Why industrial risk is the CAT model's blind spot

While much of the insurance industry focuses on hurricane season, wildfires and other extreme summer weather, what happens if the next catastrophe doesn't come from a storm system at all?

Last month, more than 50,000 people were told to evacuate their homes as a 34,000-gallon tank at an aerospace facility in Garden Grove, Calif., holding about 7,000 gallons of methyl methacrylate was on the brink of exploding. If that had happened, the pressure wave, fireball and toxic vapor cloud would have torn through dense residential neighborhoods. 

Orange County residents ultimately got lucky when evacuation orders were lifted a few days later and, frankly, so did the insurance industry. But luck is not a CAT strategy. 

Industrial events are CAT events

A nine-square-mile evacuation displacing 50,000 residents is comparable to a Category 2 hurricane hitting a mid-sized coastal city. The East Palestine, Ohio, train derailment in 2023 ultimately cost more than $1.1 billion, rivaling or exceeding a mid-tier weather CAT. Garden Grove triggered a state of emergency and a Federal Emergency Declaration, the same response typically reserved for major hurricanes and other natural disasters. 

Despite the growing risk for industrial events, these incidents are often excluded from CAT aggregation frameworks. 

But if carriers can price hurricane and wildfire exposure into portfolio risk with sophisticated models, shouldn't the same be true for a chemical facility a mile from 10,000 homes? 

With last year's global insured CAT losses at $129 billion and a protection gap hovering around 56%, meaning over half of total economic losses went uninsured, the industry cannot afford another unmodeled category.

Recent industrial incidents expose coverage gaps

If Garden Grove had gone the other way, policyholders would likely have discovered their lack of coverage at the worst possible moment. 

The pollution exclusion, standard in most HO-3 policies, creates real gaps for chemical contamination and airborne exposure — many homeowners think they are covered and exclusions are not clearly laid out. ALE coverage typically requires the home to be uninhabitable following a covered peril, and a chemical evacuation order with no structural damage would have been a gray zone. 

Property devaluation after a nearby industrial incident is not covered under any standard policy either; it's a litigation-only remedy.

East Palestine showed the country how that plays out. Residents described the claims experience as "exhausting and arbitrary," with settlement checks arriving smaller than expected, three years later. That's not the experience the industry strives to deliver, and certainly not what consumers deserve when their world gets turned upside down.

It's time to adjust strategy

Logistics corridors, EV battery plants and advanced manufacturing facilities are all pushing deeper into residential areas. The industrial exposure map is growing while most carriers' CAT playbooks stay focused on extreme weather. Carriers should be analyzing the threat of industrial risks — and communicating those risks — with the same rigor as named storms:

• Communicate the industrial risk. Most carriers do not proactively flag proximity to industrial sites at binding or renewal. However, it should be part of the standard CAT communication playbook. The same digital channels we use for hurricane prep can tell a policyholder what their policy does and does not cover if the factory down the road has an incident, or whether a new site development impacts rating or access to standard coverage.

• Educate policyholders even before a policy is bound. Buyers near industrial sites rarely know that the EPA's Toxic Release Inventory is searchable, that emergency planners map hazard zones around these facilities, or that state disclosure laws won't necessarily surface latent chemical risk. Carriers who explain the pollution exclusion up front, and offer an environmental endorsement where available, can turn a coverage gap into a trust-building moment.

• Overprepare for incidents to come. Disasters can affect neighboring communities with little notice, but preparing for any scenario is key. If and when an industrial event hits, policyholders need clear, fast answers on ALE, exclusions and next steps. Anticipate questions before they ask and, again, proactively communicate that information as soon as possible to limit questions and disputes that can flood carrier communication channels and contribute to negative experiences. 

East Palestine was an eye-opener for carriers and consumers alike. Garden Grove thankfully resolved with the community unscathed, but the next industrial scare may not. Hurricane season, wildfires and other extreme weather will always dominate the industry's attention at this time of year, but the events reshaping CAT risk are not all coming from Mother Nature. It's time the models and communication with policyholders caught up.