A Comprehensive Look at Climate Change Liability Risks

In an earlier post (here), I wrote about global climate change and D & O risk. The potential challenge to D & O insurers from the risks and potential liabilities of global climate change is only a part of the full range of liability exposures the insurance industry potentially faces as a result of climate change. A May 2007 article by Christine Ross, Evan Mills and Sean Hecht entitled "Limiting Liability in the Greenhouse: Insurance Risk-Management Strategies in the Context of Global Climate Change" (here) take a comprehensive look at the insurance industry’s liability exposures arising from the causes and consequences of climate change.

The authors’ premise is that the discussion of potential insurance consequences from climate change tends to focus on the property damage concerns of extreme weather events. Their article, by contrast, focuses on the "relatively subtle but equally important dimension of liability." The authors examine a broad range of potential liabilities and insurance coverages that could be implicated, including commercial general liability claims; product liability claims; environmental liability claims, professional liability claims; political liability claims; and others.

The authors' starting point is that "parties that disproportionately contribute to the impacts of climate change are not required through any statutory or regulatory scheme to internalize costs of these impacts." The externalized costs "are left of the victims to bear," based upon which, the authors observe, "applying tort law to climate change harm could be consistent with tort law’s basic goals of reducing the societal costs of human activities, compensating those who are harmed unduly by these activites, and providing corrective justice." While substantial barriers could impede efforts to impose tort liability, the costs of defense alone will be burdensome on companies and their insurers.

In addition to attempts to redress climate change through litigation, other climate change initiatives are or will impact many companies. For example, investors have evinced an increasing desire to compel full disclosure of environmental liability risks. The article notes that "over the last seven proxy seasons, climate change resolutions filed by shareholders have increased from six in 2001 to a record forty-two filed in the first two months of 2007." The authors also specifically note that "shareholder resolutions were filed with four insurance companies during the 2007 proxy season … requesting those companies to disclose strategy and actions on climate change." While in the past these kinds of resolutions would have arisen from special interest investor groups, now "some of America’s most powerful institutional investors …are becoming increasingly active in environmental and social issues."

The authors also note that several SEC regulations deal directly or indirectly with environmental risk disclosure, including Items 101 and 303 of Reg. S-K. The article does note that, at least in the past, there has been "lax enforcement" of these disclosure requirements, and that only five times in the last thirty years has the SEC taken action to enforce environmental liability disclosure. Moreover, the SEC "does not specifically require reporting on greenhouse gas emissions and climate change."

The authors assert that the growing awareness of the potential impact of climate change on companies' circumstances is increasing pressure on the companies to address these disclosure issues. The authors cite the 2006 SEC enforcement action (here) against Ashland Inc., where the SEC found that the company understated its environmental reserves by improperly reducing its remediation estimates. The authors state that this enforcement action may "be a signal of the SEC’s increasing willingness to hold companies accountable for failure to adequately disclose material environmental risks." (Refer here for my prior post about the Ashland enforcement action.)

In addition, the authors further note that "failing to establish standards or to take proactive measures to reduce greenhouse gas emissions could expose companies to reputation and brand damage, as well as regulatory and litigation risk." Among the specific litigation risks, the authors note that "shareholder lawsuits could be focused on a company’s performance suffering due to negligent planning by corporate directors for climate change risk." The authors also note that "ignoring climate change, or even worse, misrepresenting its risks can result in exposure to litigation risk."

The authors cite a study finding that 53% of the largest 500 publicly traded companies are doing "a poor job" describing climate change risks to investors, and "are thus at risk of shareholder lawsuits." The authors further note that insurers may be particularly vulnerable, since insurers in particular "have been reluctant to disclose their climate-related risks."

After comprehensively reviewing a wide variety of potential liability exposures, the authors move on to suggest a variety of risk management and mitigation strategies. The authors also call on financial services companies in general to incorporate environmental awareness into their portfolio strategies. The authors call on insurers in particular to "offer innovative products and services that maximize incentives for energy efficiency while minimizing risk." The authors cite, among other things, insurer initiated property loss mitigation efforts and pay-as-you-drive automobile insurance as examples of innovative insurance efforts "to take concrete actions that generate profits while maintaining insurability and protecting customers from extreme weather-related losses, as well as reducing greenhouse gas emissions."

The authors conclude by noting that:

The insurance industry, perhaps more than any other institution, has the power to set the stage for enduring and significant contributions to solving the problem of global climate change. In doing so, liability insurance considerations could prove to be as important as the more widely studied property insurance consequences of climate change.

As I discussed in my earlier post, global climate change is going to loom increasingly large, not least as a growing source of potential liability risk for companies and their directors and officers. Readers who are interesting in these topics will want to know about the free June 12, 2007 webinar entitled "Tackling Global Warming: Challenge for Boards and Their Advisors," co-sponsored by The CorporateCounsel.net and the National Council for Science and the Environment. Information about the webinar can be found here.

Readers interested in global climate change as an environmental phenomenon will be interested to read the June 7, 2007 Washington Post article entitled "Icy Island Warms to Climate Change" (here) discussing the wide-ranging impacts of climate change that Greenland and its inhabitants are already experiencing.

Hat tip to the Sox First blog (here) for the link to the climate change article.