Climate Change and Construction Insurance: From Hurricane Katrina to Haifa Bay

Aug 28, 2024

By: Omri Nissany, Civil Engineer

Does climate change have dramatic implications for the Israeli construction industry, and what could this mean when viewed from a construction insurance perspective? We will briefly discuss this in the text below, but first let's return to one of the dramatic events that sparked the revolution.

August 2005. Hurricane Katrina hits the US and is recorded as one of the most severe tropical storms to hit North America. The extreme event storms (literally) through the state of Florida in the southeastern US, with winds of 280 km/h (!), with its main victim being the city of New Orleans in the neighboring state of Louisiana.

To this day, "Katrina" is considered the most expensive natural disaster in US history, with a price tag of approximately $125 billion. It is noted as a more expensive insurance event than even the attacks on the Twin Towers. Of course, in addition to the enormous damage to property, the storm claimed the lives of more than 1,800 people, making it one of the deadliest storms in American history.

By: Omri Nissany, Civil Engineer

Does climate change have dramatic implications for the Israeli construction industry, and what could this mean when viewed from a construction insurance perspective? We will briefly discuss this in the text below, but first let's return to one of the dramatic events that sparked the revolution.

August 2005. Hurricane Katrina hits the US and is recorded as one of the most severe tropical storms to hit North America. The extreme event storms (literally) through the state of Florida in the southeastern US, with winds of 280 km/h (!), with its main victim being the city of New Orleans in the neighboring state of Louisiana.

To this day, "Katrina" is considered the most expensive natural disaster in US history, with a price tag of approximately $125 billion. It is noted as a more expensive insurance event than even the attacks on the Twin Towers. Of course, in addition to the enormous damage to property, the storm claimed the lives of more than 1,800 people, making it one of the deadliest storms in American history.

The change in construction methods following the disaster

The devastating effects of Katrina forced the city of New Orleans to rethink its approach to residential construction in flood-prone areas. New Orleans established a dedicated fund, Make It Right, through which it developed, together with architects and urban planners, a series of elevated housing designs specifically for the Lower Ninth Ward (one of the areas hardest hit by the hurricane). The construction included, for example:

· Foundations are raised approximately 3 meters above the ground.

· Concrete pier foundations or steel frame structures to raise the main living areas.

· Ground levels with breakaway walls to deal with flooding without damaging the main structure.

· Ramps or stairs that lead to the first entrance on the raised entrance floor.

These examples, which are of course only a small part of the many, are intended to create a new construction method that will cope with natural disasters, including storms and floods, the frequency of which is increasing as a result of climate change.

It is interesting to note that the success of elevated designs influenced construction methods not only in New Orleans but in other coastal areas prone to flooding throughout the United States and even the world.

The devastating effects of Katrina forced the city of New Orleans to rethink its approach to residential construction in flood-prone areas. New Orleans established a dedicated fund, Make It Right, through which it developed, together with architects and urban planners, a series of elevated housing designs specifically for the Lower Ninth Ward (one of the areas hardest hit by the hurricane). The construction included, for example:

· Foundations are raised approximately 3 meters above the ground.

· Concrete pier foundations or steel frame structures to raise the main living areas.

· Ground levels with breakaway walls to deal with flooding without damaging the main structure.

· Ramps or stairs that lead to the first entrance on the raised entrance floor.

These examples, which are of course only a small part of the many, are intended to create a new construction method that will cope with natural disasters, including storms and floods, the frequency of which is increasing as a result of climate change.

It is interesting to note that the success of elevated designs influenced construction methods not only in New Orleans but in other coastal areas prone to flooding throughout the United States and even the world.

Back to the Holy Land and to our day. The Israeli Planning Administration recently published a mapping of the various climatic trends in the country, and the risks inherent in them. The Planning Administration predicts (as expected) extreme increases in temperature in Israel, including, for example, heatstrokes that have struck Tel Aviv as a result of the city's construction methods.

The Planning Administration warns in a report about the rising water level in Haifa Bay to the point of the sea invading the Kishon River. In the Galilee, on the other hand, the data actually speaks of a lack of future precipitation that will require replanning of irrigation of agricultural areas.

The Planning Administration presented only the trends and risks in the document, but did not provide solutions or operational recommendations. In other words, for now, there is no change in the national outline plans, even though there is a real concern that existing construction methods are not suitable for the climate changes that are affecting us.

Will climate change reach us too?

Haifa: Climate danger for a 100,000 apartment project?

