At a glance
- When one considers ‘trends’, impacts and changes in the D&O market over the years, they will often focus on defined events that shape the market
- The first sign of the relevance of climate change to D&O insurance emerged in 2010 when the SEC provided guidance to public companies
- Another indication of the emergence of the risk of climate change has been a high profile investigation into one of the world’s leading oil companies
With respect to Financial Lines, it is most likely that D&O insurance will take the brunt of the impact and this article explores the current rumblings that appear to be building in respect of that.
When one considers ‘trends’, impacts and changes in the D&O market over the years, they will often focus on defined events that shape the market, for example; the stock market crash of 1987, the implementation of Sarbanes Oxley and the Financial Crisis of 2007 amongst others. The difference with Climate Change and its effect is that even the very concept is still debated, albeit its impact on D&O insurance is beginning to emerge.
The first sign of the relevance of climate change to D&O insurance emerged in 2010 when the SEC provided guidance to public companies, focusing on “the SEC’s existing disclosure requirements as they apply to business or legal developments relating to the issue of climate change”. It identified circumstances in which corporate disclosures would be warranted, which interestingly includes political and scientific developments regarding climate change that may create existential or reputational risk for companies.
Another indication of the emergence of the risk of climate change has been a high profile investigation into one of the world’s leading oil companies. The company’s past statements about climate change have recently come under scrutiny and allegations were made that the company deliberately funded groups promoting doubt about climate change. Given the growing international concern about climate change and its impact, it is speculated that we may shortly arrive at a time where the use of fossil fuels is severely restricted. There is therefore an argument that the fossil fuel reserves that currently exist will never be used. The concern is that energy companies and their directors are aware of this risk, however have not taken this into account when stating their reserves, thus massively overstating the value of their business and leaving them open to the risk of actions against them. This may also have a knock on effect to their advisors, e.g. actions against their auditors and investment banks.
It is evident from both examples above that one of the key concerns is going to be around disclosure based claims. It has been speculated by Clyde & Co that the three key issues will be:
1) Companies who fail to disclose how climate change may affect their business in the future.
2) Investors and shareholders suing investment and pension funds for investing in businesses adversely affected by climate change.
3) Companies who have allegedly directly contributed to the rise of Climate Change internationally and its affects locally having a liability to those affected by the consequences of climate change.
This is clearly not just a question for the claims teams. Underwriters are going to have to widen the scope of their assessment and take into account the risk of climate change on a business and look into how they may be directly contributing to it, or how they are managing the risk it may pose indirectly, e.g. adequate disclosure.
It is not just financial overstatement and a failure by D&O’s to advise on the potential effects of climate change that should concern the D&O market. As cited above, companies are being increasingly targeted for their direct contribution to the rise of climate change and it goes without saying that almost all companies have a carbon footprint. There has recently been a rise in actions against companies and their directors by individuals who have suffered a loss at the hands of large storms and rising waters which has been blamed on these polluting companies. This may also prompt a risk of regulatory actions against companies and their D&O’s.
One may look to exclusionary language in the policy, such as a possible pollution exclusion, however in recent times the market has softened to contain carve outs to such an exclusion for securities and derivative suits. One may also question how such an exclusion may apply should allegations centre on business judgement and whether the language is intended to cover issues such as poor management in respect the Insured’s day to day operation. Since climate change is still deemed conceptual by some, quite how you can apply such an exclusion requires further testing in the Courts.
In conclusion, whether you believe it as a fact or a concept, the Insurance market as a whole is likely to face increased risk as a result of the effects of climate change. The Governor of the Bank of England has previously delivered a strong message to the Insurance industry as a whole, detailing the varied risks that the industry faces, including; traditional property risks as a result of increased weather patterns, the devaluing of traditionally high-value commodities such as oil and coal and personal liability risks from those seeking to target companies for their direct contribution to climate change. From a D&O perspective it is more than likely that the industry will see an increase in claims in the future as a result of companies failing to adequately manage the risk of climate change on their business and to disclose these risks to investors. There are also likely to be actions from individuals and companies directly affected by the effect of climate change, either personally or to their business as a result of the mismanagement of a polluter company. Quite how this will pan out given the defences of causation and quantification, is still to be determined, but certainly the risk exists. It goes without saying that such a risk is international and one that cannot be restricted to one country/region and managed in that way.
This article was published as part of our Spring 2018 Claims Quarterly Journal.
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