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Climate Change for Insurers: When Politics Fail, Flood the Courts

January 29, 2020

By Jason Reeves and Deepa Sutherland
To read this article in PDF format, please click here.

This article follows on from a series of previous articles seeking to address climate change litigation in the context of insurance and reinsurance.  Three different, but important, decisions in December 2019 have once again highlighted the need for the industry to address the issue of climate change at both an underwriting and structural level. 

Each day seems to bring a new headline about what is being labelled an urgent climate crisis.  The Paris Agreement, the Kyoto Protocol, and COP25 (the 25th United Nations Climate Change Conference) are familiar to most people as some of the well-intentioned political attempts to address climate change.  These arrangements allow signatory national governments to demonstrate publicly that they are serious about taking action.  However, even a brief glance at the daily news would suggest that public opinion decries the inaction of governments, while, at the same time, climate-related disasters appear to be increasing in frequency and severity.  Indeed, many view these intergovernmental plans as, at best, too little too late and, at worst, largely toothless, voluntary, non-binding, or simply blocked by obstructive stakeholders.  Traditional politics appears unable to provide an effective solution and, in certain cases, is said to be part of the problem. 

The seemingly growing gap between the need for action and lack of efficacy of political solutions is being filled by strategic lawsuits.  From 2017-2018, the US saw what can be termed a “second wave” of climate-related lawsuits, largely reliant on developments in climate science.  (It is worth noting that a decade ago, the “first wave” of US climate change lawsuits, Kivalina and Comer, were dismissed at an early stage because the courts did not have discretion to interfere in political matters, and the claimants did not have standing.)  Many of these actions have survived summary dismissal and are frequently advancing to discovery.  However, this is by no means a US-only trend.  Today, strategic climate change litigation is being brought around the world. 

The end of last year saw global attention given to climate protesters in Australia, Madrid, and elsewhere.  At the same time, decisions were reached in three vastly different climate change actions; however, these legal developments were given much less (if any) coverage in the mainstream press.  While perhaps not traditional front-page-worthy news, they are hugely important to the issue of climate justice.  These actions illustrate the different ways in which, behind the political bluster of climate change debate and (in some cases) denial, people are using the courts to effect change and indicate the courts’ appetite to venture into this traditionally political field.

Urgenda vs the Netherlands (20 December 2019) is an example of a country’s citizens holding a national government to account upon constitutional and human rights grounds;  Commission on Human Rights of the Philippines (9 December 2019) illustrates the efforts of citizens and NGOs using a national human rights body to demand accountability from private companies and linking climate change to human rights violations; and New York v Exxon (10 December 2019) is an example of a state government bringing an action against a private company using securities legislation.

Urgenda vs the Netherlands (20 December 2019)

Less than a week after the disappointing COP 25 in Madrid, the Dutch Supreme Court handed down its decision in Urgenda.  The Urgenda Foundation brought the case on behalf of 886 Dutch citizens in 2013, alleging that rapid global warming caused by greenhouse gases is a danger to life and well-being, and sought to compel the Dutch Government to move more quickly to reduce emissions in line with its obligations under the Dutch Civil Code and European Convention of Human Rights (ECHR).

The Dutch Supreme Court rejected the Government’s further appeal and confirmed that its failure to reduce emissions is a breach of its obligations under the ECHR.  The Court noted the Government’s argument that this is a political question, but found that the Dutch Constitution requires Dutch courts to apply the provisions of the ECHR in their role to guard the limits of the law and provide protection where there is an insufficient governmental response.

The judgment requires the Dutch Government to reduce emissions by a minimum of 25% by the end of 2020 as compared to 1990 levels. 

