body’s commitment to climate change by requesting board minutes and comprehensive annual financial reports (CAFR) to validate investments made in employee training, community outreach, mitigation measures, and ongoing maintenance. There must similarly be a clear link between climate change and one’s Environmental, Social, and Governance (ESG) policies because climate change is inextricably linked to these policies. Equally important, validation of climate change funding must be distinct from one’s capital improvement program because these investments do not always have aligned objectives. 

The aforesaid verification extends to documented governing body training by competent counsel to defend against climate change litigation arising from public improvement decisions (design, placement, funding, and maintenance). Communication with state and federal agencies on available resources to augment internal funding is also prudent due to the vast nature and cost of climate change mitigation. 

An encapsulation of these measures must be compiled and included in one’s insurance submission. Such measures will establish a baseline of action that noticeably surpasses commercial insureds. It will similarly provide a meaningful governing body defense against allegations of misfeasance and nonfeasance. Underwriters will favorably receive this information, which allows water utilities to upend marketplace supply dynamics in their favor. 

Impact / Credit Rating and Bond Issuance: 

Forward risk management8 on climate change will favorably influence a water utility’s credit rating and bond subscription. Credit ratings are influenced because a best-in-class risk transfer solution shifts much of the climate change liability to one’s insurer. This outcome prevents adverse capital events and promotes community goodwill. It also demonstrates strong governance where climate change is top of mind and correlative investments are prioritized to address organizational impact.

Bond subscriptions are also influenced by articulating one’s climate change strategy and linking it back to ESG policies and its favorable impact on insurance purchases. This messaging is most effective by disclosing climate change shock to the insurance industry, especially in catastrophe-prone areas. Discussion should then transition to one’s climate change policies and investments. Specific examples of innovative climate change measures complete the presentation and will influence the reader’s opinion as to the water utility’s distinction with its peers. 

Conclusion: 

The compilation and documentation of risk-related data and actionable climate change policy are essential components of forward risk management since water utilities must demonstrate their risk exceptionalism before underwriters will provide competitive and appropriate insurance terms. Forward risk management also influences one’s credit rating and bond subscriptions because it impacts governing body decisions and inculcates an organizational belief structure. 

Success necessitates action, investment, and discipline. It similarly requires a deliberative plan that is fastidiously followed and cogently articulated. This last element is essential because water utilities must artfully communicate their plan to the insurance industry and other stakeholders. Equally important, in-person meetings between staff and underwriters will provide the vital confidence building measures to achieve advantageous and maintainable insurance terms. This level of interaction must be ongoing, as is the commitment to forward risk management. 

Water utilities that accept climate change as an existential threat will be well positioned to effectively address its sway on the source, quality, cost, and delivery of one’s product.