Climate Risk: Liability Writers Brace for A Perfect Storm

Click on the link below to see highlights from the panel, or click to watch the full hour-long replay.

The corporate risk profile for climate change extends far beyond property lines and insurers’ portfolios are exposed to significant direct and indirect liability losses across a wide spectrum. This was the sobering message from a panel of industry experts speaking at a recent Insider Engage webinar, sponsored by Verisk, the data analytics and risk assessment firm.

According to Robin Wilkinson, senior vice president and managing director, casualty analytics at Verisk, the first and most obvious impact is when insured corporations, especially energy companies, are sued for their direct contributions to climate change, such as allegedly causing sea level rise or extreme heat, Wilkinson said.

Commenting on these lawsuits currently in play, Nigel Brook, partner in the law firm Clyde & Co., said that “dozens” of cases targeting oil companies over the impact of historic emissions exist in the US: “Those cases aren't going to get tried anytime soon on the merits, because they're mired in the usual procedural wrangling mainly about whether they should be heard in state or federal court...overall there's nearly 2,000 climate cases from the beginning of time to today. And it's a broadening and an evolving range.”

Right now, insurers need to keep their focus on these tort liability claims, especially in the US energy industry, said Mia Finsness, managing executive, Global Casualty Underwriting and Claims at specialty insurer Markel. Finsness said that cases might take a long time to work through the courts, but the nature of the US tort system is such that huge sums will be needed to settle these cases.

“This is a very political issue. Everyone is already coming into this with their own biases, preconceptions about climate change. So, by time it gets to a jury, it's not going to matter what the science is or who the experts are, the jurors are going to decide based on how they feel. And then it's a crapshoot,” she said.

The panel generally agreed that even without large settlements or jury awards, these types of lawsuits will still generate defense costs into the hundreds of millions of dollars. Depending the particular liability insurance programs in place, insurers may end up holding the bag for those defense costs, regardless of whether or not indemnity on the claims is ultimately paid out.

Addressing the question of what specific liability insurance lines might be impacted, John Scott, head of sustainability risk, Zurich Insurance Group, pointed to product liability. Here, for example, it’s conceivable that petroleum might be considered a defective product, Scott said.

The second class of claims in the pipeline are a result of corporates failing to disclose, or misrepresenting the risks of climate change, Wilkinson added. “Increasing pressure for ESG disclosure, including disclosures relating to climate risks, may increase exposures for [firms] failing to comply. Corporates might over enthusiastically portray their companies or their products as being green.”

Different industries could be vulnerable to such complaints, Wilkson stressed, even though exposures currently appear to be concentrated in the energy sectors.

Scott noted that in financial lines classes, both D&O and E&O lines could be vulnerable: “That can be to do with different aspects of wrongful acts, for example - misrepresentation or omissions of material facts about the value of assets, like trapped oil and gas reserves and failure of fiduciary duty.”

Brook pointed to a landmark case last year, in Australia, related to corporate greenwashing. The suit, which was filed by the Australian Centre for Corporate Responsibility, accuses the oil and gas business Santos of engaging in misleading or deceptive conduct by claiming that it produces clean energy and has a pathway to reach net zero emissions. “I think we're going to see more companies being held accountable for their statements about how green they are,” Brook warned, while also noting that these lawsuits typically seek to change the behavior of companies and not always to recoup significant monetary damages.

Failing to mitigate or prepare for climate change, another potential source of exposure is notable in the context of clashes between property and liability coverages, Wilkinson said. Citing the Florida Surfside condo collapse in 2021, she said that in a world of rising sea levels, what came to light following Surfside is that there may be an increased risk of corrosion of structural foundations, creating a potential need to mitigate against such risk in coastal properties and potential liability for failing to do so.

In addition to these liability related risk exposures, more indirect systemic risk needs to be considered, Wilkinson suggested. “Consider, for example, the impact of sea level rise on mortgages of coastal properties, or the financing of other large coastal capital-intensive projects. If these are not adequately prepared for sea level risk or priced for that risk, what might happen to the value of these properties? I think the key question is how climate change might alter underlying conditions and thereby lead to direct and indirect liability losses if companies fail to prepare for and mitigate against climate change.”

Finsness also highlighted the growing indirect liability loss potential posed by climate change. Tort lawsuits are already becoming a feature of natural disasters, Finsness said, citing the example of hospitals in the US being sued over wrongful death in the aftermath of hurricanes because they didn’t have generators ready when there were power outages.

Oil companies sued over pollution incidents caused by a weather event and utilities paying out multi-million damages following wildfires are other examples. “We're seeing this trend, and it's increasing. Anytime there is a severe weather-related event, we're seeing personal injury, or subrogation actions against insureds that trigger general liability policies,” she said.

In Europe there’s an upsurge in what Brook calls rights-based claims. Unlike the US litigation, these claims are forward looking with the emphasis on forcing companies to reduce their emissions, rather than holding them responsible for historical emissions.

A Dutch court ruled in a landmark case last year that oil giant Shell must reduce its emissions. By 2030, it must cut its CO2 emissions by 45% compared to 2019 levels, the civil court ruled. The Shell group is responsible for its own CO2 emissions and those of its suppliers, the verdict said.

“If this duty of care takes hold, and there is more litigation already underway against motor manufacturers in Germany along similar lines, then in principle, later on, other claimants could assert that there's been a breach of this new novel duty of care, and that this leads to damages,” Brook said.

Even the transition to net zero brings new risks with it, according to Zurich’s John Scott. “As people try to build more sustainable buildings with new materials and new designs to reduce carbon emissions, that potentially could result in additional exposure… the characteristics of those new materials, and the lack of, or upscaling required of subcontractors and contractors’ skills to deal with it,” he said.

Verisk’s Robin Wilkinson said her firm is actively modelling the different types of indirect liability events that could combine to create significant loss aggregations, where climate change influences known underlying conditions. The risk exposures could range from (as outlined earlier) product liability to construction products to corporate bankruptcies caused by a rapid transition to net zero.

“We think these systemic, indirect type impacts could really have the greatest ramifications for the insurance and reinsurance sector... And they're the ones the industry needs to see identified and quantified before they can adequately manage those aggregations.”