June 4, 2014

Insurer Sues Chicago for Failure to Prevent Damages From Climate Change

Environmental Alert

UPDATE: Farmers Insurance has dropped its suit against Chicago and other area municipalities that had sought damages for claims it paid as a result of damage caused by flooded sewer systems overwhelmed by an extreme weather event in 2013. Farmers has not given any particular reason for withdrawing its suit; however, a press release issued by the company stated “We believe our lawsuit brought important issues to the attention of the respective cities and counties, and that our policyholders' interests will be protected by the local governments going forward.” Regardless of this turn of events, the drivers behind the lawsuit remain: extreme weather caused by climate change – rain, drought, heat, etc. – will continue to cause damage in municipalities struggling to implement climate adaptation policies, and the insurance industry will continue to face mounting claims based on such events. Given the increasingly common occurrence of extreme weather, the question of who ultimately pays for the cost of cleanups will continue to be tested.

Posted May 20, 2014:
On April 16, 2014, Illinois Famer's Insurance Co. filed a class action lawsuit against the City of Chicago and surrounding municipalities claiming damages relating to the failure by the municipalities to adequately prevent flooding resulting from climate change. This suit could spell a shift not only in the insurance market, but could prompt municipalities to act more quickly to adapt to climate change impacts through infrastructure improvements and zoning changes.

Over April 17 and 18, 2013, heavy rainfall overwhelmed stormwater and sanitary water sewers, causing Farmer's insured homeowners to be inundated by sewer water. Farmer's paid claims to policy holders ranging from home damage and evacuation costs to lost income and reduced property values. Farmer's suit alleges that the City's 2008 Chicago Climate Action Plan evidences that Chicago and other municipalities were aware that climate change causes heavier rainfall events, yet they failed to adequately prepare in the days leading up to the predicted heavy rainfall by not maximizing storage and transportation capacity within their sewer systems. The suit also contends that local water districts knew that water reclamation systems were defective and had issued plans that disclosed such defects – but never appropriately mitigated such problems.

Municipalities may react to this case in multiple ways. First, they may be spurred to undertake construction projects to overhaul aging and/or inadequate infrastructure, thus making progress towards climate change adaptation. However, the severe budgetary constraints facing most municipalities means the likelihood of commencing costly municipally funded infrastructure projects is low. Similarly, municipalities may seek to prevent future vulnerability by amending zoning ordinances to prevent development that is particularly vulnerable to climate change impacts. Another option is for municipalities to shift the blame for failing infrastructure to the engineering firms and professionals who designed them.

However, yet another (and unfortunate) option might arise, based on the legal consequences that Chicago faces for officially recognizing climate change as a threat, adopting a Climate Action Plan and allegedly not implementing it. Municipalities may simply forego doing any climate change study and planning so as to avoid later legal claims. Of course, such inaction could one day lead to claims being pursued against municipalities.

Whatever the outcome may be, this case ultimately raises timely issues regarding both the insurance industry's and municipalities' duties related to adaptation and coping with climate change impacts and damage.

For more information on this matter, contact Jeff Talbert of Preti Flaherty's Environmental Litigation Group at 207.791.3000.

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