The climate change landscape for insurers has changed dramatically this past month. There are multiple developments insurers should keep in mind – and not just the US Securities and Exchange Commission’s (SEC) recent adoption of climate-related risk disclosure rules. A climate change strategy shift at the National Association of Insurance Commissioners (NAIC), federal and state regulators pursuing a significant residential property insurance data call, various climate change-related litigation developments and SEC enforcement activity with respect to sustainability are all worth noting.
The SEC’s “long-awaited” release of its climate-related risk disclosure rules was by no means a unanimous decision. Its 3-2 split vote foreshadowed litigation challenges to the release of the rules. As expected by many, the SEC dropped its original proposed requirement that registrants must provide information about Scope 3 greenhouse gas (GHG) emissions (i.e., from suppliers and customers of their products and services). As to Scope 1 GHG emissions (i.e., the registrant’s own) and Scope 2 GHG emissions (i.e., indirect, arising from production/delivery of energy used by registrant) disclosures, the SEC has proposed that those be disclosed by the largest companies only if material.
IN DEPTH
As noted above, opponents of the SEC’s decision have already launched multiple legal challenges, with one suit brought by West Virginia and nine other states being filed the same day the SEC published its rules. More suits have already been filed by other states (e.g., Texas), and it seems likely that some will be filed by individual companies and/or industry trade groups like recent industry challenges to California’s climate disclosure laws that were enacted last year. All challenges to the SEC’s rules are likely to assert that the rules violate the “major questions” doctrine established by the Supreme Court of the United States in its 2022 West Virginia v. EPA decision. The major questions doctrine holds that absent clear congressional authority (via legislation), a government agency cannot make regulations that have significant political or economic consequences.
There may also be litigation initiated by environmental activist organizations (e.g., Sierra Club) seeking the SEC to rewrite its rules, presumably to reinsert disclosure requirements with respect to Scope 3 GHG emissions.
While the litigation experts will determine whether (and how quickly) these disparate suits might be combined to facilitate judicial consideration, it seems clear that these challenges may take years to conclude and require at least one trip to the Supreme Court.
Hypothetically speaking, let’s say the litigation challenges fail to enjoin the SEC’s implementation of the proposed rules and fail to invalidate them altogether. How might US insurers be impacted? Since it was last counted, there are slightly more than 100 insurers who are SEC registrants. Think of all the privately owned stock insurers in the country and the large mutual insurers owned by policyholders. Last time we checked, the total number of US insurers – i.e., by property/casualty, life/health and title) – amounted to nearly 5,000. So, if the SEC’s rules go into effect, the direct impact will not be massive. That said, a significant number of US insurers are already filing Task Force on Climate-Related Financial Disclosures (TCFD)-compliant climate-related risk disclosures on an annual basis in states that have decided their domestic insurers must file such disclosures. Those disclosures do not currently come with any insurance regulatory teeth, however.
Regardless of whether insurers are SEC registrants, there are other climate-related regulatory developments to consider.
THE NAIC DECIDES AGAINST CERTAIN ESG POLICY DEVELOPMENT ACTIVITIES
On February 21, 2024, the NAIC issued the following policy statement on environmental, social and corporate governance (ESG):
The NAIC does not anticipate developing regulatory policy to require or prohibit insurance companies from adopting ESG policies that govern insurers’ underwriting, investing, or other business decisions. However, we have extensive work underway on climate risk, race and insurance, corporate governance, and other related factors to the extent they directly pertain to our responsibility to protect policyholders and supervise the financial health of insurers.
The NAIC encourages insurers, regulatory bodies, standard setters, and policymakers to consider the reliability of metrics and the impact of ESG policies on the financial condition of insurers and the availability and affordability of insurance products and services, if adopting such policies.
For many climate change activists and some state insurance regulators this policy statement will be unsatisfactory. However, we have yet to see any public expressions of disappointment. Some may be offered during the NAIC’s upcoming Spring National Meeting, but after an unsuccessful effort by some regulators at the last national meeting in December 2023 to have the full NAIC adopt a “National Climate Resilience Strategy,” it became clear there was opposition to having the NAIC announce any grand climate change (or ESG) strategies or policies. Nevertheless, there is a new version of the National Climate Resilience Strategy that will be considered by the NAIC’s Climate and Resiliency Task Force on March 18.
The NAIC’s above statement is unlikely to deter ESG policymaking, including those that impact (if not govern) “insurers’ underwriting, investing, or other business decisions” by individual states (e.g., California, New York and Washington State have already started down that path). Roughly 20 states require their domestic insurers to file TCFD-compliant climate-related risk disclosures and are likely to continue to require such filings.
