Part three of an eight-part series featuring legal insights from Queen’s Law scholars and practitioners 

Insurance industry pivots to address large-scale climate risks

Given the increased frequency and severity of natural disasters such as floods, hurricanes, forest fires, and drought, Professor Erik Knutsen, an insurance law expert, believes insurers must adjust and adapt to the increased risks to people and assets associated with climate change. “Insurers will want to look at their methodology and underwriting practices in relation to the coverage they provide for large-scale catastrophic losses. A key question is how to assess risk and build a different product that’s responsive to the need for climate risk protection and yet financially sound?”

The industry must pivot, Knutsen says, because not much of our infrastructure was designed to handle such ubiquitous climate swings. “I expect insurance coverage to become – at least in the short term – more expensive due to the volatility and long-term changes in the frequency and severity of these events.”

New and more extensive climate risks also present insurers with a business opportunity. “The insurance industry is creative and resilient,” Knutsen says. “It doesn’t run from risk; it relies on it.”

A key trend in the U.S. is a rise in climate change litigation. “Young people are more ready to sue for climate-related claims, and advocates are pursuing group-based litigation to represent consumers such as people losing their homes in events not covered by their policies but related to climate change,” he explains. “U.S. insurance trends always impact Canada, though we tend to lag behind. We have a loser-pays litigation system that makes it harder for consumers to sue governments or companies about these issues.”

Knutsen does foresee some conscribed potential role for government in helping to insure people against such large-scale catastrophic losses. Proposals have included the government acting as insurer to fill coverage gaps or levying a tax on every insurance policy related to climate change risks, but Knutsen believes there’s a better, more efficient alternative: “Governments could act as re-insurers, being the backstop to insurers only when certain societally significant losses surpass a certain very high value dollar amount and those losses are not what a reasonable insurer could expect to shoulder.”

Currently, the unpredictability when generic insurance policies are applied to real-life losses from floods and other large-scale climate events can result in unfairness and huge expenses for consumers who are victims. Based on his research, Knutsen recommends reforms to insurance policy interpretation principles, so that disputes reach fairer, more predictable resolutions.

He maintains that Canadian and U.S. courts often take a literalist approach where the wording of an insurance policy meant to cover floods, for example, can override its intent, denying victims any compensation in ways they might not expect. “If the policy’s wording is confusing, don’t stick the policyholder with the problem,” he says. “It would be horrifying if we took such a major social loss issue as climate change and relegated it to needing a dictionary to solve. Instead, courts should be taking an integrated approach that considers a policy’s context and intent. That could lead insurers to develop fairer, clearer, and more efficient products that more directly communicate to policyholders which risks are insured and which are not.”

Professor Erik Knutsen, an insurance law expert, has received grants for projects on insurance policy interpretation principles from both the Social Sciences and Humanities Research Council and the Canadian Foundation for Legal Research. 

Watch for the next stories in this series featuring our experts’ opinions on four other areas – environmental, financial, Indigenous rights, and the energy sector – and their concluding remarks. 

Read earlier parts of this series:

“Constitutional authority to address humanity’s existential threat,” featuring Professors Cherie Metcalf and Nicolas Lamp. 

"Trade measures can help countries strategize about emission reduction," featuring Professor Nicolas Lamp.

By Mark Witten