This decision is significant for a number of reasons.  It is the first time a court anywhere in the world has ordered a country to reduce its emissions by a minimum amount.  At a time where governments are failing to act, this decision offers proof that courts can be used to bridge the gap.  It also marks a turning point in the evolving impact of human rights law on climate change – the Dutch Government was determined to have binding legal obligations based on international human rights law.  Further, it demonstrates the impact and importance of a strategic approach. Even before the judgment, Urgenda had developed broad public support for the case which in turn generated pressure and scrutiny. This strategic approach has extended to the question of implementation – the Dutch Parliament has asked the Dutch Government to publish the measures of implementation to reduce emissions and, indeed, the Government had already started to take certain steps in this direction.

Commission on Human Rights of the Philippines (9 December 2019)

The Philippines Commission on Human Rights began investigating 47 oil and gas companies, the “Carbon Majors,” in 2016 following receipt of a petition from Greenpeace South-East Asia and other groups. 

At that time, there was no precedent to follow where climate change had been framed as a human rights issue.  However, as a national human rights institution, the Commission acknowledged that it had the flexibility to create its own processes and was “ideally situated to deal on issues that regular courts would normally not touch or are not familiar with.”  The Carbon Majors, unsurprisingly, argued that climate change was not a human rights issue under domestic or international law and disputed the Commission’s authority to investigate them.

On 9 December 2019, following three years of investigations and hearings in Manila, New York, and London, the Commission concluded that the Carbon Majors can be held accountable for causing global warming and violating citizens’ rights. 

Significantly, the Commission also recognised that there was evidence of criminal intent in the Carbon Majors’ denial and obstruction in connection with climate change, and that it may be possible to hold companies criminally accountable where they have been clearly proved to have engaged in such acts.

However, the Commission’s recommendations are not legally binding, and while the Commission concluded that fossil fuel companies have a “clear moral responsibility,” it found that legal responsibility for climate damage is not covered by current international human rights law and it would be up to individual countries to pass sufficiently robust legislation and establish legal liability in their own courts.

While on the surface it might appear that concrete outcomes are still subject to political will, it would be wrong to dismiss the outcome on those grounds.  The Commission’s conclusions are significant and have given the climate litigation movement more credibility and ammunition at a time of increased public awareness and appetite for change.  The findings could lead to stricter regulations and pressure on companies to cut their emissions in the Philippines and elsewhere (the Commission noted that there was clear scope under existing civil law in the Philippines to take action against the Carbon Majors).  The Commission recognises that its findings can be relied upon as a precedent for future climate justice actions and they may well provide avenues for new cases to be brought against companies and for citizens to pressure their governments to take action, spurred on by the success of Urgenda, which is expected to inspire challenges to national governments in other jurisdictions.  Further, this investigation has built up a repository of information and data on climate change that has been amassed and tested, which can provide evidence to support such actions. 

As summarised by the Center for International Environmental Law, “Both for civil and criminal liability in jurisdictions around the world, the Commission’s findings in this inquiry represent not an end of the legal investigations into Carbon Majors companies but a major new beginning for them.”

New York v Exxon (10 December 2019)

In 2018, the State of New York brought a claim against Exxon in a New York State court under the Martin Act (a New York securities statute) following a three-year investigation.  The investigation focused on whether Exxon had misled investors about the impact of climate change on its financial value.  Exxon was accused of keeping two books: one for internal use, one for investors.  Specifically, New York alleged that Exxon falsely communicated the impact of climate change on its business by using different internal and external metrics for pricing carbon emissions and caused investors to lose USD 1.6 billion. 

The Court rejected the State of New York’s claim and found that its arguments were deliberately exaggerated, its expert evidence inadequate, and that it had failed to identify any investor who had been misled.  The Court noted that the judgment did not concern Exxon’s role in global warming and addressed securities issues only.  This serves as a warning that claimants seeking creative climate change remedies must still find a breach of existing statute: complicit involvement in global warming does not mean a breach of securities regulation.

