Climate Change: Policyholders Should Be Braced for a Rising Tide of Coverage Issues

Morgan Lewis
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Morgan Lewis

The Intergovernmental Panel on Climate Change has declared that “[i]t is indisputable that human activities are causing climate change, making extreme climate events, including heat waves, heavy rainfall, and droughts, more frequent and severe.” Many of the world’s governments are seeking to address the long-term impact of climate change as well as the immediate consequences of events such as Hurricane Ida, the Australian bushfires, floods in Germany, and increasing California wildfires. With these developments come key questions for policyholders—how can businesses be protected from the potential of increasing losses (both physical and economic) resulting from climate change and extreme climate events? Will relevant insurance coverage be available? If so, at what cost?

In this series of LawFlashes, Morgan Lewis will examine the impact of climate change events on the insurance market, including: (1) the increase in liability claims against policyholders by third parties; (2) the increase in claims by policyholders as they in turn seek to recover from their insurers for losses suffered; and (3) the future of climate-related insurance as policyholders seek to establish the extent of available cover.[1]

THE INCREASE IN NUMBER AND SEVERITY OF CLIMATE-RELATED EVENTS

In 2021, the United Nation’s World Meteorological Organization (WMO) published its “Atlas of Mortality and Economic Losses from Weather, Climate and Water Extremes (1970-2019).” According to the WMO, between 1970 and 2019, there were 11,072 disasters that stemmed from weather, climate, and water-related hazards. Those events resulted in 2.06 million deaths and $3.64 trillion in losses.

The WMO’s Atlas reveals two distinct trends over the past 50 years. First, economic losses due to weather, climate, and water extremes have increased sevenfold from the 1970s ($49 million per day on average between 1970 and 1979) to the 2010s ($383 million per day on average between 2010 and 2019). Second, and fortunately, the number of deaths caused by weather, climate, and water-related disasters has decreased from over 50,000 per year to less than 20,000 per year between 1970 and 2019.

The ever-increasing economic impact of such events will leave policyholders reliant on their insurance. Unfortunately, an insurance “protection gap” exists (being the difference between insured losses and economic losses). Aon’s 2020 report, “Weather, Climate & Catastrophe Insight,” states that a global protection gap of 64% has emerged, as approximately 36% of global economic losses in 2020 resulting from natural disasters were covered by insurance. To put this in context, in 2020, there were $97 billion of insured losses as a consequence of natural disasters, making 2020 the fifth costliest year for insurers. According to the data, Hurricane Laura in the United States and the Caribbean was the top global insured loss event in 2020 ($10 billion).

In the wake of Hurricane Ida in 2021, the Consumer Federation of America estimated that there will be $19 billion in insured losses, including over $12 billion (approximately 180,000 claims) caused by wind damage, and over $7 billion (approximately 100,000 claims) in relation to flood damage. Risk modelling firm Applied Insurance Research Worldwide (AIR) goes further and projects that insurers will incur costs of between $20 billion to $30 billion. As a further example, Storm Ciara (also known as Storm Sabine/Elsa) which affected Europe in February 2020, was the costliest event outside of the United States. Storm Ciara generated more than one million insurance claims and resulted in 2.1 billion pounds ($2.8 billion) in insured losses.

CLAIMS AGAINST POLICYHOLDERS BY THIRD PARTIES

Given the prominence of climate change concerns in the eyes of the public and the increasing number of activist groups with a climate focus, it is perhaps unsurprising that litigation resulting from climate change and extreme climate events is increasing worldwide (more than doubling since 2015). This appears to coincide with the increasing acknowledgement and scientific understanding of climate-related issues. Furthermore, factors such as the entry by states into national and international agreements on climate change (for example, the Paris Agreement), the adoption by governments of climate-related policymaking, and commitments by corporations to tackle climate change, are likely to have fuelled the global rise in climate change litigation.

Over 800 climate-related cases were filed in courts between 1986 and 2014, while over 1,000 cases have been brought in the last six years. According to data from the Climate Change Laws of the World database and the United States Climate Litigation Database, as of May 2021, there were 1,841 ongoing or concluded cases of climate change litigation globally. Of these, 1,387 cases have been commenced in US courts, 454 were filed in 39 other countries and 13 have been brought in other international or regional courts and tribunals. The UK has seen 73 cases and there were 58 cases in the European Union.

