A thirsty world: The legal and insurance implications of water scarcity

Water is a basic necessity for life on Earth, but in some parts of the world today, access to sufficient water to provide for human needs and to support ecosystems is becoming increasingly limited. Indeed, half of the world’s population is now living in areas facing ‘water scarcity’. [1]

In the third of our 2025 Emerging Risks webinar series, we look at what causes water scarcity, which geographies and industries are most affected and its impacts on people and planet. We also consider what insurance coverage and legal issues could arise as the situation develops.

What is water scarcity?

According to UNICEF, water scarcity occurs when: ‘The demand for water exceeds supply, and where available water resources are approaching or have exceeded sustainable limits. Water scarcity can either be physical or economic.’

When the quality and availability of water are put under extreme pressure, water scarcity turns into ‘water stress’. The most water-stressed regions are the Middle East and North Africa, where 83% of the population is exposed to extremely high water stress, and South Asia, where 74% is exposed.[2] The most affected industries are energy (particularly renewables, notably hydropower), agriculture, and manufacturing (especially semiconductor and textiles producers).

What causes water scarcity?

“Understanding what causes water scarcity is key to identifying the commercial and legal risks involved,” said Laura Ranz, Senior Associate at Clyde & Co in Madrid. Speakers identified four main drivers:

1. Climate change – Just 0.5% of all the water available on Earth is usable fresh water.[3] Global warming is causing fresh water availability to decline, e.g. as weather patterns change, glaciers melt and sea levels rise which increases the salination of groundwater, and as higher temperatures cause more droughts and floods which exacerbate water pollution.
2. Agriculture – 72% of water withdrawals are used in agriculture, but intensifying pressure to feed an expanding global population is likely to increase agricultural water demand.[4]
3. Population growth – The world’s population has doubled in the last century to 8 billion people, increasing domestic water consumption, while humankind’s industrial and energy needs have also grown.[5] The rise of AI technology is a potentially significant new factor, as data centres have high water consumption requirements.
4. Poor water management/misuse – Pollution is a major problem, particularly from fertilisers, pesticides or waste water which cause high nitrogen levels, or contaminants such as microplastics or heavy metals. As a result of deteriorating water quality, a further 3 billion people may face water scarcity by 2050.

What are the consequences?

The consequences of water scarcity are wide-ranging. As well as posing direct risks to human health (starvation and disease) resulting in bodily injury, causing environmental damage and damage to property (e.g. due to floods or wildfires), it can also impact crop yields or the viability of livestock, trigger the displacement of peoples, or cause power outages and business disruption.

When water scarcity turns into water stress, UNICEF points out that conflict over water resources or over-extraction can also result. The economic impacts are also significant – almost a third of global GDP (31%) is forecast to be exposed to high water stress by 2050.[6]

Legal and insurance issues

Several legal and insurance issues could arise in relation to water scarcity, such as:

• Contractual or management-related insurance exposure. For example, water shortages can cause hydropower facilities to halt operations, leading to power cuts. Miguel Lozano-Salazar, Foreign Associate at Clyde & Co in London explained, “Due to the way energy production and purchase works through power purchase agreements, allegations of breach of contract could be made against energy companies for not being able to produce the agreed levels of power.”

The growth of AI data centres could create claims activity for management, as many are being built in water scarce areas which may impact local populations, as well as expose companies to the risk of operational downtime or increased investment costs if there is not enough water to cool processors. There’s also the risk of reputational damage.

• Coverage limitations. An insurance gap – where the amount of loss that is insured is less than the economic loss suffered - exists in all regions of the world, but it is particularly pronounced in the global south. Reasons for this include lower economic growth, higher levels of poverty, more limited financial education and limited implementation of public policies. Parametric insurance, where pay-outs are based on a pre-defined triggering event rather than a specific loss, could provide a solution in severely under-insured areas. Almost anyone (governments, businesses, communities or individuals) can be a policy-holder and a wide range of potentially loss-causing events can be covered, making appropriate coverage more accessible to all.

In other areas that are increasingly affected by water scarcity and its impacts, such as California, where high volumes of large claims have been made following the wildfires, premiums could rise and getting cover may prove challenging if insurers decide to exit the market. “Water scarcity ties into property damage and potential impact on insurers,” said David Ktshozyan, Senior Counsel in Los Angeles. “It remains to be seen whether there will be issues with coverage in the next five to ten years in some places.”

• The risk of litigation. Human rights arguments have already been used in several cases concerning climate change, such as the 2024 KlimaSeniorinnen v. Switzerland European Court of Human Rights ruling. The court found that the Swiss government had violated Article 8 of the European Convention due to insufficient efforts to reduce carbon emissions. It’s possible that the same reasoning could be applied to other environmental risks such as water scarcity.

Climate change allegations are also being brought against companies, and corporate duty of care arguments like those used in Milieudefensie v. Shell could similarly translate across to water scarcity issues. “This ruling establishes a precedent that goes beyond carbon emissions because it means companies could be held responsible for their contribution to environmental harm, which could include water over-use,” said Ranz.

• Evolving regulation. Several new EU laws could impact insurance exposure, including:

• The Representative Actions Directive, which enables non-governmental organisations (NGOs) and consumer bodies to file collective environmental claims;
• The Corporate Sustainability Reporting Directive, which requires large companies to disclose sustainability risks, including water stress and water governance; and
• The Corporate Sustainability Due Diligence Directive, which requires businesses to identify and mitigate environmental risks throughout their supply chains.

Therefore, companies would be well-advised to embrace sustainability and incorporate water availability and usage considerations into their risk assessments and policies. For insurers, the combination of litigation and regulatory risks means demand could well increase for coverage for environmental liability, including cover for legal costs, and D&O insurance for those involved in water management decisions.

“Water scarcity as a risk should not be overlooked, especially as global thirst for water looks set to increase in the years ahead,” concluded Neil Beresford, Clyde & Co Partner in London.

To learn more about this issue, watch the webinar here.