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Executive risks grow as lawsuits target corporate policies on climate change

PLUS Conference

SAN DIEGO – Climate change-related risks are a growing area of exposure for directors and officers and their insurers, panelists said at the Professional Liability Underwriting Society’s 35th annual conference last month.

Even without disclosure requirements, there have already been attempts to litigate and sue “bad actors” on issues related to climate change, said William P. Kelly, senior vice president and U.S. deputy head of management & professional liability lines at Canopius Group Ltd. 

There have already been some examples of “high-profile” climate change-related matters, said Maurice Pesso, partner at Kennedys Law LLP.

Recent cases include those filed by attorneys general in New York and Massachusetts against Exxon Mobil Corp. for its climate-related disclosures; the Volkswagen emissions scandal; and the case against Vale Mining Co. following a mine collapse in which more than 270 people died, Mr. Pesso said.

“There are D&O-related climate issues out there. The question is are we going to have a lot more?” he said.

A new climate-related case concerns Enviva Inc., a company that produces wood pellets. A securities class-action lawsuit was filed Nov. 3 in District Court in Maryland against Enviva and its top executives after a short-seller report alleged the company engaged in so-called greenwashing and its stock dropped. The lawsuit alleges that Enviva misled investors regarding its financial position and misrepresented the environmental sustainability of its wood pellet production.

Greenwashing describes when a company or organization markets its operations, products or initiatives as more environmentally friendly than they actually are.

“We’re going to keep seeing these things,” Mr. Pesso said.

In boardrooms, climate has transitioned from something that “was not a big deal” to an issue in the spotlight and there’s a lot more exposure, said Lenin Lopez, vice president, corporate securities attorney, at Woodruff Sawyer & Co.

“It’s not just shareholders that boards need to worry about. It’s activist investors, employees and other stakeholders, customers,” Mr. Lopez said.

Disclosures from energy companies around the risks of wildfires look a lot different now than they used to, for example, he said. Climate disclosures have to be accurate, he said.

For underwriters, the question is how to price the exposure without a body of facts, Mr. Kelly said. “How do we calculate what our exposure is?” he said.

SEC climate, cyber rules could prompt lawsuits 

SAN DIEGO — Proposed U.S. Securities and Exchange Commission disclosure rules on climate-related risks and cybersecurity could prompt more litigation and claims for the directors and officers liability insurance market.

“More disclosure, more securities litigation,” said Noelle M. Reed, partner, securities litigation, at Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates.

“Any time you have disclosure you’re going to have plaintiffs scrubbing, looking for claims to make,” Ms. Reed said during a session at the Professional Liability Underwriting Society’s annual conference.

There’s a potential conflict between what companies say on climate and cybersecurity issues in less formal disclosures, such as in brochures, on earnings calls or in presentations to employees and what they say in regulatory filings, she said.

“From a securities litigation perspective, anytime you’ve got new rules requiring a company to speak — and in some cases not with a materiality requirement — it’s going to be rich for plaintiffs to mine,” Ms. Reed said. 

Climate disclosure rules may initially lead to a spate of new lawsuits but are unlikely to yield long-term business for the plaintiffs bar, said Doru Gavril, a partner with Freshfields, Bruckhaus, Deringer LLP.

What companies should be looking at is how they can get into trouble under the new rules, Mr. Gavril said.

One situation is where companies “make reckless statements or say something aspirational” and put it out there in a disclosure that makes it sound like fact, but they have no backing for it, he said.

Companies that think they can measure their impact on the environment, but in fact are not, is another situation, he said.

“Those are the pressure points. You’re always going to have litigation after some large traumatic event, whether it has to do with climate issues” or anything else, Mr. Gavril said.

Companies that invest to make themselves a better organization or a less likely target of a lawsuit will differentiate themselves from a coverage standpoint, said Jack Flug, head of U.S. FINPRO claims at Marsh LLC.

“Clients that make the investment to batten down the hatches to deal with the issues that are coming their way are a better risk,” Mr. Flug said.

The D&O market has gotten better for buyers and from the standpoint of broking deals, but not for underwriters, he said. The market went up “far too fast” and came down just as quickly, he said.

“If you look at where things were two years ago, and you compare it to today, it’s a bit better if you’re a buyer — there’s no question about it — but the claims are still there,” he said.

As the SEC disclosure rules get more fulsome “there is a distinct possibility” it will give more fodder to the plaintiffs bar, Mr. Flug said.

The panel was moderated by Matthew McLellan, senior vice president at Marsh.

D&O rates fall with fewer deals, surge in capacity

SAN DIEGO — Buyers are seeing more competitive directors and officer liability insurance market conditions, driven by increased capacity and reduced demand due to a slowdown in initial public offerings.

The industry is in a pretty good place when it comes to rate adequacy, said Marek Krowka, chief underwriting officer, North America financial lines, at American International Group Inc.

However, rate adequacy is more stable in the primary market than the excess market, where there’s been a lot of new capacity and competition, Mr. Krowka said during a session at the Professional Liability Underwriting Society’s annual conference last month. “It’s causing some concerns around rate adequacy on excess business,” he said.

Over the past three years the rate change in the market has been dramatic, and the point of rate adequacy was probably met, said Jonathan Reiner, executive vice president at Ryan Specialty LLC.

“It leads us to believe it was a bit of an overcorrection, judging by how much rate is being given back to clients afterwards,” Mr. Reiner said.

If it continues in this direction the market might get to the point of “overcorrection in the wrong direction,” he said.

Business that flows through the wholesale market tends to see more dramatic rate changes versus a traditional retail portfolio, and IPOs for special purpose acquisition companies have seen some of the most substantial rate decreases, Mr. Reiner said.

Capacity is not the No. 1 factor driving recent rate decreases, said Yera Patel, head of casualty and financial lines claims and analytics for Inigo Ltd., a London-based specialty insurer and reinsurer.

“The IPO market and the stock market has dried up. That’s really the main factor,” Ms. Patel said.

Another factor is that long-established markets that had pulled back capacity decided to lean back in and take capacity, she said.

Buyers set their budgets in July and August for the entire year, so having transparency with underwriters is important, said Beth Goldberg, vice president and chief risk officer at Northwell Health, a health care network based in Great Neck, New York.

“Make sure when you’re underwriting you don’t spread the rate like peanut butter,” Ms. Goldberg said.

Buyers want to be valued, she said. “Your clients do have budgets, so you have to be very transparent in what you’re saying when you come to the table,” she said.

With new market entrants, trust is important, she said. 

The panel “Fact or Fiction About the D&O Market” was moderated by Gregory Spore, managing director and center of excellence leader at Guy Carpenter & Co LLC.