Some of these cases may have been inspired by the decision of the Dutch Supreme Court in a case brought against the Dutch government by the Urgenda Foundation (a Dutch environmental group) alongside 900 Dutch citizens.[2] This case was particularly notable as the court concluded that a national government’s approach to mitigating greenhouse gas (GHG) emissions was insufficient and placed it in violation of its duty of care to its citizens.

Although many instances of climate change litigation are centered on regulation by governments and national policymaking, the case law is also pertinent to companies. It could result in, for example, governments legislating to require more rigorous GHG emissions standards, higher reporting and disclosure obligations, and impacts on permits, planning permission, and licenses. Litigation may arise in circumstances where companies fail to comply with those more exacting requirements. Moreover, companies may turn to their insurers in respect of claims against them by: (1) shareholders in circumstances where they are subject to fines or sanctions as a result of breaching regulations; and/or (2) individuals who have suffered adverse consequences of climate events, allegedly contributed to or caused by those companies, or activist groups alleging the same. Policyholders will need to be aware of the types of claims that could be made against them in order to determine whether this aligns with their existing insurance coverage.

WHO ARE THE DEFENDANTS?

Large Contributors to GHG Emissions

Hypothetically, the courts could see claims against companies with the largest historical contributions to GHG emissions and may order them to reduce their GHG emissions accordingly. However, some of these companies are voluntarily taking significant positive steps to offset their historical contributions to GHG emissions, thereby forgoing the need for any such court order in certain instances. Examples of such constructive actions include making sizeable investments in clean energy technologies and renewable energy project developments. Nonetheless, these efforts may not be sufficient to avoid litigation, and in some instances may create additional grounds for legal challenges, including potential claims of “greenwashing.”

Pension Funds and Asset Managers

The case of McVeigh v Retail Employees Superannuation Trust[3] raised the question of whether an Australian pension fund was in breach of the Corporations Act 2001 by failing to provide information related to climate change business risks and its strategies to address and manage those risks. This case was settled in November 2020. The Australian pension fund committed to implementing a net-zero carbon footprint by 2050, and agreed to incorporate climate change financial risks in its investments.

Company Directors

Directors of companies that are large contributors to GHG emissions may, hypothetically, face claims (by shareholders and others) for breaches of their fiduciary duties in relation to, for example, failure to disclose sufficient or relevant climate-related information or to adapt investment strategies in accordance with exposure to climate-related risks.

Financial Institutions

Litigation against a central bank for its alleged climate failings materialized for the first time in April 2021, when ClientEarth launched a claim against the Belgian National Bank, submitting that, when purchasing bonds from GHG-intensive companies as part of the bank’s participation in the European Central Bank’s Corporate Sector Purchase Programme, the bank had breached EU law concerning the obligation to integrate environmental protection into EU policies because over half of the bonds purchased were allegedly issued by high-emitting companies. The Corporate Sector Purchase Programme aims to improve financing conditions for eligible companies by lowering debt costs, but ClientEarth claims that Belgian National Bank’s purchases are facilitating the direction of capital into sectors which exacerbate climate change.

Others

The United States in particular has seen claims against individuals and businesses who have purchased resources from companies with significant GHG emissions and have in turn made large contributions to GHG emissions. This trend may emerge across other jurisdictions.

WHO ARE THE CLAIMANTS?

NGOs

In March 2021, 11 non-governmental organizations (NGOs), including Envol Vert, filed a claim against the French supermarket chain Casino for its involvement in environmental damage caused by deforestation that is linked to the cattle industry in Brazil and Colombia, where the farms form part of the supermarket’s supply chain.[4] The NGOs allege that this constitutes a breach of Casino’s obligations under the French Duty of Vigilance Law (which places an onus on large companies in France to identify and prevent risks to the environment—and to human rights—that could result from their business activities). This case also serves as a reminder that claimants may wish to hold not only one corporate entity liable for actions or omissions related to climate change, but also other entities within their value or supply chains.

