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Climate Change and Insurance: Litigation Risks for Insurers

Insurance Law360
January 23, 2019

By Jason Reeves and José M. Umbert
To read this article in PDF format, please click here.

This is the first of five articles that address climate change lawsuits in the context of (re)insurance. This article reviews the recent U.S. and foreign climate change lawsuits and offers suggestions to liability (re)insurers for responding proactively to climate change claims and related coverage litigation.[1] 

Over the past few years, a number of lawsuits seeking damages related to climate change have been brought in the U.S. and abroad. Most of these lawsuits target large oil and gas companies. Many of the high-profile lawsuits are nuisance claims but some allege misrepresentation of financial information in the context of climate change. How should liability insurers respond? First, we address why the industry may now want to consider responding.

Smoking cigarettes causes cancer. Tobacco industry-funded experts, who argued the contrary, have been discredited. The evidence of harm caused by smoking spurred a once unthinkable shift in social and political attitudes toward tobacco: governments in many Western countries have taken action to reduce smoking. Tobacco litigation worked: it resulted in awards to injured parties and changed corporate behaviour. “Business as usual” had to change and it did.

Burning hydrocarbons causes climate change. Credible experts agree about the causes and impact of climate change. This evidence has led to a new social awareness of the effects of climate change and, with a few outliers, climate change is on the agenda for governments around the world. The costs of dealing with climate change are beginning to be understood and quantified. “Business as usual” must change in response to the impacts of climate change, and (re)insurers can be at the forefront of that change.

What are (re)insurers doing about it?

(Re)insurance is by its nature a reactive industry — ironic given it is an industry that anticipates and measures risk. Typically, the industry responds to claims as they come in. The industry is less adept, however, at responding to emerging risks. Waiting for slow moving, long-tail liability claims to hit before taking action seems counterintuitive. Climate change exposure is not a theoretical/ actuarial issue concerning potential losses from increased storm frequency and intensity. Policyholders are being sued now.

There are a handful of active U.S. climate change lawsuits brought by state and local governments pending in California, New York, Colorado, Washington state, Baltimore and Rhode Island. Generally speaking, the lawsuits allege the use of fossil fuels produced by the defendants (large oil and gas companies) has created greenhouse gas pollution (by carbon dioxide, methane and nitrous oxide), which is causing global warming. The complaints also describe the damage allegedly sustained and anticipated by plaintiffs as a result of the defendants’ conduct, including rising sea levels, wildfires, landslides, extreme precipitation events, drought and public health impacts.

Significantly, plaintiffs allege that the defendant oil and gas companies have known for nearly 50 years that greenhouse gas pollution from their fossil fuel products has a significant impact on the Earth’s climate and sea levels. The complaints contain detailed allegations regarding defendants’ knowledge that greenhouse gases, specifically those emitted from the use of their fossil fuel products, were causing global warming, sea level rise and disruptions to the hydrologic cycle. Plaintiffs further claim that the defendants failed to disclose, and indeed affirmatively concealed, the impacts of the use of their fossil fuel products. The parallels to the tobacco litigation of yesteryear are obvious.

The complaints typically plead a number of causes of action: public nuisance; private nuisance; trespass; failure to warn; design defect; and negligence. The defendants have denied the claims and sought to have them dismissed on jurisdictional and other grounds. In many cases, defendants have advanced many of the same nuisance and dismissal arguments first raised in Comer v. Murphy Oil in 2005 and Kivalina v. Exxon in 2008. In those cases, similar arguments resulted in dismissals.

But in the new crop of U.S. and foreign climate change lawsuits, the plaintiffs’ primary goal is not necessarily to win the suits; instead, the lawsuits are part of a social campaign designed to win hearts and minds. Plaintiffs are looking to depart from “business as usual.” Litigation of this kind in the U.S. may be driven, at least in part, as a response to the Trump administration’s environmental policies. Each new climate change lawsuit amends the basis of claim. It’s hard to believe that one of these lawsuits won’t eventually be successful. The first meaningful tobacco judgment was in February 2000, more than 40 years after the first tobacco lawsuit was filed. The timetable for success in the climate change litigation may well be much sooner.

Success will likely be incremental. “Losing” for defendants may be a lengthy discovery exercise. For (re)insurers it may be indemnifying policyholders for defense costs.

Some (re)insurers aren’t doing anything because none of the underlying claims have yet succeeded. But common sense (and history) suggest that the “for all time it will never happen” approach may not be prudent. (Re)insurers should consider how long the good luck in underlying lawsuits will last. Will climate change be the next Y2K or follow the path of tobacco, asbestos, environmental pollution and MTBE, which resulted in decades of coverage litigation?

CGL policies routinely exclude any number of risks: war; terror; EMP; nuclear; radioactive; cyber, which aren’t associated with a developing area of law which is enhanced by changing social and political views. Most existing CGL policies do have exclusions that appear to apply to climate change claims, but they are not climate change specific. Two easy fixes would address any residual exposure and present new opportunities. For (re)insurers, “doing something” in connection with climate change is about who and what are insured and how a policy is worded. It’s not a marketing exercise.

First, (re)insurers can, as with any risk not intended to be covered by a CGL policy, insert an endorsement that expressly excludes climate change claims. Equipped with knowledge of past long-tail categories, (re)insurers can draft new exclusions that address new exposures. Second, where captive and ceding insurers are involved, a clear claims control clause should be included in reinsurance contract wordings to avoid potential problems with the handling of the claim at the direct insurance level. These two simple steps may reduce exposure significantly. Even if climate change develops in the same way as Y2K, rather than MTBE, the solution is quick, easy and cheap.

Insurers should be aware that climate change claims and suits threaten industries and businesses other than the obvious low hanging fruit oil and gas companies. Any industry linked to hydrocarbons and greenhouse gas emissions may be at risk: transport; manufacturing; agri-business; and finance. Increasingly, the most interesting climate change lawsuits, like the October 2018 New York v. Exxon lawsuit, allege misrepresentations of the financial impact of addressing climate change in the context of the business. Because of the nature of the allegations, these cases may be more difficult to dismiss than the nuisance lawsuits. The unique D&O/ shareholder exposure also highlights the plaintiff goal of effecting change with activist shareholders.

There is a place for (re)insurers to offer a climate change product for policyholders outside of generic CGL policies. As with war, terror, nuclear and cyber policies, a dedicated climate change policy could more accurately measure the exposure and rate the risk of climate change. A bespoke liability policy would allow a policyholder to buy coverage to transfer risk, brokers to sell more products and underwriters to accurately rate a risk and collect a fair premium.

Jason Reeves and José M. Umbert are partners at Zelle LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Subsequent articles will address the following issues: what (re)insurers should know about climate change lawsuits outside of the U.S.; legal theories that may be used to attempt to hold companies responsible for their “share” of climate change; how lessons learned from tobacco, asbestos, environmental, and MTBE coverage litigation may instruct the handling of climate change claims; and subrogation possibilities related to climate change.

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