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Litigation alleging responsibility for climate impacts could be on the verge of escalating, triggering additional directors and officers and product liability claims, according to a report by Clyde & Co.
More than 1,100 climate change lawsuits have been filed to date in the United States, according to a database tracking such court actions maintained by the Columbia Law School’s Sabin Center for Climate Change Law in New York and law firm Arnold & Porter Kaye Scholer LLP based in Washington, D.C.
Legal actions generally fall into three categories: securities class actions in which groups of shareholders bring actions against companies and senior individuals within them to compensate them for alleged losses incurred, derivative actions in which shareholders bring actions on behalf of the company against the board alleging breach of fiduciary duty, and tort claims on the basis of product liability arguments claiming that an allegedly defective product caused environmental damage resulting in current losses or future costs to put right or guard against the effects of climate change, according to the Clyde & Co LLP report released on Monday.
For example, a securities class action lawsuit called Ramirez v. Exxon Mobil Corp. alleging the Irving, Texas-based oil and gas major hid and mispresented the potential costs of climate change was filed in 2016. In August, a federal court denied Exxon’s motion to dismiss, suggesting that the “long-anticipated specter of a rise in climate-related D&O claims could at last be about to materialize,” Clyde & Co said in its report.
“Climate change litigation is not new – but now we are seeing new types of claims emerge brought by a wider range of claimants against businesses with potential for increased D&O risk, too,” Neil Beresford, a London-based partner, said in the report.
However, a positive impact from such litigation could be that “companies will wake up to the fact that they need to be more careful when making disclosures about climate change – if they’re not there already,” Ned Kirk, a New York-based partner at the law firm, said in the report.
“For insurers, liability for climate change disclosures is likely to be a key issue for D&O insurers in the near future,” Mr. Kirk added in the report.
“When it comes to reducing exposures, some insurers may feel it necessary to increase reserves to cover the probability of rising defense claims costs,” the report stated. “Of course, reviewing policy wordings and exclusions for climate change related exposures is also vital: understanding not only the risks, but also how the policy will respond.”
In addition, the potential for product liability claims related to climate change is rising, with this approach creating significant risks for companies because the lawsuits have been filed as simple tort claims in the state courts, according to the report.
“If state court jurisdiction is upheld, it allows plaintiffs to launch similar actions nationwide in courts which are often perceived to be a dangerous forum for corporate defendants,” the report stated. “The complaints focus upon an allegation that the oil industry has, for the last 50 years, sold and marketed petroleum, despite knowing about the harmful effects of burning carbon-based products. The arguments are similar to those used in tobacco and asbestos litigation although the core allegation that petroleum is a defective product is clearly on a different scale. Such a finding has potential to disrupt the global economy.”
Insurers are already developing novel risk transfer solutions such as parametric insurance and using the power of insurance pricing to incentivize investing in resilience measures, according to the report.
“For insurers, reducing their exposures while developing solutions for clients to help build resilience to climate change risk is a delicate balancing act,” the report stated. “There is, of course, a danger that some kinds of risks simply become uninsurable, but the industry is working hard to come up with innovative solutions to ensure that doesn’t happen and to find ways to extend coverage to more communities and businesses that aren’t currently insured.”
BOSTON — Climate change presents risk management challenges to the insurance industry that are increasingly attracting the attention of their regulators, experts say.