Is Climate Change a D&O Insurance Issue?

Is Climate Change a D&O Insurance Issue?

 In a series of letters sent to individual board members of various major energy companies and to a number of participants in the directors and officers liability insurance industry, three environmental groups contend that climate change denial by energy industry representatives presents a risk of personal liability to the individual energy company board members. The letters also contend that “the threat of future civil or criminal litigation could have major implications for D&O liability insurance coverage.” The letters, which demand that the recipients respond to a list of specified question, clearly seek to make the global climate change debate personal and to take the fight to the D&O insurance industry.

The letters were sent in late May by three environmental organizations – Greenpeace International, the World Wildlife Fund International and the Center for International Environmental Law – to board members at 32 energy companies and to 44 participants in the D&O insurance industry. The list of energy companies whose board members received the letters include petroleum giants such as ExxonMobil, Chevron, and ConocoPhillips, as well as many of the world’s largest coal companies, including Peabody Energy, Murray Energy and Arch Coal. Insurers receiving the letter included American International Group, Berkshire Hathaway, and Zurich Insurance Group.

A complete list of the companies and insurers that were sent the letters can be found here. An example of the letter sent to the board members of the companies can be found here. An example of the letter sent to the D&O insurance industry participants can be found here.

Each of the letters asserts that the environmental groups sent the letters to companies that “rank among the largest historic contributors to industrial greenhouse gas emissions.” The letters also assert that the companies “share the majority of the responsibility for the estimated global industrial emissions of CO2.” The letters further assert that these companies “may have been or may be working to defeat action on climate change and clean energy by funding climate denial and disseminating false or misleading information on climate risks” despite “increased awareness of the threats associated with climate change” among shareholders and insurers and despite “the overwhelming body of climate science on impacts, adaptation and vulnerability.”

The letters go on to assert that these actions “aiming to obstruct action on climate change, coupled with the development, sponsorship or dissemination of false, misleading or intentionally incomplete information” about climate change risks “could pose a risk to directors and officers personally.” The threat of future civil or criminal litigation “could have major implications for D&O liability insurance coverage.”

Each letter requests that the individual board member respond within four weeks to a list of questions presented in an annex to the letter. Similarly, the letters to the D&O insurance industry participants requests that the insurers respond to questions. The letters state that responses will be posted on the website for Greenpeace.

An Annex to the letters (refer here) details what the environmental groups characterize as the “potential implications of climate-related litigation on D&O liability policies.” Among other things, the Annex asserts that “fossil fuel companies and utilities have been and will continue to be the target of climate-related lawsuits.”  The Annex goes on to assert that “some insurance industry experts believe that the fiduciary duties of directors and officers are evolving in the context of climate change and that this will have a major effect on D&O coverage.”

The Annex asserts that claims against directors and officers for “concealment, misrepresentation and mismanagement of climate change-related risk may look for reimbursement of defense costs and indemnification” from their D&O insurers; however, there is a risk that the policies might not provide coverage “creating a personal risk for directors and officers.”

In a May 28, 2014 press release (here), a representative for the Center for International Environmental Law is quoted as saying that the letter campaign is intended to elicit information and to “start a conversation about climate inside the companies, and with the public and investors.” A representative for Greenpeace is quoted as saying that because the cost of climate change is personal “the responsibility – not just the devastating effects – should be personal.” A representative of the World Wildlife Fund is quoted as saying that “Sooner or later those who hide the facts and oppose policies to fight climate change will be held to account by the courts.”

Discussion 

I mean no disrespect to the three environmental groups and I do not mean to seem as if I am belittling the seriousness of their message.  But just the same, whatever the environmental groups’ motivations were in sending these letters, when you look at what they actually did, their efforts can only be described as scattershot. The list of “insurers” to whom the letters were sent is, well, just plain odd.

Though the list includes some of the major global D&O insurers, other important insurers are simply missing. Other companies on the list are not insurers at all, but are insurance  brokers – and not even the largest brokers, but a seemingly random selection of smaller brokers. The list also includes reinsurers. In some cases the letter apparently was sent to the reinsurance division of a major insurance holding company but not to the direct insurance division that actually provides D&O insurance. The list also includes reinsurance intermediaries – why? And finally the list includes several companies that I literally have never even heard of. So, for starters, I think the environmental group can fairly be faulted for failing to do their homework.

The energy companies to whose board members the environmental groups contacted all seem to be significant petroleum or coal companies, so the energy company list in that respect makes more sense than the insurance company list. But the environmental groups really don’t explain why those particular companies are receiving letters. Though the letters assert generally that the companies involved “may have been or may be working to defeat action on climate change and clean energy by funding climate denial and disseminating false or misleading information,” none of the letters identify any specific ways any particular company engaged in these alleged activities.

The Annex to the letter that purportedly identifies the false and misleading information the energy industry has been putting out is full of bizarre typographical errors. (I suspect the version that is posted on the Internet has some weird technological bug.)  But with respect to the list of publications and resources to which the Annex intended to refer, the Annex itself says, “We are not providing evidence of specific company involvement in these activities, or suggesting that specific companies were or are currently involved.” Instead, what the Annex refers to are climate change denial statements by “trade associations, public relations firms or other third party intermediaries.”

In other words, the environmental groups apparently are not alleging that the specific companies to whom the letters were sent are involved in efforts to undermine action on climate change. Rather, the groups seem to be suggesting that energy companies generally are guilty by way of their very industry involvement in efforts by third-party groups to try to counter the environmental groups’ advocacy on climate change.

