Cheating Emissions Tests

Volkswagen, the German Car Giant has admitted cheating emissions tests in the U. S. According to the Environmental Protection Agency (EPA), some cars being sold in America had devices in diesel engines that could detect when they were being tested. This therefore changed the performance accordingly to improve results.

VW has had a major push to sell diesel cars in the U. S..  This was backed by a huge marketing campaign trumpeting its cars’ low emissions. The EPA’s findings cover 482,000 cars in the U. S. only. This included the VW manufactured Audi A3 and the VW brands Jetta, Beetle, Golf and Passat. However VW has admitted that about 11 million cars worldwide are fitted with the so-called “defect device”.

Full details of how it worked are sketchy. The EPA has said that the engines had computer software that could sense test scenarios by monitoring speed, engine operation, air pressure and even the position of the steering wheel.

In addition the cars were operating under controlled laboratory conditions. This involved putting them on a stationary test rig.  The device appears to have put the vehicle into a sort of safety mode.  The engine then ran below normal power and performance. Once on the road, the engine switched from this test mode. The result? The engines as a result emitted nitrogen oxide pollutants up to 40 times above what is allowed in the U. S.

With VW recalling almost 500, 000 cars in the U. S. alone, it has set aside €6.5 billion to cover costs. However that is unlikely to be the end of the financial impact. The EPA has the power to fine a company up to $37, 500 for each vehicle that breaches standards – a maximum fine of about $18 bn.

At this time, only cars in the U. S. named by the EPA are being recalled.  Owners elsewhere need take no action. About 11 million VW diesel cars are potentially affected by this cheating.  Of this 2.8 million cars are in Germany itself.  Further costly recalls and refits are possible.

California’s Air Resources Board is now looking into other manufacturer’s testing results. Ford, BMW and Renault said they did not use  cheating”defeat devices”.   Other firms had yet to respond or simply stated they had complied with the laws.

A legal source says it is unlikely that the company will be able to turn for product liability or product recall insurance to cover losses related to the scandal. Insurance industry insiders say Directors and Officers Liability insurance (D & O) are likely to see the biggest damage claims.

It stems from an unfolding scandal around Volkswagen’s cheating of U. S. emissions tests.  This situation has therefore prompted the German car maker’s chief to resign.

D & O insurance is taken out by companies to cover claims against senior executives for the decisions and actions they take as part of their management duties. While insurers and brokers as per industry custom declined to give details about Volkswagen specifically, they said a German blue chip manufacturer of its size would typically buy around 500 million euros ($560 million) in D & O cover each year.

That money would be used to pay claims against VW executives from shareholders. There has been a 30 percent drop in VW’s share price, as well as legal expenses.  The the cost would typically be spread among more than a dozen insurers and reinsurers, industry officials said.

Volkswagen would thus have to foot the bill once the limit is reached on the D and O insurance.  This does not normally cover fines and penalties.

Insurers would be off the hook for costs related to any recall of the cars affected. Any cover would likely be negated by their own knowledge or cause, as it is just for accidental or negligent damage.

As a result, the implications for D and O insurers are potentially wide:

VW and its executives can be expected to face criminal and/or regulatory investigations for cheating in the U. S., Europe and in other jurisdictions.

VW and its executives can be expected to face myriad civil claims globally.  This would be class action claims by investors alleging that a failure to disclose the cheating emissions tests led investors to buy or to hold onto VW shares.

Companies that VW may have used to design, manufacture and/or install the devices behind the alleged deception, and their directors, may also find that they are the subject of similar investigations and civil claims.

California Wildfires

Warming temperatures and a historic drought made Northern California wildfires burn faster and spread.  This furthermore made the fires harder to fight. The bigger culprit was something under human control – forest mismanagement.

There are five times as many trees per acre in this area today as there were 150 years ago.  The underbrush is twice as thick. This is according to a wild land resource scientist at the University of California at Berkley. If smaller wildfires had been allowed to burn 20 years ago, the forest would not have grown so dense.   Today’s flames would not have had the fuel to reach the canopy. These flames consume the treetops.  They send embers flying, spreading the blaze.

The Valley Fire demonstrates what can happen when public and private landowners fail to manage their property. When people neglect to thin trees wildfires will continue.   Thinning reduces combustible underbrush.

The U. S. Forest Service, which is in charge of most fire management also has a financial incentive to put out all wildfires.  The cost of clearing the underbrush and managing small fires comes from the individual forests’ budgets.  National “fire suppression” is funded by Congress.

In 2014, the federal government spent $3 billion putting out fires – five times as much as 20 years ago.

There are many reasons why people choose to live in California’s Modjeska Canyon.

Nestled against the mountains and adjacent to the Cleveland National Forest, the area has abundant wildlife. It has access to nature, yet is just a 20 minute drive from larger Orange County communities.

The things that make Modjeska appealing have also made homes there and in other wildfire-prone parts of California increasingly difficult to insure.

In the last decade, major wildfires in California and losses in the billions of dollars have led some big insurance companies to stop writing homeowners policies for many of the nearly two million household that are considered at high risk of fire. Allstate Corp., for instance, in 2007 stopped writing new homeowners policies in the Golden State altogether. Others, like Farmers Insurance and State Farm, have become more discerning about the areas the will insure homes.

Californians who can’t find insurance in the traditional market can purchase limited fire coverage from a state-established consortium of insurance companies. However, homeowners who have been denied coverage by standard insurers are not flocking to the state plan.  It is both more costly and far less comprehensive than traditional homeowners’ policies. Rather, they are increasingly signing up for speciality policies. These are provided by companies best known for insuring unusual risks such as major construction projects.  Such policies are still expensive but offer more coverage than the state plan.

Bonnie Smith, a landscape designer who has lived in Modjeska Canyon since 1981, said the availability of traditional homeowners insurance plans tightened after a 2007 fire destroyed several homes in the canyon.

Allstate cancelled Smith’s $1400-a-year homeowners policy in 2012. Smith considers herself lucky that she was able to find a $2100 policy with Lexington Insurance.

Thousands of Californians in hilly, forested areas have also signed up for such policies in recent years with companies like Lexington, Lloyds of London, Nationwide Mutual Insurance Co., Scottsdale Insurance Company and Foremost. So-called surplus line insurers wrote 23, 120 homeowners policies in California in 2014. This represents a 91 percent increase from the 12, 097.  These were written just two years earlier, according to the Surplus Line Association of California.

Surplus Line insurance is meant for higher risks.  Insurance brokers must show that they cannot get coverage for their clients in the standard market before they can get a specialty policy.

The companies that offer those policies must be approved by the California Department of Insurance. However their rates are not regulated like those of traditional insurers.

Part of the attraction of speciality policies is they offer more coverage than the state-sponsored program, known as the California FAIR plan. The FAIR plan offers a basic plan that covers fire.  It will only insure up to $1.5 million for a structure and its contents. That means people have to look elsewhere for other coverage that would normally be included in a standard homeowner’s policy, such as liability for accidents or injury.

The number of policies under the FAIR plan has been flat for the last two years. Nearly 80 percent of the FAIR plan’s 126, 000 policies are in urban areas with no wildfire exposure.