Let's take the example of extreme rainfall events combined with rising water levels in the Gush Dan area. These dramatic events – some of which we have already been exposed to recently – can cause enormous damage to infrastructure and structures, including, of course, a real risk to human life.

If we analyze the report's statements about Haifa Bay, then a significant rise in sea level and intrusion into the Kishon River could cause dangerous flooding in areas such as Nahal Gerura or Kiryat Bialik. Is the Haifa Municipality aware of this situation while simultaneously planning the development of approximately 100,000 housing units in the Kishon area, with the removal of the petrochemical industry from the city and the transformation of the refinery area into a residential district?

Additional master plans that need to take this type of climate change into account are the plans that concern the drainage basins of the Hadera and Taninim streams, which threaten Hadera and the northern Sharon, and even the collapse of coastal cliffs that will lead to flooding of tributaries of the Yarkon in the areas of Kfar Saba and Ra'anana. In the southern cities, the danger from climate change is the desertification phenomenon that Be'er Sheva has been dealing with for years.

Haifa: Climate danger for a 100,000 apartment project?

Climate change is affecting construction methods and construction insurance. Several years ago, the global risk management brokerage firm Marsh McLennan published a report with a global outlook for construction that dealt at length with climate change and its impact on the industry. The international agency's research reveals some interesting data. For example:

· Extreme weather events (such as blizzards or floods) cause 45% of delays at construction sites worldwide.

· In projects carried out by the US Air Force, it was found that the productivity of construction workers decreased by approximately 57% (!) with each increase in temperature above 28 degrees Celsius.

The agency explicitly recommended to those in the field: " To maintain a competitive advantage and remain able to operate under these conditions, contractors are advised to work to understand these risks, characterize and address them, and improve resilience ."

The agency further emphasizes that considerations surrounding the quality of foundations, separation of structures, elevations, flammable materials, as well as wind and heat insulation, must not only deal with today's environment but also with " the potential environment that the future has to offer."

Not a new or local phenomenon at all.

What does this mean for construction insurance?

Climate change has a significant impact on contractor insurance, both due to the nature of the risks to which contractors are exposed and in terms of the insurance industry's approach to insurance coverage for these risks.

In fact, since 2019, there has been a change in perception among reinsurers abroad regarding construction insurance policies as a result of a desire to reduce losses due to extreme climate events (of which Hurricane Katrina was just one).

Indeed, in the near future we are expected to see more and more reference to natural disasters and climate change in policies issued to the construction industry, from contractor work insurance to ongoing policies in the Claims Made format (date of filing a claim), such as professional liability insurance or product liability insurance.

What does this mean for construction insurance?

Insurance companies are rightly concerned about an increase in claims resulting from construction site incidents caused by natural disasters resulting from climate change, or in other words – the almost automatic coverage they are obligated to have in the event of natural damage. This applies to both compensation and expensive litigation services.

Extreme events at construction sites put insurance companies at risk due to significant delays in schedules, construction freezes (a situation of an empty and dangerous site), disruptions in the supply chain, and more.

Similarly, insurance companies can certainly take into account situations of changes in standards and regulations regarding construction methods by the government out of the need to adapt existing construction methods to new climate risks (as was done in New Orleans, for example). The response can be expressed in channels such as:

Higher premiums and increased deductibles: As natural disasters such as floods, fires, hurricanes, and extreme weather events become more frequent and severe, insurers may seek to increase premiums for contractor work insurance to account for the higher risk resulting from natural disaster risks. Of course, this includes not only premiums but also deductible rates for event controls.

· Stricter underwriting standards : It is quite reasonable to assume that insurance companies will seek to implement stricter underwriting standards that require contractors to also demonstrate preparedness plans against climate disasters.

· Preventing expansions and inclusion of exceptions to coverage : As the external risk increases, so do the requirements for exceptions, limitations, restrictions, etc., especially regarding coverage of damages directly related to climate damage events.

The concern of insurance companies

In conclusion,

From Hurricane Katrina to rising sea levels in Haifa, climate change is not only changing our environment. This is while affecting many dramatic aspects of the construction industry in general and the construction insurance industry in particular. Familiarity with these changes must be taken into account when contracting a contractor's work insurance policy or product liability and product liability insurance. Starting from the planning stage, of course.

There is also reason for optimism . The strict approach of insurance companies may lead to the use of green materials, increasing the scope of green construction, consideration of environmental elements, creating healthy and good buildings for their occupants, and more. If you like, this is not a fairy tale, and the construction industry may be a positive factor in dealing with the changing ecology and global warming.