Re/insurers warned to brace for more climate litigation: Kennedys

The underwriting practices of re/insurers represent a major catalyst for change among businesses in the ongoing climate crisis but the industry should also brace itself for more climate litigation and carriers should also move quickly to get their houses in order when it comes to sustainability.

That is the warning in a new report by law firm Kennedys called Rewriting the risk: Addressing the challenges of climate change. The report notes that appetites are changing in response to the growing environmental and significant business challenges posed by environmental factors, which in turn is mobilising insurers to reassess their own operations and increase efforts to demonstrate climate leadership.

In particular, Kennedys identifies three main types of climate litigation being seen in the courts which bring Directors and Officers (D&O) and Errors and Omissions (E&O) insurance into focus.

These are: lawsuits targeting states challenging the adequacy of climate policies; lawsuits targeting companies over their emissions of carbon dioxide, alleging climate-related harms; and other litigation strategies including activist shareholder and employees, including with regard to misleading environmental promises (greenwashing) and non-disclosure of climate-related risks.

Within this already active, litigious landscape, Kennedys notes two major developments compounding pressure as companies transition towards sustainable practices. First, a climate change ‘duty of care’ is owed by public and private actors, which is already being tested when establishing causation.

As with the ‘duty of care’, shareholder activism is also on the rise and is set to drive a change in corporate behaviour. Individuals and NGOs are increasingly using the court to try to achieve their objectives, including enforcing board responsibility with regard to corporate compliance with regulations, targets and broader environmental principles. Insured companies must, therefore, focus on improving their ESG regulatory frameworks.

The report incorporated the views from leaders in insurance including Cedric Lobo, senior vice-president at Transatlantic Reinsurance and Chair of the International Underwriting Association (IUA) Climate Committee and Katie Lennon, Head of ESG, UK & Lloyd’s at AXA XL and Vice-Chair of the IUA Climate Committee.

The report recommends six strategies for re/insurers and their corporate clients to adopt

and to encourage their corporate clients to embrace to address climate risks and reduce the likelihood of environmental liability claims made against them:

1. Embed climate mitigation within governance changes and senior leadership
2. Advocate enhanced annual climate emissions disclosures, to include data on specific emissions sources and, in time, associated biodiversity risks
3. Develop extended net zero plans which consider climate impacts across the business value chain, incorporating sustainable procurement policies
4. Reduce emissions across the value chain by implementing and disclosing details of decarbonisation measures, ensuring that externally sourced inputs are aligned with business sustainability targets
5. Take steps to ensure conduct is fully compliant with objectives and insureds do not make misleading statements or pledges in the rush to adopt sustainable practices (greenwashing) – including a review of all consumer literature
6. Seize the opportunities in green technology, green building and renewable energy (which could represent a market worth more than £200bn by 2030) – rather than try to resist the inevitable transition towards long-term sustainability.

John Bruce (pictured), partner, Kennedys said: “The growth in sustainability and climate-related issues impacts on all types of insurance policies for the simple reason that climate risks are a constant, growing concern. From an underwriting perspective, changes in practice will be required to price climate risks more accurately in the future. (Re)insurers (and the businesses they insure) that are ahead of the transformation game, like those at the forefront of the industrial revolution and the move to a digital economy, are much more likely to succeed.”

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