Climate Change and Insurance: Insurers' Subrogation Claims

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This is the fifth of six articles addressing climate change lawsuits in the context of (re)insurance.

In previous articles in this series, we have discussed the litigation risks faced by liability insurers as a result of recent U.S. and foreign climate change lawsuits, where private and government plaintiffs are seeking to hold policyholders such as gas and oil companies responsible for climate-related damages caused by greenhouse gas emissions, and other climate-related exposures affecting the (re)insurance industry.

In this article, we discuss an anticipated second wave of climate change litigation involving insurance companies: subrogation claims brought by first-party property insurers against producers of crude oil, natural gas, coal and cement (the “carbon majors”) and other large polluters to recover the amounts paid to policyholders whose property has been lost or damaged as a result of the impacts of climate change. Subrogation thus presents an opportunity for (re)insurers to recover at least part of their climate-related losses from the parties responsible for bringing about global warming.

Overview of Subrogation Recoveries

Subrogation is the process by which an insurance company seeks to recover from a third party responsible for a loss the money it paid to the policyholder as a result of the loss. Most property insurance policies contain a subrogation provision, pursuant to which, upon payment of a claim under the policy, the insurer receives the rights or recovery that the policyholder had against any third parties. The insured is required to cooperate with the insurer in any recovery action against those responsible parties.

In addition to this contractual subrogation, and independently of any policy provision, in common-law jurisdictions, insurers that pay for losses caused by a wrongdoer are entitled to seek recovery under the doctrine of equitable subrogation. In civil law jurisdictions, subrogation is similarly authorized and regulated by statute.

The policy or applicable law will also provide for how any recovery must be shared between the policyholder and the insurer. Depending on the policy language and jurisdiction, either the parties share in the recovery in proportion to their respective loss, or the insured must be “made whole” before the insurer can share in the proceeds.

At its core, subrogation is the transfer of money from the liability insurance market to the property insurance market. There are some inherent tensions in subrogation — particularly where first-party catastrophes are caused or worsened by insured third parties. This may well be the case in climate change subrogation litigation.

Subrogation in the Context of Climate Change Litigation

In the recent climate change lawsuits filed in the U.S. and other jurisdictions, state and local governments, as well as private plaintiffs, are alleging that the emission of greenhouse gases, by defendants or from the use of their products, is causing global warming.

Plaintiffs plead a number of causes of action, including nuisance, trespass, failure to warn, design defect and negligence. The lawsuits are currently targeting the carbon majors but will likely expand to other carbon-heavy industries, such as agri-business, manufacturing and transport. The plaintiffs allege that they have sustained property damage as a result of the impacts of climate change, including rising sea levels, wildfires, landslides, extreme precipitation events and drought.

Some of these alleged losses may be covered under the plaintiffs’ property insurance policies. For example, if the property of a local government is damaged by a wildfire or a flood, its all-risk property insurance policy may be triggered and respond to the loss. At that point, as part of the adjustment of the claim, the property insurer will evaluate potential recovery opportunities. Many U.S. (re)insurers have dedicated subrogation departments that analyze recovery options as a matter of routine, even in catastrophic losses where a subrogation target may not be immediately apparent. Outside of the U.S. there is little subrogation specialization by (re)insurers.

As explained in previous articles in this series, it is likely that one of the lawsuits against the carbon majors or other large emitters will, eventually, succeed. The plaintiffs are trying to establish a legally sufficient causal link between greenhouse gas emissions and the impacts of climate change, to hold those companies accountable. Plaintiffs are relying on scientific evidence such as the “carbon majors report,”[1] which attributes specific percentages of global greenhouse gas emissions to individual companies, as well as creative legal causation theories, to prove that the carbon majors are liable for contributing to climate change. These arguments have already been accepted by a German appellate court in the Lliuya v. RWE AG case, where a Peruvian farmer sued the German utility company for contributing to create a flood risk to his property.

Once a court finds a carbon major liable for causing climate change-related damage to the property of a private plaintiff or government entity, we expect that the litigation flood gates will open, and many other parties will bring damages lawsuits against greenhouse gas polluters, relying on the same type of evidence and arguments that the court found satisfactory.

These “me too” lawsuits will undoubtedly include subrogation actions brought by property insurers who have paid claims for loss or damage to their insureds’ property, such as the wildfire or flood losses mentioned in the example above. Standing in the shoes of their policyholders, these insurers will be armed with precedent supporting their right to recover the amounts paid from the parties responsible for contributing to climate change.

Subrogation as an Opportunity and an Additional Exposure

As discussed above, subrogation presents a recovery opportunity for property insurers paying claims by their insureds for climate change-related damage to their property. However, when faced with these subrogation claims, the carbon majors will turn to their liability insurers to seek coverage for the costs of defending the lawsuits, and for any judgment or settlement they may ultimately have to pay. Therefore, subrogation also creates an additional exposure for the liability insurers of greenhouse gas polluters. Effectively, subrogation in these climate change cases may well result in the transfer of money from the liability insurance market to the property insurance market.

Conclusion

The reality of climate change exposure for insurers is that virtually every insured is, at least theoretically, exposed to a climate change claim. We all sit atop the progress achieved since the Industrial Revolution. We are all responsible — at least in some small measure — for anthropogenic climate change and happily enjoy the benefits of power, energy, manufacturing and technology.

It is not a stretch to imagine some climate change claims as a circling firing squad where everyone attempts to lay blame on someone else. But it would be surprising if claims are advanced against insureds who are, in the context of climate change, simply complicit for participating in the modern economic world. Put another way, obvious targets, including the carbon majors, are likely to attract exposure for their knowing conduct in connection with climate change rather than for being merely a participant in a technology-driven economy.

While (re)insurers face significant exposure to risks presented by other long tail liability claims (e.g., asbestos, MTBE), the threat posed by an ever-growing number of climate change suits is more expansive and not necessarily confined to a narrow policyholder profile. If provided a legal and factual blueprint, will first-party insurers pursue their third-party colleagues following first-party losses caused or worsened by climate change? When faced with a series of first party climate change claims, the industry is unlikely to forgo subrogation opportunities.

In sum, once climate change damages litigation against the carbon majors and other large polluters begins to gain traction in the courts, first-party property insurers will in all likelihood begin to bring, or at least seriously consider, subrogation actions against those companies to recover the claims paid to policyholders that sustained property damage from climate change impacts.

[1] Richard Heede, Carbon Majors: Accounting for carbon and methane emissions 1854-2010 Methods & Results Report (2014).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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