13 June 2019News

Insurers braced for sharp increase in climate-related litigation

Decisional law relating to insurance for climate change liability is virtually non-existent, but that is set to change soon, according to Adam Krauss, partner at Traub Lieberman Straus and Shrewsberry.

Writing in a white paper titled Climate Change and the (Re)Insurance Implications, produced in partnership with Aspen Re, Krauss said the rising prominence of the climate change issue and the substantial costs involved will soon force the issue. Courts will have to settle amid “increased litigation activity by municipalities and private parties against fossil fuel companies and other target defendants,” said Krauss.

Climate litigation has been increasing globally in recent years, with over 1,200 laws and policies related to climate change in effect in 2017, up from only 60 in 1997. Outside the US approximately 64 climate cases have been filed in the past 15 years, at least 21 of which have been filed since 2015. And where once these actions tended to target government, they are increasingly likely to be brought against companies.

Seven climate lawsuits were filed in the US against fossil fuel companies in 2017, with six more brought in 2018, to hold fossil fuel companies accountable for the past and future costs arising from climate change. “There have been no substantive rulings in any of these cases on the merits raised by the plaintiffs,” said Krauss. The cases have now moved from state to federal courts to take advantage of the Massachusetts v EPA precedent, where the US Supreme Court determined that carbon dioxide was a pollutant under the Clean Air Act.

Commercial general liability, D&O and property insurance business lines will all be affected by climate change litigation, said Krauss, with courts settling disputes over amount and type of damage, occurrence, trigger, allocation and pollutant exclusions.

Krauss said: “The world’s leading insurance companies have made some progress in setting climate strategy, targets and risk management in place, although those in the US are lagging those in Europe and Japan.” Both the asset and the liability side of the balance sheet are vulnerable, he added.

For the insured, climate change could mean credit rating downgrades for coastal municipalities, given sea level projections, and escalating flood insurance premiums. There will be calls for significant legislative reform, including accounting for specific flood risks associated with the location and structural characteristics of properties, replacing the more general underwriting criteria currently used.

The year 2017 was the costliest on record for natural catastrophe events, with global economic losses recorded at $344 billion, of which 97 percent was due to weather-related events. Insured loss estimates from natural catastrophes totalled $140 billion that year, while even the $80 billion losses from 2018 were significantly higher than the long-term average.

The 2018 IPCC Special Report estimated that by 2100 global economic damages will have reached $54 trillion with 1.5°C of warming, $69 trillion with 2°C of warming or $551 trillion with 3.7°C of warming above preindustrial levels.