Climate Change Series As environmental awareness increases, the risk of litigation arising from climate change is growing, and there are fears the insurance industry could bear the brunt of this.
Insurers provide cover to big multinational companies. They are also significant investors themselves, through their life funds and through the money they set aside to meet future claims.
Lis Gibson, insurance partner at Deloitte, the professional services firm, says insurers are at risk in a number of ways. They could be exposed through the policies they have written to protect directors of companies from paying out of their own pockets in cases arising from their duties as directors. If shareholders, for example, were to allege that directors had brought a company into disrepute through pollution, this could lead to a claim under a so-called directors and officers policy.
Similarly, insurers write public liability policies that provide cover for claims brought against companies by the public. After insurers, including Lloyd’s of London, the world’s oldest insurance market, suffered heavy losses from pollution in the 1980s, this has been excluded from many policies and is written as a separate cover.
However, Ms Gibson says there have recently been efforts to categorise greenhouse gas emissions as pollution. Earlier this year, US states and campaign groups won a case against the US Environmental Protection Agency, the body which regulates pollution and punishes polluters. The US Supreme Court ruled that greenhouse gases were pollutants and should, therefore, be regulated. “It has opened the door to a number of attempted lawsuits,” says Ms Gibson.
Peter Breitstone, chief executive of Aon Environmental Services, which analyses environmental risk, agrees that the “foundation is being laid for potential claims for damage resulting from climate change under pollution and possibly even general liability policies”.
Such trends are not confined to the US. Regulations in Europe and parts of Asia are moving towards holding business owners accountable for environmental damage.
Ms Gibson urges insurers to check the small print of the policies they write to establish whether they intend to cover liability for greenhouse gas emissions.
“If a class action were ever successful, it could be hundreds of billions [of dollars] of liability. It will make asbestos look tiny,” she says.
Ken Ayers, managing director of Aon, says that in the past year a number of insurers have begun to introduce climate change or global warming exclusions into policies.
According to Paul Bowden, a partner in the environment group at Freshfields, the law firm, fears about insurers’ exposure are overdone.
One area under discussion, he says, is whether the industry could be drawn into “climate change litigation” – potential class actions brought by populations that have suffered from hurricanes, flooding and other extreme weather events or recoupment claims by governments and municipalities that have had to bear the costs of clean-up and civil defence.
However, he adds that these sorts of suits have to be distinguished from the industry’s exposure to conventional property and material damage claims.
Proving cause and liability for long-term macroclimatic change is a tall order under the law as it stands. Tracing changing weather patterns back to the historic, carbon-emitting activities of a particular company or even an industry sector strains the limits of accepted science.
“But that is not to say that creative plaintiffs’ lawyers will not chance their hand,” says Mr Bowden. “And it is quite right that the insurance industry is being as pro-active as it is and has the entire climate change issue firmly on its agenda.”
Insurers have responded by creating ClimateWise, a series of principles for managing and reducing the risk of climate change. Forty of the world’s biggest insurers, reinsurers and brokers have signed up.
One of the principles is for insurers to take account of climate change when making investment decisions, a significant move as insurers are powerful investors.
Another principle is encouraging the companies that insurers cover to manage and reduce the risks from climate change, and insurers have already launched a range of programmes to encourage their retail customers to be more green.
Andrea Felsted is insurance correspondent
