DAC Beachcroft’s Sarah Crowther discusses the implications of strategic climate change litigation for insurers.
According to the London School of Economics, the number of climate change-related legal cases doubled globally between 2015 and 2022. Eighty percent of these cases can be classed as strategic or semi-strategic, with 30 strategic cases filed against companies in 2021 alone.
Strategic climate litigation presents unique challenges for insurers. With the number of these cases continuing to rise, could we see changes to underwriting practices?
Strategic litigation
According to the LSE's report, cases classified as strategic are those which are "filed with the aim of influencing the broader debate around decision-making with climate change relevance". A significant proportion of strategic climate litigation is targeted at governments, but we are seeing an increasing number against large corporations. These challenge corporate climate strategies or targets, or otherwise seek to halt the flow of finance to certain industries or projects.
Strategic climate litigation sometimes includes claims for monetary damages, but unlike other forms of litigation, most strategic cases do not seek compensation for losses. Instead, these cases normally pursue a change in corporate practice, and given the unusual remedies sought, can present unique issues for insurers.
Claims against companies
One of the most well-known strategic cases against a corporate is the Dutch case of Milieudefensie and others v Royal Dutch Shell plc. The action sought a ruling that the company had a duty of care to reduce carbon emissions in line with the 2015 Paris Agreement under the Dutch civil code. The Hague District Court ruled that the oil and gas major must reduce its CO2 emissions by 45 percent compared to 2019 levels by 2030. The ruling is being appealed. If upheld, it offers a blueprint for prospective actions against other major carbon emitters subject to the Dutch civil code that do not have viable Paris-aligned transition plans.
We have also seen several claims brought pursuant to the French Corporate Duty of Vigilance Law. This requires companies over a certain size to identify risks and prevent human rights abuses or environmental harm from their actions. Amongst other cases, the French NGO Notre Affaire brought a claim against the bank BNP Paribas. It alleges failures in BNP Paribas' due diligence plan, including a lack of transparency in the bank's financing and investment activities, and absence of any commitment to stop supporting new fossil fuels projects. The claimants seek an order that the bank publish and implement a new due diligence plan compliant with the legislation, and which includes a transition plan aligned with 1.5 degrees of warming.
Another avenue available for strategic claims is consumer protection law. Greenpeace France's case against TotalEnergies alleges greenwashing by the company during a 2021 rebranding campaign. The claim seeks an injunction to stop the campaign, publication of the decision, and compensation for moral damages. A similar claim has been brought by the NGO FossilVrij NL against airline KLM in the Netherlands.
Claims against directors
An attempt in the UK to extend strategic litigation against companies to target directors personally was brought in ClientEarth v Shell plc and others. The claim alleged breaches of the directors' statutory duties by failing to adopt an energy transition strategy that properly manages the risks posed to the company by climate change. Permission to bring the derivative action was initially dismissed by the High Court, and this has now been upheld by the Court of Appeal.
Changes in underwriting?
For insurers, strategic litigation is difficult. This is because the plaintiffs are often not looking for a financial outcome but for a company to reduce its CO2 emissions or otherwise change its corporate behaviour, which might be incompatible with the company’s current business priorities.
Climate change litigation of this type may require not just a different settlement strategy but also a change in how insurers underwrite these risks. When insurers underwrite defence costs, they are prepared to pay damages, but they are not going to reimburse companies for any loss they might suffer as a result of any steps they need to take to become more environmentally friendly. Might we see a slight shift in underwriting appetite as a result?
Another potential change in underwriting practice could see climate change carved out as a standalone insurable risk, similar to cyber. The above ClientEarth derivative action against Shell was the first time directors in the UK have been specifically targeted by activist investors. It is likely to prompt a review of how D&O insurance is viewed by underwriters.
Typically, D&O insurance is not intended as a blanket general liability coverage, and firms may need to obtain additional coverage for defence costs incurred by insured individuals due to non-compliance with environmental legislation.
This issue is further complicated by existing – and, so far, untested in court – exclusions for pollution from many existing D&O policies which means this is the area of the insurance market where climate change litigation is likely to have the biggest impact.
Sarah Crowther is a partner at international law firm DAC Beachcroft