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May 11, 2023

Directors’ personal liability insurance cover in limbo over climate litigation

UK insurance giant Aviva says that as a D&O insurer, it is “increasingly observing climate disclosures of our insureds to consider whether they are accurate, credible and achievable” (Photo: Ben StansallAFP via Getty Images)
UK insurance giant Aviva says that as a D&O insurer, it is “increasingly observing climate disclosures of our insureds to consider whether they are accurate, credible and achievable” (Photo: Ben StansallAFP via Getty Images)

A rise in ESG-related lawsuits and increased scrutiny of board directors’ responsibilities for climate disclosure obligations are revealing grey areas in management liability policies.

Company board directors are becoming increasingly vulnerable to litigation risks as sustainability-related regulation intensifies and environmental, social and governance claims continue to be brought before courts across the world.

The recent claim filed by ClientEarth against the board directors of oil and gas major Shell in the High Court of England and Wales has made this potential risk a reality, with the possibility of further repercussions on risk management mitigation.

Sustainable Views reached out to specialist insurers and legal advisors in the UK to understand whether existing personal insurance policies go far enough to cover potential liabilities if directors are sued over ESG issues.

“Growing levels of climate litigation, coupled with the addition of new laws and regulations globally, could have a meaningful impact on the D&O [directors and officers] insurance industry in the years ahead,” according to Hannah Tindal, head of D&O for regional unit, London and Nordics at Allianz Global Corporate & Specialty.

She explains current D&O policies may respond to climate-related litigation in cases of: securities class action claims alleging direct financial harm to the investors; shareholder derivative claims alleging directors or officers breached fiduciary duties to the company (the legal foundation used to sue the directors of Shell); or regulatory claims alleging securities fraud.

Simon Colvin, partner and head of law firm Weightmans’ environmental team, says he has noticed a trend whereby underwriters are carving out climate change litigation cover – offering it separately at an additional cost, as well as more specifically addressing the scope of cover for such risks.

One example can be found in a D&O policy underwritten by insurance giant Aviva that provides cover for climate-related financial disclosure investigations brought against companies. An Aviva spokesperson said the policy responds to “an increasingly broad range of disclosures … imposing personal accountability for climate-related disclosures on directors” and that it provides up to £1mn of cover.

However, Aviva warns it is a “matter of debate” whether such investigations are automatically covered under D&O, and says: “As D&O insurers, we are increasingly observing climate disclosures of our insured to consider whether they are accurate, credible and achievable.”

The spokesperson also notes there may be a sub-limit for investigations, but that there is generally a disconnect between climate-related and pollution-related investigations (given the latter’s long and extensive investigation costs), which then leads to grey areas in coverage interpretation. 

Colvin adds: “It’s fair to say that currently, pending the further testing of cases in court, there are some grey areas, especially in historic D&O policies, when it comes to climate change litigation cover.” He anticipates this changing as underwriters become increasingly aware of the risks posed by climate change, resulting in increased costs for specific, and more tightly defined, cover.

Potential exclusions

Any insurance policy has its own terms and conditions that may include or exclude certain specific claims, such as climate change or greenwashing.

DAC Beachcroft insurance partner Graham Ludlam says exclusions might exist for pollution-related losses, bodily injury or sickness, or certain civil fines and penalties. “We have reached the point where underwriters can start to underwrite these specific risks and policyholders need to consider whether to transfer or retain the risk of a claim. There is certainly capacity and appetite in the insurance market for such risk transfer,” he adds.

Issues might arise, however, when policyholders file a claim under a D&O policy that was not at the forefront in the underwriting process. Ludlam points out that, for instance, in cases of alleged greenwashing, it may be difficult to cover the claim if the alleged greenwashing amounts to dishonest conduct by directors. The differentiation between “intentionally dishonest” as opposed to “merely ambitious” in the company’s sustainability report would be a key factor, he says.

The insurance market continues to debate if, and what type of, ESG exclusions would be justified in D&O policies. 

Alex Nurse, a partner at law firm Kennedys who specialises in D&O insurance, expects that material changes to policy terms and conditions will only be introduced once large climate-related losses are incurred because of D&O claims.

Ludlam and Nurse agree that no widespread ESG exclusions or major reductions in cover limits have yet been introduced in D&O policies. However, Colvin at Weightmans says: “Historically, risks such as litigation and resulting damages connected with climate change impacts will have been covered under D&O policies, although specific exclusions for such environmental issues have become more common in recent years.”

Ludlam stresses that, given the increased risk for directors in this area, transfer of ESG risks to insurers is something a board should be considering.

Beatriz Araujo, head of D&O at Zurich UK, says: “In our opinion, we should support business leaders who choose to make the right journey, ensuring there is suitable personal liability cover under D&O liability policies for climate-related exposure.”

She adds that the insurer continues to focus on underwriting these exposures to offer its clients the best possible terms and peace of mind. Zurich did not, however, elaborate on whether it is considering any ESG exclusions, or what specific insurance options it offers to company directors wishing to protect themselves against third-party claims, such as climate change and/or greenwashing.

Meanwhile, insurer Allianz flagged in a report on D&O insurance trends for 2023 that a rise in social, diversity and inclusion issues is also being observed in the market. “D&Os who are perceived to have not taken enough action to stamp out discrimination, or are regarded as enabling such a culture to develop, may also find themselves exposed to litigation,” the report warns.

Ludlam anticipates that since claims are quickly evolving, it will only become more challenging for directors to confirm to their insurers with certainty that they are not aware of circumstances that might give rise to an ESG claim. “A company’s approach to governance will be key,” he adds.

On the upside, while insurers would generally be unable to offer cover for fines and penalties, they could cover the legal defence costs under D&O policies, which can run into tens of millions of pounds, says Ludlam, who’s based in the UK.

In its report, Allianz analyst Lydia Miller notes that “companies with strong ESG frameworks and governance will likely find insurers more willing to offer capacity”.

Meanwhile, the spokesperson for Aviva said it recommends companies to engage in a comprehensive review of any D&O policy to ensure this offers the broadest possible coverage, given that much ESG litigation will “directly or indirectly implicate directors”.

 

A service from the Financial Times