Activist Groups and the General Public

In 2019, four French NGOs successfully contended in the Administrative Court of Paris that France had failed to meet its own commitments to reduce GHG emissions, and inadequate action by the government had contributed to environmental damage by exceeding France’s annual carbon budgets. This case garnered the support of over 2.3 million members of the French public, who signed a petition submitted with court filings.[5] Additionally, more than 60,000 Belgian nationals were joined as co-claimants in a case filed by the Klimaatzaak association in 2015, compelling the Belgian government to adopt a more aggressive stance on reducing GHG emissions. Although the Brussels Court of First Instance declined to set specific reduction targets, it held that the Belgian government had breached its general duty of care under Article 1382 of the Belgian Civil Code (as well as its obligations under Articles 2 and 8 of the European Convention on Human Rights).[6]

Shareholders

ClientEarth (an NGO) is a shareholder in the Polish power company Enea SA. ClientEarth brought a claim under the Polish Commercial Companies Code to challenge a resolution by Enea which granted its approval for the construction of a new coal-fired power plant, on the basis that it was not an economically viable decision in light of rising carbon and falling renewable energy prices and would therefore be detrimental to the company’s finances. The shareholder’s claim was successful, and the Polish court concluded that Enea’s resolution was invalid.[7]

WHAT TYPE OF LIABILITY CLAIMS MIGHT POLICYHOLDERS FACE?[8]

Failure to Mitigate or Manage Climate Change Risk

Certain policyholders, including companies and fund managers, may be at risk of litigation in which it is alleged that they have failed to manage or mitigate climate change risk. These claims may include failure to make suitable adaptations for extreme weather events (such as those described above), failure to adapt existing investment strategies in line with climate risks or failure to challenge new investments involving high emission levels—see the Australian McVeigh case above.

Failure to Disclose Climate-Related Information

Policyholders may face claims centered on inadequate disclosure of information or risks related to climate change. Alternatively, intentional discrepancies may arise between the actual climate change action and the information disseminated to the public on climate change action, which is misleading because it either exaggerates the company’s mitigation or adaptation efforts, or minimizes the extent of its carbon-intensive activities (i.e., “greenwashing”).

Challenges to Specific Projects on Climate Change Grounds

Litigation may also be deployed to challenge specific projects on climate change grounds, as was seen in ClientEarth v Enea. Similarly, a number of environmental campaigners raised various arguments grounded in climate change to challenge the lawfulness of the UK government’s plans to develop a third runway at Heathrow Airport, including that the commitments of the UK government under the Paris Agreement had not been given due consideration. The UK Supreme Court overturned the Court of Appeal’s ruling which had previously blocked Heathrow Airport from making an application for planning permission.[9] It is inevitable that, going forward, close scrutiny will be applied to the climate change implications of infrastructure projects. This is particularly true of conventional generation projects in the power sector.

Liability for Property Damage and Similar Loss on Grounds of Climate Change

Events such as flooding can have a devastating impact on property. Individuals whose homes might have sustained damage due to flooding may seek recourse against companies who are being deemed responsible for contributing to or causing climate change.

CONCLUSION

It is clear (including from the WMO’s Atlas) that there has been an increase in the frequency and severity of extreme weather events that many scientists have attributed to climate change and that result in losses suffered by third parties. Litigation is on the rise as those third parties bring claims against policyholders that emit greenhouse gases or invest in activities related to such emissions. Such claims are brought on the grounds that those policyholders have acted without regard to climate consequences (or failed to take appropriate action with respect to those consequences). Following such claims, policyholders may then attempt to secure cover from their insurer.

In the next LawFlash, we will provide an overview of the exponential rise in claims by policyholders who have suffered losses as a result of extreme weather events deemed by scientists to be attributable to climate change.

Trainee solicitor Charlotte Warke contributed to this LawFlash.

[1] The primary focus of this series is the impact of climate events on the European (rather than US) market.

[2] Urgenda Foundation v State of the Netherlands, Supreme Court of the Netherlands (20 December 2019)

[3] Mark McVeigh v. Retail Employees Superannuation Pty Ltd (Federal Court of Australia, NSD1333/2018, Amended Complaint, 21 September 2018)

[4] Envol Vert et al. v Casino Guichard Perrachon S.A. (filed 2021 in the Saint-Étienne Judicial Court on 2 March 2021)

[5] Notre Affaire à Tous and others v. France (Paris Administrative Court, No 1904967, 1904968, 1904972, 1904976/4-1, 14 October 2021)

[6] VZW Klimaatzaak v Kingdom of Belgium & Others (Brussels Court of First Instance, 17 June 2021)

[7] ClientEarth v Enea (Regional Court in Poznań, 1 August 2019)

[8] There has been a visible trend of claimants in recent years seeking to rely on human rights arguments in order to establish liability on the part of governments and corporations with respect to climate change issues, but this topic is beyond the scope of this article.

[9] R (on the application of Friends of the Earth Ltd and others) v Heathrow Airport Ltd [2020] UKSC 52

[View source.]

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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