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Environmental responsibility is latest front in D&O litigation

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Recent litigation is putting directors and officers on the spot for environmental risks allegedly posed by the companies they oversee.

Risk managers should make certain that the terms and conditions of their environmental D&O coverage are adequate to protect top executives and board directors from such shareholder litigation, experts say.

An April 30 suit filed in Jacksonville, Florida, federal court against Jacksonville-based Rayonier Advanced Materials Inc. and its directors and officers alleges there was insufficient disclosure to investors about the specialty fiber maker's environmental remediation and related obligations. Rayonair Advanced Materials, previously a unit of Rayonier Inc., was spun off to shareholder a year ago.

The suit, Oklahoma Firefighters Pension & Retirement System et al. v. Rayonier Advanced Materials Inc. et al., followed the company's announcement in January that it had boosted environmental reserves by $69 million for disposed operations.

In addition, Charlotte, North Carolina-based Duke Energy Corp. faces five shareholder derivative suits filed last October in Delaware Chancery Court and one filed in March in North Carolina state court over the 2014 release of up to 39,000 tons of coal ash into the Dan River from its retired coal-fired power plant in Eden, North Carolina, according to company regulatory filings.

Meanwhile, significant attention has focused on a case in Canada, in which former directors of a bankrupt aerospace firm agreed to personally pay a settlement with regulators in an environmental case (see related story).

D&O coverage can have significant differences in terms and conditions, said Donna Ferrara, Chicago-based senior vice president and managing director at Arthur J. Gallagher & Co. in Chicago.

“There's no D&O policy that is going to pay for the cleanup of a brownfield, but you may have coverage for a security claim and a shareholder claim ... that says, "Board of directors, why did you make this great big mess happen,' or "Why did you buy this brownfield?' “ Ms. Ferrara said.

Paul R. Walker-Bright, a partner at Reed Smith L.L.P. in Chicago, said it's common for D&O policies to exclude claims for the discharge, dispersal or release of pollutants.

This “creates a potential avenue for insurance companies to contest coverage for claims against the directors or officers,” Mr. Walker-Bright said “We've seen that happen, so we think that it is very important for companies to be aware of that. It's sort of a hidden trap door, if you will, that insurance companies can take advantage of, and your best defense against that is to try to negotiate better wording, or narrower wording, to avoid exactly that problem.”

On top of that, remediation costs frequently are included in pollution exclusions.

Kevin LaCroix, executive vice president at RT ProExec, a division of R-T Specialty L.L.C. in Beachwood, Ohio, said a “lot of disclosure is required” by companies on environmental issues, and “there are a lot of ways companies can guess wrong,” such as the status of environmental remediation proceedings or determining reserves for legal or environmental costs.

“Where I see it come up most often is with regard to acquisition or divestiture activity,” said William G. Passannante, a shareholder at Anderson Kill P.C. in New York.

“Directors can get second-guessed” about environmental liabilities, Mr. Passannante said. “The question is whether what you're talking about, really, is an environmental claim or is it really a claim related to a mistake in the valuation of the corporate assets.”

Another recent case involves Charleston, West Virginia-based Freedom Industries Inc. The company and four former directors pleaded guilty in March to environmental crimes in connection with a January 2014 chemical spill in the Elk River in West Virginia, in which several thousand gallons of a coal-processing chemical were released.

Gregory Schilz, San Francisco-based executive vice president at JLT Specialty Insurance Services Inc., said pollution legal liability coverage is available that specifically addresses corporate liability for pollution resulting from operations.

“I think we're going to see a lot more critical viewing” of the issue of providing coverage as a result of this case, Mr. Schilz said.