Insurance Law Legal Report: The rise of climate change risk

Companies need to be evaluating their insurance policies with climate change risk in mind, say lawyers

Insurance Law Legal Report: The rise of climate change risk
David Tupper is a partner at Blake Cassels & Graydon LLP, in Calgary.

Global temperature rise, warming and acidifying oceans, shrinking ice sheets, decreased sea cover, glacial retreat, rising sea levels and extreme weather events — climate change is slowly changing the world. This creates new exposure for insurance companies, and the rise of environmental and social governance policies makes climate risk a key consideration for all corporations, say lawyers.  

Around the world, but primarily in the U.S., climate change-related litigation is on the ascent, says David Tupper, a partner at Blake Cassels & Graydon LLP in Calgary. “The trend-line seems to be that it's increasing and becoming more varied in nature and type.” 

Climate change litigation has gone through two phases — the first from 2005 to 2015 and the second from 2015 until the present, Tupper says. Phase one involved litigation alleging that corporations — primarily energy companies — had contributed to climate change and caused harm. 

“Virtually all” of the first batch of litigation was unsuccessful for two reasons, he says. One, constitutional legal doctrine in the United States says political questions are non-justiciable. And two, there is difficulty in showing a clear-cut causation between one company’s carbon emissions and a specific harm. 

In Kivalina v. ExxonMobil, for example, members of Alaska’s Iñupiat Indigenous peoples sued an oil company for the coastal erosion and Arctic sea-ice and permafrost melting, which threatened their way of life. However, the court found there was “no realistic possibility of tracing any particular alleged effect of global warming to any particular emissions by any specific person, entity, [or] group at any particular point in time.” On appeal, the court found any solution to climate change effects was up to the legislative and executive branches of government, not common law. 

The second wave saw more variety in causes of action and was buttressed by advances in the science, linking major companies’ emissions to climate change and assisting lawyers with the burden of causation, Tupper says. An example this second wave was the 2015 case filed by Peruvian farmer Saul Luciano Lliuya, who sued German utility company RWE for $21,000, for the cost of protecting his village and property from glacial lake flooding and landslides. The $21,000 represents 0.47 per cent of the cost of harnessing the lake, with 0.47 per cent being the share of carbon emissions released into the atmosphere in the industrial era that can be traced back to RWE, according a 2013 study by Richard Heede. Heede’s study tracked the emissions of the 90 largest carbon producers from 1854 to 2010.  

Aside from claims associated with emissions and environmental effects, second-wave litigation involved claims that directors failed to manage the business risks associated with climate change and harmed the company or shareholders. Directors and their companies were also sued for misleading investors about climate change business risks or misstating climate change targets — for example, Exxon was sued (although the action was ultimately dismissed) by the State of New York for misrepresenting how climate change regulations would affect the demand for oil and feasibility of future projects.  

The effect on insurance companies of upwardly trending climate change litigation is two-fold, says Tupper. First, the risk affects directors’ and officers’ liability policies when suits are brought against directors for failing their duty to disclose or properly manage the company, he says. 

“Even if these suits are unsuccessful, the prospect of future litigation will create a potential burden on insurers and is not likely to be prevented by exclusions as they are now drafted,” says Tupper.  

Commercial general liability policies may also be affected, which “invariably” include duties to defend lawsuits and indemnify if the company is found liable. Although there are usually exclusions in commercial general liability policies for pollution, those will not apply to climate change-based litigation, Tupper says. Language in those policies typically refers to “contaminants or the release of contamination” whereas climate change suits focus on the release of “carbon-based compounds” and there is “significant risk” carbon will not be viewed as a contaminant falling within the meaning of a pollution exclusion. 

“This creates an exposure risk for insurers,” Tupper says. 

Using climate change risks and effects as a tool for litigation is coming to Canada, Tupper says, and could be further motivated by new amendments to the Canada Business Corporations Act. In June 2019, the Government of Canada added a clause to s. 122(1) of the CBCA outlining the duty of care for directors and officers, adding factors that directors and officers must consider when acting with a view to the best interests of the corporation. Joining the interests of shareholders, employees, retirees and pensioners, creditors, consumers and governments and the long-term interests of the corporations is “the environment” as a factor. 

