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Using contractual provisions to protect coral reefs

Contract law facilitates a variety of mechanisms that can help manage risk from climate-related weather events that can devastate coral reefs and associated ecosystems, as well as coastal communities and infrastructure in low-lying areas. Since coral reefs offer substantial protection from hurricane-related storm surges along coastlines where coral reefs occur, mechanisms for reducing the costs associated with this risk are critically important.

An example of the use of contractual provisions to protect coral reefs is the development by The Chancery Lane Project (TCLP)1 of a model contractual clause that allows insured parties (such as governments or NGOs responsible for reef conservation) to receive parametric insurance2 payments to fund rapid response efforts to repair coral reefs following catastrophic weather events (such as hurricanes) based on the magnitude of the event, as verified by an independent, mutually agreed meteorological authority. The clause was created to sit within the provisions of a parametric insurance policy.

Nemo's Clause
The model clause Parametric Insurance Incentives for the Protection of Coral Reefs or "Nemo's Clause" is a free, "open source" clause that can be adapted to the specific circumstances of where it is needed.3 Since parametric insurance policies do not require the insured party to prove the magnitude of the loss following a triggering event (the occurance of a natural disaster meeting a predefined threshold), the costly and time-consuming process of damage assessment and subsequent litigation is avoided. Funds are available more quickly for time-sensitive reef recovery efforts.4

Munich RE, an organization that conducts research in the insurance industry, has stated that an estimated 60% of economic losses resulting from climate-induced natural disasters are uninsured.5 Contractual provisions like the Nemo's Clause, when used in conjunction with parametric insurance policies, can provide an opportunity to narrow this significant protection gap.

Case Study: The Mesoamerican Barrier Reef Policy
Working with its partners, the Nature Conservancy (TNC) fascilitated the creation of the Mesoamerican Barrier Reef Policy, the world's first ever coral reef insurance policy.6 In 2019, the government of the Mexican state of Quintana Roo purchased the policy to protect its 160km portion of the barrier reef on the Yucatan peninsula.7 The policy turned out to be a wise investment. In October of 2020, Hurricane Delta slammed into the coastline of Quintana Roo with 100 knot winds (the triggering threshold for the policy), shattering a broad area of live coral structures.

Following the hurricane, a payout of $800,000 was activated to mobilize staff, dive boats, equipment and supplies to repair the reef—a herculean effort. According to TNC, Reef Brigade teams performed restoration work on Puerto Morelos Reef, Cancun, Nizuc and Isla Mujeres Reef National Park, stabilizing large coral colonies that had been displaced and overturned, as well as rescuing and transplanting live coral fragments, a portion of which are expected grow back into larger colonies.8 A 2020 study by TNC found that in certain locations (e.g., Hawaii), parametric insurance policies could cover damage resulting from high marine temperatures (coral bleaching) and sedimentation from stormwater runoff, in addition to hurricanes.9

1. The Chancery Lane Project (TCLP) is "a collaborative effort of legal professionals from around the world whose vision is a world where every contract enables solutions to climate change." Working together, its members draft "new, practical contractual clauses ready to incorporate into law firm precedents and commercial agreements to deliver climate solutions."

2. According to the The National Association of Insurance Commissioners (NAIC), "The term parametric insurance describes a type of insurance contract that insures a policyholder against the occurrence of a specific event by paying a set amount based on the magnitude of the event, as opposed to the magnitude of the losses in a traditional indemnity policy." .

3. The Chancery Lane Project (TCLP), Parametric Insurance Incentives for the Protection of Coral Reefs (Nemo's Clause).

4. Ibid.

5. The Actuary, Insured losses from natural disasters rise in 2020, Insured losses from natural disasters rise in 2020.

6. (7 December 2020), World's First Coral Reef Insurance Policy Triggered by Hurricane Delta.

7. Ibid.

8. TCLP, Supra note 3.

9., Insurance for Natural Infrastructure: Assessing the feasibility of insuring coral reefs in Florida and Hawai'i.

Comments and suggestions for improving the utility of this resource are greatly appreciated and can be submitted to me via email.

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