The President’s Authority to Impose Tariffs and The Effect on Catastrophic Claims

At first glance, President Trump’s tariffs and recent catastrophic events – including the fires and mudslides in California, and the hurricanes across the Atlantic coastline – may not seem to have much in common. But on the heels of dramatic catastrophic losses across the United States, President Trump’s new tariffs on steel and aluminum will likely result in increased claim costs.

The U.S. Constitution empowers Congress “to lay and collect taxes, duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.”¹Over the last century, however, Congress has slowly shifted the power to raise and lower tariffs to the president.² Those actions include the following: (1) the “Trading With The Enemy Act of 1917,” allowing the president to impose tariffs during times of war; (2) the “Trade Act of 1974,” allowing the president to impose a 15 percent tariff for 150 days if the imports adversely impact national security; and (3) the “International Emergency Economic Powers Act of 1977,” allowing the president to impose tariffs during national emergencies.

Recently, President Trump implemented tariffs on steel and aluminum through another grant of power, the “Trade Expansion Act of 1962,” which authorizes the secretary of commerce to investigate how imports affect national security, and endows the president with the authority to adjust tariffs accordingly. Applying that authority, this past April Secretary of Commerce Wilbur Ross investigated the impact of steel and aluminum imports and how they “threaten to impair the national security”; his findings were the basis for the recent tariffs. Secretary Ross also recommended the tariffs as a way to increase domestic steel production.³ Although Congress and the independent U.S. International Trade Commission generally have oversight to weigh in on proposed tariffs, the Act authorizes President Trump to impose tariffs without their prior approval.

These tariffs will likely affect insurance claims involving homes, buildings, and infrastructure or pipelines that are composed of steel and aluminum. On March 9, 2018, a day after President Trump announced the tariffs, Dan Ikenson of Consumer Reports posited the tariffs would affect steel and aluminum prices within the next year, and likely lead to retaliatory efforts by other countries.⁴ This has proven true and the initial tariffs have turned into a trade war between the United States and China, with China levying 15 to 25 percent tariffs on $ 3 billion worth of American goods.⁵ President Trump responded with an announcement on April 3 of a 25 percent tariff on Chinese products, and there was an immediate reply by China of a 25 percent tariff on U.S. products. The underlying motivations of the trade war include U.S. claims of Chinese theft of trade secrets. Increased prices for raw and building materials will likely result in increased claim costs to repair and replace damaged property. These increases could drive up claim costs for insurers and implicate policy limits that may not otherwise affect insureds.

Some of the first scenarios where insurers may see increased costs due to the tariffs will be for claims ensuing from the recent hurricanes, mudslides, and wildfires of the past year and a half. Many of the areas affected by hurricanes involve commercial and industrial risks which require significant amounts of steel and aluminum to rebuild or replace the losses.⁶ The fires and mudslides have affected roadways, bridges, homes, and commercial buildings, with the damage potentially in the hundreds of millions.⁷ While claims for damages from these events have already been pouring in, more could be expected with the next hurricane season and the summer fire season in California. It should be noted, even for those claims already filed, the cost of repair or replacement may not yet have been calculated and will likely experience an increase due to the recent tariffs. Though the next few months will be revealing, the long-term impact of the new tariffs within both the steel and aluminum industries and the industries that depend upon them remains to be seen.