The Commonwealth of Massachusetts is currently pursuing a similar case against Exxon.  Its state laws provide a broader consumer protection basis for the claim, and Massachusetts alleges that Exxon misled investors and consumers; it specifically argues that Exxon systematically misled consumers about the role fossil fuel products played in causing climate change.

This type of lawsuit poses a more significant threat to Exxon and for Carbon Majors generally.  While the Martin Act in New York requires a link to misled investors, Massachusetts law only requires a link to misled consumers, a far easier threshold to satisfy.  The difference between the two lawsuits is obvious, but the real concern for the Carbon Majors is that they face a series of potential claims in jurisdictions with different standards, and some of those standards will be more easily met.  This therefore remains a developing exposure.

Why these decisions matter

These actions are just some examples of strategic litigation being brought on a domestic, regional, and international level to hold to account and change the behaviour of governments and companies and shape public and policy debate.  These suits are not always successful, but they are ever-evolving: they draw on concepts from many different areas of law, refining the arguments and relying on developments in science; claimants are increasingly informed and empowered; courts in different jurisdictions are using innovative means of intervening in policy and politics.  What is clear is that climate change litigation is a growing trend. 

These decisions also show that success in a climate change case is not limited to, as many believe, vanquishing a Carbon Major in a US court (although that certainly remains an actively pursued goal).  The decision in Urgenda, and indeed the public debate shaped during the course of the case, will affect how power is delivered and heavy industry operates, and also the viability of green technology and carbon offsetting projects.  This will have a direct impact on Dutch industry and consumers and related economies.

There are cases similar to Urgenda currently proceeding in Belgium, Canada, Colombia, France, Germany, India, Ireland, New Zealand, Pakistan, Switzerland, the UK, the US, and the EU.  Further, because the Urgenda decision was based on the ECHR, it has implications for all 47 member states of the Council of Europe.

The insurance and reinsurance industry cannot ignore the implications of this.  Putting to one side the transition risks of their own investment portfolios, thought must be given as to how a policyholder targeted by a government’s carbon reduction obligation might respond.  Are there claims risks?  Are there new risk transfer opportunities? 

Furthermore, given the Philippines findings, how should insurers and reinsurers approach climate change cases advanced on the basis of human rights?  If there is evidence of criminal intent in a policyholder’s denial and obstruction in connection with climate change, how should this be treated by CGL and D&O policies? 

Climate change litigation poses a still unquantified risk for the insurance and reinsurance industry. 

What can the industry do?

Climate change lawsuits threaten the very existence of carbon-intensive industries and will be vigorously defended.  While it might, at present, seem a stretch to imagine a Carbon Major being found liable for damages, assuming continued success in court in the face of a rising tide of determined plaintiffs, public opinion and scientific data is not a prudent long-term strategy.  Whether or not a successful judgment against a policyholder is indemnifiable under a responsive policy, or whether a climate change claim against a policyholder is ultimately successful, the industry is uniquely exposed through the costs of defending those claims under liability policies.  A policyholder win is still a loss for the insurer and its reinsurer who bear defense costs.

Ideally, every insurer and reinsurer should develop a climate change business plan that identifies and manages climate change exposures at the core of its business.  The industry should not wait for notices of climate change claims before taking action.

At the very minimum, it should prompt a proactive review of the available coverage and wordings for policyholders involved in carbon-intensive industries.  This would ideally include a 360-degree review of business lines and policyholders with enhanced exposure to climate change lawsuits.  Wordings should be assessed and, where necessary, amended.  Exclusions, caps and sub-limits for climate change exposure can complement the development of new bespoke risk transfer products, much like the industry has seen with cyber-related risks. 

At a structural level, companies who insure and invest in carbon intensive industries while at the same time failing to address increased exposure to climate change risk may face action by activist shareholders.  

As an integral part of the financial system, and as experts on risk management, the insurance industry has a valuable opportunity to assume a central role in the wider climate change discussion concerning exposure, risk and remedy, rather than simply wait for the inevitable claims to roll in.

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