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Today marks the deadline for banks and insurance companies to identify an appropriate Senior Manager who has specific responsibility for identifying and managing climate risks. In its April 2019 Supervisory Statement the Prudential Regulation Authority (PRA) said it “expects firms to have clear roles and responsibilities for the board and its relevant sub-committees in managing the financial risks from climate change.” Failure to comply with the PRA’s expectations could have regulatory consequences for affected firms, their boards and the relevant Senior Managers with responsibility for climate-related risks. Affected firms should immediately check the terms of their D&O insurance, if they have not already done so, to ensure that the scope of cover is sufficiently broad to cover climate-related regulatory action.
The PRA’s approach is just one example of the increased scrutiny on companies (not just banks and insurers), and their directors, in relation to climate risks. In the US in particular this increased scrutiny has led to substantial civil litigation; a possible sign of things to come in the UK. It is therefore imperative that all companies consider carefully their exposure to climate-related regulatory or civil action when placing or renewing their liability insurance covers and with premiums on the rise and a hardening market, companies will need to ensure the scope of their cover isn’t compromised.
In the US, several lawsuits have been brought against energy companies since 2017 by cities including San Francisco, New York and Baltimore as well as the State of Rhode Island. Plaintiffs seek damages for the costs of dealing with climate change, such as improvements to sea defences, and allege nuisance and negligence on the part of oil and gas companies, as well as a failure to warn of the impact of their products on the climate. Despite a fair degree of scepticism about the likely success of such suits, the costs of defending the actions cannot be underestimated, with analogies being drawn with the tobacco litigation. These types of claims are not restricted to the US courts, with other cities and even countries around the world also indicating that they may take action against energy providers; for example, the Pacific island of Vanuatu has said that it is considering suing fossil fuel companies after 64% of the country’s GDP was wiped out following Cyclone Pam in 2015.
In addition to claims based in tort and product liability law, which allege that a company has played a role in climate change itself, businesses also face lawsuits brought by or on behalf of shareholders. In 2018, the Attorney General of New York sued Exxon Mobil saying that the company had engaged in a “longstanding fraud scheme”, deceiving shareholders by downplaying the risks of climate change to the business. In Poland, environmental association ClientEarth purchased shares in energy company Enea thereby enabling it to commence legal action against the company following the board’s decision to build a new coal-fired plant; the action was successful with the Polish court in Poznan finding the company’s decision to be invalid.
Policyholders must carefully consider their exposure to climate-related litigation when renewing their liability insurance covers and ensure that those covers are fit for purpose. It is not just energy companies which have the potential to be affected by litigation either; other industries which contribute to climate change could be in the firing line too, with firms operating in the transport, manufacturing and agriculture sectors likely targets. Similarly, asset management firms, pension funds and other investment companies could face claims that they have invested in assets and stock without careful and full consideration of the likely risks and financial impact of climate change.
Key things to consider include:
Michelmores assists policyholders by reviewing policy wordings to ensure they are fit for purpose. We also represent policyholders in coverage disputes relating to underlying shareholder claims, regulatory investigations and US litigation. If you would like to discuss your company’s insurance cover with us please contact Garbhan.Shanks@michelmores.com or Harriet.Chopra@michelmores.com.