Given the Climate and Resiliency Task Force’s continuing work to develop a National Climate Resilience Strategy, it seems unlikely that the NAIC will cease working on loss prevention and mitigation initiatives that many regulators and others appreciate offer significant returns on investment and that will support future adaptation efforts and expenditures. In a March 13 Geneva Association webinar that addressed the potential impact of climate change on life and health insurers, one speaker made the point that there can be no climate change adaptation without mitigation. Helping policyholders help themselves to reduce the impact of severe weather events (regardless of whether they are due to climate change) would seem to qualify as both “protecting policyholders” and promoting the “financial health of insurers.” Despite any other climate change “policy” initiative, the industry and regulators ought to be spearheading adoption and funding local loss mitigation efforts, such as “Fortify Homes” programs, following the lead of Alabama and other southeastern states (and Connecticut). Finally, the NAIC’s policy statement does not mean regulators will turn away from trying to understand the market impact of recent industry cutbacks in and exits from multiple catastrophe-exposed jurisdictions (i.e., actions that clearly go toward preserving individual companies’ financial health, regardless of negative impact of availability and affordability on consumers).
COMBINED STATE AND FEDERAL “PROPERTY AND CASUALTY MARKET INTELLIGENCE DATA CALL”
In other recent climate change-related developments, on March 8, 2024, both the NAIC and the US Department of the Treasury’s Federal Insurance Office (FIO) made announcements about a massive residential property insurance data call that will require approximately 400 (admitted) property insurers “to submit ZIP-code-level data across the U.S. on premiums, policies, claims, losses, limits, deductibles, non-renewals, and coverage types. In all, state insurance regulators seek more than 70 data points. All homeowners’ insurers subject to the data call will have 90 days to submit their information.”
Working jointly with the NAIC and the states represents an about-face for the Treasury/FIO. The Treasury/FIO planned to administer their own data call. The NAIC will now conduct the data call and share the results with the Treasury/FIO. Regulators and legislators (at both federal and state levels) continue to seek reliable market data on admitted insurers’ well-publicized cutbacks and withdrawals from catastrophe-exposed states around the country, as well as on the impact of availability and affordability on consumers. We should be hearing more about this during the upcoming Spring National Meeting and in the months to come.
State and Federal Climate Change Litigation Activity
Insurers should be monitoring the expanding array of climate-related litigation. Suits brought by states and municipalities against fossil fuel giants first started years ago. Last year, with the Supreme Court’s rejection of energy companies’ arguments that these suits belonged in federal court and not state courts, at least one such suit brought by Massachusetts has now progressed to the discovery stage. However, in February 2024, energy companies sought Supreme Court review of an October 2023 Hawai’i Supreme Court decision that allowed the city and county of Honolulu to proceed with its claims that oil companies misrepresented and concealed the contribution their products made to global warming and climate change. The defendants contend that “…federal law precludes state-law claims seeking redress for injuries allegedly caused by the effects of interstate and international greenhouse-gas emissions on the global climate.”
Assuming the Supreme Court agrees to hear the case, briefing and oral argument will likely take place later this year, with a decision to come in 2025. How much discovery will have occurred in the Massachusetts case (and perhaps in others) and how impactful the results of that discovery will be remains to be seen. If discovery uncovers smoking guns, will that prompt others – insurers included (potentially in subrogation actions to be filed following the next major natural catastrophe) – to sue energy companies?
NEW YORK AG SUES BEEF COMPANY FOR DECEPTIVE ACTS AND ADVERTISING
Additionally, in February 2024, New York Attorney General Letitia James sued the world’s largest beef processing company for making false claims that it would be “Net Zero by 2040.” The lawsuit alleges violations of two consumer protection statutes – General Business Law §§ 349 and 350 – and New York Executive Law §63(12). Persons who engage in “repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on, conducting or transaction of business” may be enjoined from so doing.
While this litigation may be peculiar to New York (and putting aside the question of whether Attorney General James can succeed in proving that a company with a GHG footprint that is the same size as Ireland’s cannot become net zero within the next 16 years), there is no shortage of other greenwashing suits. Insurers that have significant Scope 1, 2 and/or 3 GHG emissions and are making net zero claims should continue to be vigilant. And if the insureds are publicly traded and making climate change disclosures, there is the SEC to worry about.
SEC ENFORCEMENT ACTIVITY
In another development from February 2024, Director of the SEC’s Division of Enforcement Gurbir Grewal delivered a speech in Ohio in which he reminded the audience that the SEC continues to look at companies’ ESG disclosures to ensure they are not materially false or misleading (just as they do with other disclosures). Director Grewal also reminded the audience of the SEC’s lengthening track record of successfully pursuing companies that either made false statements or failed to mention information that would have made disclosures not misleading.
It’s tempting to conclude that the general lack of consensus among insurance regulators as to climate change regulation means there is something like a “safe harbor” available to insurers who avoid making any bold claims as to sustainability or achieving net-zero status in the near future. Should insurers keep a low profile with respect to the advisability of climate change disclosure generally or for the protection of investors? Perhaps. But should more insurers have an active role in searching for and publicizing ways to help insureds prevent and mitigate severe weather and catastrophe losses? Almost certainly. Should regulators and legislators be prepared to help shrink protection gaps with well-funded education/outreach efforts and meaningful financial incentives to encourage property owners to fortify homes and other structures? Absolutely. Public and private sectors have so much work to do to ramp up loss prevention and mitigation efforts in preparation for future political and legal battles as to funding adaptation efforts domestically and globally.
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