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Article February 19, 2020

Climate change litigation and D&O insurance: What you need to know

With climate change firmly at the top of the news agenda, companies with large carbon footprints are under pressure to dampen their impact on the planet.

Growing concern has led to an upsurge in the numbers of litigation cases centered on companies’ disclosures related to their potentially harmful practices, with lawsuits against companies alleging misleading statements regarding their environmental practices and commitments.

Litigation has, so far, focused primarily on energy companies and big-name polluters, but it’s not beyond the realm of imagination to expect manufacturers and other greenhouse gas emitting organisations to come under scrutiny, too.

Here’s what you need to know about climate change litigation and D&O insurance:

What could climate change litigation mean for businesses? 

Companies are under pressure to lessen their environmental impact, and any disclosures they make relating to their greenhouse gas (GHG) emissions and environmental exposures are being scrutinised more than ever before - boilerplate disclosures are not acceptable. Any challenges made to such disclosures can lead to expensive and high-profile lawsuits, as seen with ExxonMobil, 3M and Australia’s Commonwealth Bank.

Companies should also be mindful of the rise in remediation suits, similar to the ones brought by the State of Rhode Island and Cities of San Francisco and Oakland. These entities sought damages from energy companies to repair and rebuild coastlines as a result of rising tides brought about by climate change, for which these companies were deemed responsible. With the nationwide cost of building new or rectifying existing seawalls estimated at over $400bn, companies may well find themselves caught in a storm of defending wave after wave of liability lawsuits.

But this litigation only concerns energy companies, doesn’t it?

Not exactly. While litigation has focused primarily on energy companies, this doesn’t mean that other industries are safe. Essentially any company that emits greenhouse gases could be in the firing line – like transportation companies, agricultural businesses or businesses that manufacture products that emit GHGs. Even financial institutions. In fact, Barclays recently came under shareholder pressure to reduce its investments in fossil fuel companies, and many of the big banks have notably declared their intentions to curtail investments and loans in the fossil fuel sector.

To settle or fight: What happens in climate change disclosure cases?

Now that the world’s leading GHG emitters are showing a desire to adapt and change, any company found guilty of not pulling their climate change “weight” would suffer considerable reputational harm. When cases like this are taken to court it can prove expensive and timely. Large corporations like ExxonMobil can clear their name, but this is not always true for smaller companies which may be constrained by their financial means. Not every business can afford a protracted and expensive trial to prove their innocence.

Companies that settle out of court may find this to be a quicker, cheaper or less disruptive route, but with no admission of guilt, question marks tend to hang over what might have been the outcome had the case gone to trial.

Are current D&O insurance policies likely to respond to climate change litigation?

Aside from the bespoke terms and conditions set out in your standard D&O insurance policy, there are a few exclusions which (depending on how they are negotiated) could come into play when dealing with climate change litigation:

  1. The conduct exclusion

    This excludes claims arising out of the gaining of financial advantage, personal profit or by committing a fraudulent act or omission. The latter is the most pertinent here as plaintiffs may allege that a company’s directors and officers knowingly disclosed false or misleading information about their climate change statistics. Policies, however, would likely still look to defend the accused against these allegations during the litigation process, but if a guilty verdict was issued, then the exclusion would be brought into play.

  2. The pollution exclusion

    This exclusion typically excludes claims relating to the discharge or release of ‘pollutants’. The language of this exclusion will differ policy to policy and the decision as to whether any substance released, discharged or dispersed by an insured can be defined as a pollutant will be a matter for interpretation. Other factors to consider will be if the language in the exclusion is the ‘absolute’ version or the softer ‘for’ language version or if the exclusion provides securities or non-indemnifiable claims carve-backs. It is, however, worth noting however that on a D&O policy, loss will not extend to clean up costs.

  3. The bodily injury / property damage exclusion

    This looks to exclude claims involving damage to property and bodily injury, death and mental anguish. Depending on the policy, this exclusion might include ‘absolute’ language or the softer ‘for’ language and may include non-indemnifiable or securities carve-backs.

How can policyholders protect themselves?

It’s crucial that businesses maintain adequate levels of D&O insurance and environmental liability insurance. The size of the limit should be a consideration, as should the terms and conditions of policies. Additionally, companies need to take proactive steps to reduce emissions and/or by becoming ‘greener’.

For boards of directors this might mean the nomination of a board member or establishment of a separate committee with clear responsibility for the company’s climate change objectives.

For energy companies, diversifying into cleaner energy or investing capital into negative emissions technology would strongly help in placating go-forward concerns.

Other steps might be to review fossil fuel operations and/or set emissions targets - Rio Tinto, for example, has put a stop to its coal mining operations altogether, while the world’s largest shipping company Maersk has committed to net zero emissions by 2050 (per Climate Action 100+’s progress report). Working with organizations such as the Institutional Investor Group for Climate Change, or Climate Action 100+ would show a further commitment to achieving their objectives.

What impact will climate change cases have on D&O insurance rates?

We may see an increase in the cost of D&O insurance on a case by case basis, but it’s more likely that insurers will be looking to mitigate exposures via exclusionary language, unless they are entirely confident in a company’s eco-friendly credentials.

Every move and declaration made by these companies will be under scrutiny, so any perceived inaction, false statement or dragging of heels will likely bring about a fierce reaction from investors, lobbyists, social movement organisations and government bodies alike. Should this ultimately turn into litigation, companies will likely incur sizeable legal costs - whatever the outcome of the litigation.

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Today’s companies are under incredible pressure to lessen their impact on the environment, as they face increasing regulation around corporate behaviour and reporting. Take a look at our management liability policies to learn more about climate change litigation exposures and the risks businesses need to be aware of.