Dispute over reporting stations leads to weather insurance lawsuit

by Artemis on May 15, 2012

An interesting lawsuit is taking place in the U.S. between Mountain Creek Resort Inc., a ski resort operator, and Everest Indemnity Insurance Company, who provided Mountain Creek with weather insurance cover to protect them against a lack of snowfall during the peak ski season. It is rather strange though as the complaint seems to centre on a dispute over which reporting station was used to measure the weather conditions, something that should surely be defined upfront in an insurance or weather derivative contract.

Being the first case of its kind, as far as we are aware, the lawsuit is beginning to attract some coverage in ski industry news sources and on social media. Here’s the details as we understand them.

Mountain Creek bought a weather policy from Everest Indemnity which was designed to provide cover against warmer than normal weather during a 16 day period before Christmas which is a key snow making period for the resort. The weather cover stipulated that Everest would only have to make a payout to Mountain Creek if during the 16-day period from 12th-27th December 2011 the average temperature exceeded 33 degrees Fahrenheit for 11 days of the period. Every day in excess of 10 days where the average temperature exceeded the trigger point of 33F would make Everest liable to pay Mountain Creek $284,970 up to the policy limit of $1,710,000.

Simple enough you’d think and hard to argue when it is based on the measurement of temperatures, something which is an exact science. Unfortunately some confusion over the location of the weather reporting stations seems to be the cause of this lawsuit.

Mountain Creek Resort asserts that the average temperature exceeded the trigger point of 33F for all 16 days of the covered period, making it eligible to claim the full policy limit from Everest. The insurer disagrees and says that just 9 days exceeded the temperature trigger point.

Mountain Creek say that the temperature at the resort exceeded the trigger point on every day but Everest assert that it didn’t but used temperature measurements from reporting stations which were in colder locations. So the lawsuit asks whether the temperatures should have been measured at the ski resort or at the reporting stations.

Now, we would assume that the original insurance contract specified the locations where the temperature measurements would be taken. If that is the case then the ski resort would surely have no case to fight. If the temperature stations were not specified then it appears to be the insurers error and they should probably be liable for the full claim.

While this looks like it should be easy to resolve (one way or the other) it does have implications for the wider weather insurance, weather derivative and weather risk management sector. If the reporting stations were documented on the contract but the court finds for the resort owner and says that the temperatures at the resort should be the ones that are used then many weather risk contracts could be open to future lawsuits. We hope the court looks closely at the original contracts and makes a decision based on the language and reporting stations specified (or not specified).

Original story from the New Jersey Herald.

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