Climate change and construction insurance: From Hurricane Katrina to Haifa Bay
By Omry Nisany, Civil Engineer
Is climate change having dramatic implications on the construction sector in Israel and how significant could its impact be on construction insurance? We will answer this question later on, but we will firstly recall one of the most dramatic events that triggered the upheaval.
In August 2005, Hurricane Katrina pounded the U.S.A., and it will go down in history as one of the most powerful tropical cyclones to affect North America ever. The storm moved over the State of Florida and parts of south-east America with winds of up to 280 km/h (!), mainly affecting the city of New Orleans in Louisiana.
Hurricane Katarina is the costliest natural catastrophe in the history of the U.S.A. to date, with a price tag of around NIS 125 billion. It turned out to be an even more costly insured event than the events of 9/11. Other than extensive property damage, the storm took the lives of more than 1,800 people, making it one of the most fatal storms in the history of the U.S.A.
Changes in construction methods following the catastrophe
The cataclysmic impact of Katrina sent the New Orleans Municipality back to the drawing board in the way it approaches residential construction in flood prone areas. The city of New Orleans established a dedicated fund called Make It Right which developed, in conjunction with various architects and town planners, a series of plans for constructing houses on stilts, especially in the lower ninth district (one of the worst hit areas in the hurricane) which included construction elements such as:
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Foundations raised by up to three metres above the ground.
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Concrete pier foundations or steel frame structures to elevate the main residential areas.
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Ground floors with flood walls to prevent flooding without compromising the main structure.
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Ramps or stairs leading to the main entrance on the raised first floor.
These are only a few examples of steps taken to generate new construction methods to cope with natural catastrophes, including flooding and windstorm, both of which are becoming more frequent due to climate change.
It is interesting to note that the success of the raised planning elements has had an impact on construction methods not only in New Orleans but also in other flood prone coastal areas in the U.S.A. and elsewhere in the world.
Will climate change also affect us in Israel?
Coming back to the Holy Land and the present time…The Israeli Planning Administration recently mapped-out various climatic trends in Israel and their inherent risks. The Planning Administration expects substantial temperature extremes in Israel, including severe heat waves in the Tel Aviv area, the effects of which will be exacerbated by the construction method in the city.
The Planning Administration warns in its report of a surge in water levels in the Haifa Bay to the point of seawater breaching the course of the Kishon River. In the Galilee, on the other hand, studies point to a decline in future precipitation levels which will necessitate replanning irrigation methods in agricultural plots.
The Planning Administration merely outlined the trends and the risks in their report, but fell short of providing operative solutions or recommendations. In other words, there have been no changes to national outline plans, despite a genuine concern that current construction methods will be inadequate to cope with the climatic changes we are experiencing.
Haifa: Climatic hazard to a project of 100,000 apartments?
Let us look at events involving extreme rainfall with increases in water levels in the greater Tel Aviv area. These dramatic events, which we have already been exposed to in the last few years, can cause colossal damage to infrastructures and buildings, as well as bodily injury and death.
If we analyse the content of the report concerning the Haifa Bay, a substantial surge in water levels and a breach of the route of the Kishon could cause dangerous flooding in areas such as Nahal Gerora or Kiryat Bialik. Is the Haifa Municipality aware of this situation when it is planning to construct 100,000 apartments in the Kishon area, where there is also a potential risk of petrochemical and industrial spillages, including from the Oil Refineries plant, near a new residential neighbourhood?
Other outline plans that need to consider climate change of this type relate to the drainage basins of Nahal Hadera and Nahal Taninim, both of which pose a threat to the city of Hadera and northern areas of the Sharon plain, the risk of coastal cliff collapse, and flooding of the tributaries of the Yarkon River in Kfar Saba and Ra'anana, both of which are major population centres. In towns and cities in the south of Israel the climate change hazard arises from the phenomenon of desertification that Beersheva has been experiencing for some years i.e. less rainfall and increasing temperatures.
It’s certainly not a new or localised phenomenon
Climate change impacts construction methods and construction insurance. For several years, the international broker and risk management firm Marsh McLennan has been publishing a periodic report with global forecasts for construction and details of how climate change impacts various aspects of the industry. Research conducted by Marsh reveals some noteworthy data, such as:
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Extreme weather events (such as snowstorms or floods) lead to delays of up to 45% in construction sites around the world.
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In projects conducted by the United States Air Force, it was found that for every 1ºC rise in temperature above 28ºC, construction worker productivity can decrease by as much as 57%!
The broker makes an important recommendation: “In order maintain a competitive edge and continue to be able to operate in these conditions, contractors would be wise to internalise these risks, classify and manage with to improve resilience.”
They also emphasise that decisions concerning the quality of foundations, building separations, elevations, combustible materials, as well as wind and heat insulation, not only need to adequately withstand the current environment but also “potential future environmental conditions.”
What is the significance of climate change on the construction insurance industry?
Climate change has had a major impact on Contractors All Risks insurance, both due to the nature of the risks to which contractors are exposed as well as due to the way they are underwritten by insurance companies.
In fact, since 2019 global reinsurers have been rethinking their entire approach to Contractors All Risks insurance as part of an ongoing attempt by the industry to mitigate losses arising from extreme weather events (of which Hurricane Katrina was only one).
Therefore, in the very near future we can expect to see more attention paid to natural catastrophes and climate change when insurers write policies covering the construction industry, starting from Contractors All Risks policies to various claims-made policies such as Professional Indemnity and Products Liability.
The concern of the insurance companies
Insurance companies are concerned, rightfully so, about natural catastrophe claims under Contractors All Risks which can be attributed to climate change – risks they almost automatic cover. This is this case concerning indemnity payments for damage, as well as costly legal costs.
Extreme events at construction sites put the insurance companies at further risk due to significant delays in timetables or suspension of the construction project (a hazardous situation in which the site is unoccupied), interruptions in the supply chain and more.
The insurance companies may well consider possible changes to rules and regulations concerning construction methods imposed by the government owing to the need to adapt current construction methods to new climatic conditions (as they did in New Orleans for example), and their response to these situation may manifest in any one of various ways:
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Higher premiums and increased deductibles: The higher the frequency and severity of natural catastrophes such as flooding, fire, storms, hurricanes and other weather related events, the higher the premiums that will be required for Contractors All Risks insurance in order to more adequately reflect increased risks of natural perils claims. Deductibles will also increase in parallel.
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More stringent underwriting standards: It is fair to assume that insurers will adopt more stringent underwriting standards as time goes on, including demanding that contractors provide clear contingency plans for natural perils events.
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Restricting the scope of cover and applying new exclusions to policies: As inherent risk levels increase, there is more demand to exclude or restrict certain covers, especially in the case of direct losses arising from weather related events.
To conclude:
In New Orleans, Haifa or anywhere else, climate change is not only affecting our natural environment, but also various aspects of the construction industry in general and construction insurance in particular. Familiarisation with these changes needs to be taken into account when arranging Contractors All Risks, Professional Indemnity or Products Liability insurance.
Finally, there is still room for optimism: The stringent approach of the insurance companies could be a catalyst to the introduction of more environmentally friendly construction materials, expanding the scope of green construction, paying attention to environmental elements, creating more healthy buildings for their occupants and more. It’s not beyond the realm of imagination to anticipate that the insurance industry could make a positive contribution to the way in which we deal with climate change and global warming.