Volume 6, Issue 3 - Catastrophic Risks: Prevention, Compensation, and Recovery

First explored are the nature of disasters – societal and individual, natural and manmade – and the place of both tort law and private insurance in providing compensation for disaster victims. Following brief discussions of disaster prevention and the sorts of private and public harms that are caused by disasters, five possible roles of government with respect to individual victim compensation are examined: 1) Facilitating the Receipt of Private Compensation for the Consequences of a Disaster; 2) Assuring Insurance Availability for Disaster Victims When the Market Fails to Do So; 3) Providing Victim Compensation Either When Government Should Have Prevented the Disaster or When It Is the Sort of Disaster We Aspire to Have Government Prevent; 4) Providing Victim Compensation as an Alternative to Tort Recovery; and 5) Providing Victim Assistance to Overwhelmed Communities For Reasons of Altruism and National Solidarity. Finally, brief attention is given to the type and level of victim compensation that government might assure.

Disasters are low-probability situations with high potential losses. Shortly before and during some disasters, government use of private property may reduce losses to others that strongly outweigh the costs imposed on the property owner, implying significant net benefits. Coercive takings or attempts to contract at the time of the emergency will frequently be defeated by transactions costs. We propose a policy tool to realize the available net benefits: options contracts for contingent takings. Such contracts between the government and private parties allow the government to take property in the event of a low-probability event that would make the property much more valuable in government hands. In exchange for such use, the property owner is compensated, in part up front and in part when the option is exercised. Setting the exercise payment equal to the cost of losses promotes efficiency in both risk spreading and the incentives for exercise. Options contracts of this form will be valuable in a range of settings, from improving disaster response by guaranteeing a flow of needed supplies, to reducing potential damages by diverting floodwaters to low-value lands, or even to helping ensure the survival of some endangered species. The moral hazard and hold-out problems that may afflict such contracts can be controlled.

When catastrophic outcomes are possible, it makes sense to take precautions against the worst-case scenarios — the Catastrophic Harm Precautionary Principle. This principle is based on three foundations: an emphasis on people’s occasional failure to appreciate the expected value of truly catastrophic losses; a recognition that political actors may engage in unjustifiable delay when the costs of precautions would be incurred immediately and when the benefits would not be enjoyed until the distant future; and an understanding of the distinction between risk and uncertainty. The normative arguments are illustrated throughout with reference to the problem of climate change; other applications include avian flu, genetic modification of food, protection of endangered species, and terrorism.

When the city of New Orleans was flooded after Hurricane Katrina in August of 2005, coverage of the beleaguered city was soon dominated by horrifying tales of violent crime. These stories, carried in all the major media, and verified by top officials of the City, turned out to be completely false. The major emphasis on violent crime, however, had immediate and dire consequences. Rescuers and victims of the flood lost precious time hunkering down instead of rescuing themselves or others. Escapees from the city faced stigma and sometimes armed resistance to their seeking refuge. Politicians responsible for one of the worst failures of government in American history found crucial political traction by railing against lawlessness. Now a year later, the most significant long term consequences of this “false memory” of criminal violence in the wake of the flood, may be in shaping America’s “risk imaginary.” For a long time American personal and governmental attitudes toward risk were shaped by the work accident as a model of modern risk and insurance as an exemplary tool of risk governance. In recent decades, those models and the images, narratives, and discourses supporting them, have been replaced by ominous images of grave technological disasters and fearsome violent crimes. These new figures haunting our risk imaginary have undercut support for broad measures of social risk spreading and encouraged privatization, isolation, and heavy reliance on police and prisons as tools of government. Now, the false memory of post-Katrina violence may reinforce those tendencies by condensing the disaster and crime fears of recent decades into a memorable and racially coded image of terror.

Following a major terrorist attack, private providers of terrorism insurance often cease providing this coverage. As a result, the governments in developed countries around the world now provide some form of support to their terrorism insurance markets. This paper considers several questions regarding the private market failure and the resulting government intervention: Why do private markets for terrorism insurance fail? Given the failure, what is the optimal form of government intervention? And, what would be the likely economic ramifications if a government chose not to intervene? The paper’s discussion of these questions focuses on the 9/11 attacks on the United States, and on the 2002 Terrorism Risk Insurance Act (TRIA) and its 2005 extension (TRIAE). The paper argues that government support for the terrorism insurance market should be priced based on the expected cost of the support provided. The paper also argues that such support should generally be temporary, with a sunset as the private market recovers. A specific proposal is that the government intervention take the form of loans to the affected insurance companies, similar to the manner that central banks provide loans to banks facing temporary liquidity crises.

This article examines risk and distributional fairness as they relate the Hurricane Katrina disaster and climate change. To be sure, these catastrophes are different. Katrina was regional, not global, and was fast-acting. Climate change is global, slow-moving and will come in multiple stages in a series of sudden and incremental changes throughout the world. Yet both present challenges for policy makers concerned with managing risk and protecting the most vulnerable members of society. The issues of risk management and social vulnerability are both tied to geography, an additional theme that helps shed light on the interconnection between the Katrina tragedy and climate change. An overly narrow focus on cost-benefit studies kept the United States from adequately appreciating the destructive force of Gulf hurricanes and the vulnerability of its levees and land-use policies. This same attention to cost-benefit analysis is similarly distorting the threats that global warming now poses. A lack of attention to America's social safety net also insured that the destruction of Hurricane Katrina would place an enormously disproportionate burden on minorities, women, the poor, and other vulnerable groups. Today's predictions of climate disruption envision a similarly disproportionate burden on the world's poor, women, and people of color. Yet without aggressive efforts to strengthen the physical and economic infrastructures of developing countries, particularly those in Africa and southern Asia, the world's weakest (and least culpable) peoples will bear the brunt of global catastrophe. This article argues that the same ideas now recommended for New Orleans—a more precautionary risk-management approach and a strengthening of the social safety net—are the same prescriptions for the international community as it faces the prospects of global warming. In keeping with the theme of geography, the article includes a series of thought-provoking, full-color maps to suggest that what we see is unavoidably linked to how we see it.

Why do heat waves, which annually cause far more death, on average, than any other natural disaster, provoke little public reaction? Heat waves will become more common place and heat wave deaths more frequent as temperatures increase from climate change. Models predict that annual heat wave deaths in the U.S. by 2050 will easily surpass the death toll from Hurricane Katrina. This Article analyzes extensive data about heat waves, evaluates why heat waves seem not to raise widespread public concern and suggests that mechanisms already exist -- though widely ignored -- to mitigate the worst effects of excess heat. These mechanisms include careful emergency planning, the provision of air conditioning availability and funding, and larger structural changes in the delivery of electricity, energy efficiency and land use planning. Yet the nature of the victims of heat waves combined with cognitive mechanisms that cause individuals to systematically underestimate risk from heat waves and the fact that heat waves cause little property damage all contribute to a failure by many jurisdictions to adopt policies and programs that can mitigate heat wave deaths.