What are the risks?

Increasingly, extreme weather is leading to an uptick in public and private losses. Clients are suffering from the damaging effects of Nat Cat windstorms, and the increasingly relevant ‘secondary perils’ of hailstorms, floods, droughts, and wildfires. The World Economic Forum has estimated incremental losses from a changing climate to exceed USD140bn annually, a figure they view as conservative. A wave of litigation (exceeding 2,600 cases globally) has emerged as tighter legal and regulatory frameworks combine with the increasingly visible impacts of climate change.

Types of climate litigation include: 

• Rights claims – The use of human rights frameworks such as the European Convention on Human Rights (ECHR’s) ‘right to life’ to force changes in energy company operations. 
• Shareholder derivative actions – Activist shareholders allege breach of duty for directors’ failure to transition from fossil fuels quickly enough.
• Greenwashing claims – Claimants seeking redress for alleged breaches of consumer protection laws.
• Damages claims – Claimants seeking damages as a result of perils linked to climate change, and which typically rely upon arguments of negligence and public nuisance.

The USA leads the trend in climate litigation and accounts for over two thirds of global cases to date*. Claims for damages in Europe and the USA have so far been unsuccessful in achieving financial redress. However, many energy clients are incurring material costs from defending climate litigation and insurers within the energy sector have reviewed their coverage positions.

* Study by the Sabin Center for Climate Change Law at Columbia Law School

Coverage positions

The main clause addressing this topic in the London market is the Climate Change Exclusion LMA5570. This clause utilises the UN definition of climate change and is extremely broad: 

“Notwithstanding any other provision in this Policy or any endorsement hereto, this Policy excludes any loss, liability, cost or expense arising out of any allegation or claim that the (Re)Insured caused or contributed to Climate Change or its consequences. For the purposes of this clause Climate Change means a change of climate which is attributed directly or indirectly to human activity.”

The London Market Association (LMA) language has yet to be tested in court, but we have concerns particularly with the expression “climate change or its consequences”. The clause is styled as a Climate Change Exclusion, rather than a Climate Litigation Exclusion, and there is potential for such broad language to exclude losses resulting from natural perils that should otherwise be covered. 

Without a climate change exclusion, insurers may still seek to avoid cover based upon existing pollution restrictions. Energy forms typically exclude liability for pollution unless there is a sudden and accidental trigger. Slow and gradual emissions over many years are time-barred from coverage, but only if these emissions are considered pollution. This is a key battleground, as CO2 is a naturally occurring gas and not ordinarily considered a pollutant. The Hawaii case ruled, “Greenhouse gases (GHGs), including carbon dioxide, produce ‘traditional’ environmental pollution… these gases accumulate in the atmosphere and trap heat. Because they are released into the atmosphere and cause harm due to their presence in the atmosphere, GHGs are pollutants.” 

Whether this ruling will be adopted in other cases and jurisdictions is unclear (the ruling is not binding outside of Hawaii). Many will disagree with the findings and argue that pollution exclusions were not designed with a context like GHG emissions in mind, and which are different in many respects to a traditional view of what constitutes pollution. We also need to consider whether GHG ‘pollution’ was indeed the proximate cause of the loss to the client, and hence subject to the pollution exclusion at all. Potential avenues for coverage could remain open.

The view from Bermuda

As an excess ‘catastrophe’ liability market physically located in the path of hurricanes, the Bermudian market is very aware of the increased exposures posed by climate change. It is worth noting that the Bermudian XL004 Form has a separate definition of Product Pollution that does not apply the sudden and accidental reporting restrictions. This presents a route to coverage even if a future pollution ruling is found to time bar coverage on a client’s other policy forms. The Bermudian market push hard for climate change exclusions, and individual insurers have also developed their own very broad exclusionary language to remove not only losses from climate litigation, but also losses resulting from physical damage attributable to climate change. We, as Miller, have so far resisted these broader exclusions on our client programmes. 

An evolving landscape

The Hawaii ruling contributes to the debate on coverage over climate change litigation, but many issues around coverage remain far from resolved. Risk managers need to be aware of potential coverage limitations in their liability policy forms, and how existing and new exclusions may impact their coverage. As climate litigation cases continue to be heard globally, we can expect rulings on coverage to evolve as common law jurisdictions iterate towards more definitive positions.

Miller is here to help

We understand the risks presented by climate change litigation and we can help you navigate them. We keep track of the coverage offered under different liability forms placed across our global hubs. In response to exclusions, we can review client options, including clarifying language that losses from physical perils remain covered, and seeking to resist exclusions where clients operate in less litigious territories or, where cover is needed only for subsidiaries and exposure is viewed as impacting at parent company level. 

Get in touch with us today and find out more about how Miller can help you.