“So, a lot of companies are looking at that and looking at the litigation trend in the U.S. and really taking a hard look at climate change issues and the risk posed by them, which, of course, then feeds into the insurance question,” Tupper says.  

Heather Vaughan, a partner at Benson Percival Brown LLP, says the amendments “should not in and of themselves spawn litigation” because the environment as a factor for consideration for directors and officers has been in common law for a decade. But Vaughan adds, “It is only a matter of time before climate change litigation hits Canada. 

“Directors and officers, along with their insurance brokers, are going to have to think carefully about the wording of their D&O insurance policies to make sure that they are properly protected for” these risks, she says. 

In Ganguly et al’s article, the authors put the number of global climate change-related cases at more than 1,000, with 828 of them in U.S. courts.  

Carol Hansell, a senior partner at Hansell LLP, says that, while corporations and governments are increasingly taking climate change seriously, Canada likely won’t see comparable levels of litigation. Hansell acts for public and private corporations and governments and advises boards, management teams and institutional shareholders and regulators on legal and governance matters. 

“Their litigation environment’s very different from ours. They litigate much more frequently. And it's obviously 10 times bigger than we are,” she says. “There is simply a lot more litigation.” 

Hansell sees an increasing focus on environmental and social governance risks — something corporations and shareholders are taking “very, very seriously.” Directors need to be aware of environmental-related disclosure expectations from regulators, shareholders and stakeholders, she says, adding that government and regulators are encouraging corporations to take climate risk into account in their strategic planning and risk management.  

“If there's not proper disclosure of the environmental risks of climate change, climate risks facing an organization, and they do, in fact, end up with some kind of a loss as a result of something that happens on the environmental side, that could be a basis for a class action suit,” Hansell says. 

An example are fires that engulfed Australia in 2019, she says.  

“Even if you're not in Australia, if you have customers or suppliers — anybody in your supply chain. . . .   That'll have a very real impact on your business. And, so, if you think that the fires are climate change related as opposed to some part of a normal cycle, then you need to be paying attention to the similar threats in the future.” 

Climate change litigation 

2005-2015 — Phase one: Cases focused on procedural questions of standing and jurisdiction and substantive matters of causation and damage 

2015-present — Phase two: Scientific advancements quantified business’ historic emissions

  • More than 1,000 cases globally, majority filed since early 2000s 

  • 828 in U.S., 263 in 25 other countries 

  • Types: 

(1) Strategic public climate litigation — to influence public policy (against governments) 
(2) Strategic private climate litigation — to influence corporate behaviour and strategies (against companies)

*source: Oxford Journal of Legal Studies 

Recent Canadian Climate Change Litigation 

2020 – Lho’imggin et al. v. Her Majesty the Queen 

  • Two Indigenous groups brought a claim in Federal Court, arguing that Canada’s failure to meet international climate agreements and set sufficient emissions reduction targets violates Constitution  

2019 – Mathur, et al. v. Her Majesty the Queen in Right of Ontario 

  • Seven minors sued Ontario, alleging failing to act on climate change violates their s. 7 and 15 Charter rights 

2019 – La Rose v. Her Majesty the Queen 

  • 15 minors brought a claim against Canada alleging failure to act on climate change violates the s. 7 and 15 Charter rights of present and future Canadian children 

2018 – Environnement Jeunesse v. Canada (November 26, 2018), Montréal, 500-06, QC SCJ  

  • Class action on behalf of Quebec residents under the age of 35, suing the federal government for failure to take sufficient action to lower greenhouse gas emissions. The motion to institute a class action was dismissed but Environnement Jeunesse Intends to appeal 

2018 - Greenpeace Canada v. Minister of the Environment, Conservation, and Parks; Lieutenant Governor in Council 

  • Environmental groups sued the Ontario government, arguing that the province failed to consult the public in ending the cap-and-trade program and by cancelling carbon emissions reduction targets 

*source: Sabin Center for Climate Change Law 

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