I will leave it to others to comment on the environmental groups’ premise that the board members of various individual energy companies should be held personally liable for statements by unidentified third party groups that have had the temerity to express views different than those of the environmental groups on issues of public importance. I will say that other than rhetorical flourish, the environmental groups provide little support for their contention that the statements by those thrid-party groups translates to personal liability for the individual board members.

I also think the letters reflect a peculiar idea of how liability insurance works or might work if the kinds of claims the environmental groups describe were actually filed. The letters’ references to D&O insurance and their questions about the availability of coverage suggest that the environmental groups regard the insurance coverage as “always on,” like a TV remote control, and all somebody needs to do is push a button and the coverage, which always running in the background, is triggered. However, insurance doesn’t work like that. Insurance is a matter of contract. The insurance policy runs for specified time periods, insures certain parties, and includes certain terms and conditions.

Availability of coverage for any particular claim depends on when the lawsuit is filed, who is named as a defendant and what specific theories are alleged. The coverage also depends on the specific wordings of each separate policy as the D&O insurance policies are each separately negotiated and each involves its own particular wording. In addition, whether coverage is available in any particular situation may depend on post-claim events, such as the provision of notice and cooperation with the insurer.

Some of the carriers on the list of letter recipients only participate in the D&O insurance marketplace as D&O insurers in an excess capacity. Their coverage will not be triggered unless the underlying insurance is exhausted. Other carriers on the list only participate in the D&O insurance marketplace as Excess Side A insurers. Coverage under their policies would only be triggered if the claim filed is nonindemnifiable, whether due to insolvency or legal prohibition. Some of the carriers on the list are not active players in the energy industry, and they likely do not insure any of the energy companies on the list.

I suspect that the environmental groups that sent these letters would be very impatient with my objections. Throughout the letters, the groups’ real message seems to be that climate change is a catastrophically serious threat and something needs to be done right away. In their view, the critical importance of the message far outweighs any trivial flaws that might be involved in the communication of the message. The groups seem to think that invoking the threat of personal liability will motivate corporate board members to look into whether their company is supporting the climate change deniers. The groups also seem to think that they can goad the D&O insurance industry to put pressure on companies to avoid actions that could create liability for the insured directors and officers. These are not meant to be subtle messages and so from their perspective a blunderbuss approach works just fine.

In certain respects at least, I have to say the environmental groups’ efforts were successful. The letter-writing campaign obviously was a publicity stunt. The stunt did succeed in garnering publicity. Stories about the groups’ letters appeared in such diverse publications as Bloomberg (here), Insurance News (here), and The Nation (here). The environmental groups want to try to undercut support for the climate change deniers, and so the publicity is important to their efforts to try to put pressure on the individual board members and the D&O insurers to question the energy companies about their support for these groups.

There is another respect in which the environmental groups’ efforts may have had an impact. That is, even though the groups’ efforts to communicate with the D&O insurance industry were clumsy, the groups’ letters and publicity campaign do raise questions about the costs associated with climate change and about who is going to pay those costs. The question of who bears the costs of climate change is going to become increasingly important. (I will stipulate that there are those who believe that climate change is a hoax or a political issue; I am not taking sides on this debate, I am merely saying these questions are going to be asked).

Just last week, according to an article on Law 360 (here, subscription required), Illinois Farmers Insurance Co. launched nine proposed class actions arguing that hundreds of Illinois municipalities were to blame for storm losses because they were ill-prepared for climate change.

Because the costs claimed to be associated with climate change could be enormous, there are going to be more lawsuits like that of Illinois Farmers as those affected try to sort out who should bear those costs. And just as there have long been efforts to try to impose the costs of more traditional environmental incidents to the boards of the companies that allegedly caused the incident (refer for example here), we can all be sure that there will be efforts to try to impose the costs of climate change on the boards of the companies that supposedly caused the climate change-related loss.

So even though I find fault with the way the environmental groups delivered the message, I think there could well be some truth to the idea that there will be efforts to hold corporate board members personally liable for the costs associated with climate change. For that matter, it may even be these same environmental groups that bring these claims. Other claims could come from shareholders, regulators, property owners, municipalities and, yes, even insurers. I am not saying that I think these claims would be meritorious. And of course any claim of this type would face significant causation issues among many other hurdles. I am just saying that there may be some truth to the environmental groups’ suggestion that climate change-related claims against corporate boards could be coming.

While one might question the environmental groups’ tactics and methods, it probably is in fact a worthwhile exercise for the D&O industry to think about whether or not climate change related claims might be coming and to think about how the industry should be preparing to respond. The list of items to be considered includes questions about how these possibilities should affect pricing, underwriting and risk selection. The issues also should include terms and conditions – such as, for example, whether the provisions of the typical pollution and environmental liability exclusion found in many policies needs to be revised.

In the interests of full disclosure, I should acknowledge that I first made a prediction about the possibility of these kinds of D&O claims quite a while ago (refer here). These claims have not yet materialized. I think that in part that might be because the global financial crisis intervened and these issues were put on the back burner. These issues could well stay on a low boil for some time to come. However, there are groups like those involved here that want to make these issues a higher priority. And if there are more events like Superstorm Sandy, these issues could quickly move up the agenda. That is all the more reason for the D&O insurance industry to consider these issues now, rather than at a time when developments could overwhelm the dialogue.

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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