4 January 2021
Companies have been exposed for some time to litigation for their role in extracting biological resources and the impact of any damage caused, but could they also be held responsible for their past role in climate change?
For example, could a company be sued for the increased severity of coastal flooding from their past activities that contributed to the loss of mangrove forests and wetlands? The Economist highlighted climate litigation as a growing risk in 2017. As the cost to the environment becomes more apparent, communities who suffer losses are increasingly looking to hold someone accountable.
This article considers the impact of liability risks – this was highlighted by the PRA in its report last year on the impact of climate change on the UK insurance sector.
How could claims arise?
The claims that could arise include those in which individuals/organisations are seeking compensation for losses suffered as a result of a company’s negligent past practices. These claims may appear many years after the alleged negligence occurred and, therefore, many years after any relevant insurance policies were written. For example, in an ongoing court case in the US, a number of local governments are suing major fossil fuel companies, alleging that greenhouse gas emissions from activities over the last 50 years have contributed to sea level rises.
Directors could also be held responsible for failing to manage or consider climate change risks in the past, giving rise to claims under Directors & Officers’ policies. This is a complex area of litigation and arguably quite speculative, but there have been precedents in the past eg liability for asbestos-related risks, and the same could happen for climate change risks.
Proving a loss?
The need to establish a causative link is likely to be problematic, as the impact of environmental damage is likely to span multiple generations and require strong scientific assessments. The arguments are also complex, and losses may not necessarily be covered by insurance due to policy exclusions. But recent experience with the FCA’s business interruption test case regarding COVID-19 has taught us that nuances in policy wordings may have unintended consequences. And remember the US courts’ interpretation that gradual pollution and contamination losses were covered by insurance policies, despite the presence of a ‘sudden and accidental’ exclusion wording?
A growing issue?
There has been a significant growth in the volume of climate change litigation over time. Based on a paper published in July 2020 by the Grantham Research Institute on Climate Change, 1,587 cases were brought between 1986 and the end of May 2020. The majority occurred over the last decade and the number has increased significantly in the last few years.
The paper estimates that 42% of climate change cases brought between 1990 and 2016 were successful. This percentage is already high enough to be of concern to potential defendants, and there is a risk that it may increase. The landscape is changing fast.
In Australia, a 25-year old sued his AUD57 billion pension fund for not doing enough to consider climate change risks in its investments in a lawsuit that was recently settled out of court by the pension fund. Popular success stories such as the Urgenda case in the Netherlands (a landmark case that compelled the Dutch government to do more to cut emissions) may also drive more cases against governments and large corporations.
In a further example of recent litigation, a Peruvian farmer sued the German energy company RWE, the second-largest emitter of carbon dioxide in Europe, even though the company doesn't operate in Peru. He is suing RWE for their contribution to climate change, which is increasing water levels in his local area, threatening his livelihood.
There will be growing pressures on companies to help foot the bill of climate change especially where there is evidence that they have known about the adverse impact of their actions for some time. Increased litigation, growing awareness, the rise of anti-corporate sentiment and stronger scientific evidence on climate change may all contribute to more successful litigations and, eventually, substantial insurance claims.
An interesting aspect will be to monitor how litigation funds (which facilitate cases in order to generate returns by taking a cut of awards) judge the potential success of climate change cases. A positive outlook by them on the merits of such cases could well lead to a metaphorical tidal wave of litigation.
What should insurers be doing? They should start thinking about their current potential exposures, by identifying classes of business and policies that could be at higher risk of climate change litigation.
Going forward, insurers should be carefully thinking about the business they are writing today and mitigating further exposure to climate change litigation. They should also monitor changing sentiment and commercial considerations in this area, as evidenced by Lloyd’s recent sustainability report where a change in strategy has led to syndicates being asked not to write insurance cover for new thermal coal, oil sands, or new Arctic energy exploration from 1 January 2022.