Skip to main content
Blog Post

Climate change litigation threats to directors and officers

Financial, Executive and Professional Risks (FINEX)|Climate Quantified
Climate Risk and Resilience

November 27, 2019

Although no company has been found liable for the effects of climate change, the growing number of pending cases across the globe has had an impact on directors & officers (D&O) liability insurance policies.

There are now over 1,300 climate change related cases being brought in 28 countries around the world with the U.S. alone accounting for over 1,000 of these. Just trying to keep abreast of the rapidly changing laws and regulations relating to climate change across the world represents a formidable challenge for managers of multi-national companies. Earlier this year, international law firm Herbert Smith Freehills (HSF) estimated there were more than 1,600 different laws and policies relating to climate change across 164 countries representing a 25-fold increase since 1997.

To date no companies have been found liable for the effects of climate change let alone any directors and officers but this does not mean that the costs of defending these claims has not made an impact on directors & officers (D&O) liability insurance policies. How well adapted are these policies to this type of claim and what are the potential coverage pitfalls? Before attempting to answer that question, it’s worth reminding ourselves how directors can find themselves involved in these types of proceeding in the first place.

Litigation threats against directors

Among the litigation theories relevant to directors’ duties that are being tested in the courts are:

  • Failure to mitigate greenhouse gas (GHG) emissions
  • Failure to adapt to physical impacts of climate change
  • Failure to adapt investment strategies
  • Failure to disclose climate related risks
  • Failure to comply with environmental regulatory obligations

Under English law (which is similar in this respect to that of other developed economies) directors must exercise due skill, care and diligence in the performance of their roles and cannot delegate their overall supervisory function with respect to the company’s affairs. So how can directors keep track of the climate change risks run by their companies particularly where the risks may not always be obvious having regard to the company’s particular activities? (For example the Prudential Regulation Authority (PRA) has recently issued specific guidance on this issue to banks.)

This is a rapidly developing area and there is evidence that litigation funders in Australia and elsewhere as well as the U.S. plaintiff’s bar are advancing increasingly inventive theories. Perhaps the most obvious vehicle for this type of litigation is the U.S. shareholder class action. And certainly this is among the models being deployed against one of the largest U.S. oil majors. Typically, these cases seek to allege that a company’s share price has suffered due to climate change during a time when engaged in misleading and deceptive conduct with respect to the true impact of such change.

An alternative case theory that is often employed by plaintiff law firms — especially in the U.S. — is the derivative lawsuit. The broad principle which underlies this type of claim is that shareholders require a remedy in appropriate case to force a company to bring proceedings against delinquent directors who, by virtue of the control they exercise over the company’s management, could not otherwise be held to account. For this type of claim, shareholders do not need to identify a particular share price fall. A key distinguishing feature of these cases is that any damages ultimately payable are awarded to the company rather than to the shareholders bringing the claim, but this does not mean that they are necessarily less costly to defend. (See Von Colditz v. Woods et al)

Protecting the company and reducing the liability threat

It is perhaps no coincidence that in respect of perhaps the only other planet-sized threat affecting just about every company i.e. cyber risk, the starting point at board level is also typically a series of questions or a checklist from which more granular planning can occur. See for example the U.K. National Cyber Security Centre Board Toolkit. This is because the most solid plank of any defence to litigation alleging negligent failings at board level is the ability to demonstrate that the relevant risks were in fact duly understood and evaluated and that appropriate steps or measures were adopted. (Directors are not guarantors of good outcomes.)

D&O liability insurance coverage challenges for climate change litigation

So what are some of the potential coverage arguments which D&O insurers could arguably rely on to deny or restrict cover in the event that climate-related litigation is brought against directors?

  • Pollution exclusions
    It has long been the case that most D&O policies typically contain exclusionary language in respect of pollution/clean-up costs. In soft market conditions, absolute exclusions were comparatively rare and indeed the relevant language is often found buried (and in some cases watered down) in the definition of loss or disguised as a sub-limit or as “additional cover.” What do the exclusions have to do with climate change? Well, according to the landmark U.S. Supreme Court decision in Massachusetts v. Environmental Protection Agency (EPA), greenhouse gases such as carbon dioxide do constitute “air pollutants” as described under the U.S. Clean Air Act. Depending therefore on the policy language used and on the particular underlying facts in the claim, pollution related exclusionary language may be relied on by insurers.
  • Bodily injury and property damage
    This type of exclusion is also almost invariably found in D&O policies. Most good policies carve out (i.e. remove from the ambit of the exclusion) defence costs incurred in this type of claim thus providing directors with a key measure of protection but there are pitfalls here. One of the most common is that the carve out often does not extend to costs incurred in dealing with investigations as opposed to actual claims. Since investigations into the effects of climate change on human health and property could be extremely costly this type of claim could be a significant limitation on cover.
  • Long tail claims
    It is worth reminding ourselves that D&O policies typically run only for 12 months and respond only to claims made against past, present and future directors during that period. Once the policy period has expired then (with the exception of any circumstances validly notified during that period which later result in claims) the relevant policy limits are treated as expired. What this means is that unless the company continues to buy D&O cover into the future, directors cannot be certain that they will continue to have protection. Case theories relating to climate change will often rely on damage to the environment over many years. The Philippines Petition against the oil majors for example draws on data going back to the 1970s. Directors who retire from boards exposed to climate change litigation would do well to explore with their advisers the scope for additional protection in the event the company does not purchase D&O insurance in the year in which the claim is brought.

This article was originally authored by Francis Kean.

Contact

Executive Director
Coverage Specialist, FINEX

Contact Us