The Big Question: Is rising climate litigation a challenge or opportunity for the (re)insurance industry? With Matt Harrison, Casualty Head of Technical Sales at Gallagher Re

Against the backdrop of the build-up to the COP28 conference in the UAE and a series of record-breaking weather events across the world there has been a steady rise in the levels of climate litigation.

Both public and private organisations are in the activists’ crosshairs with allegations that they are not doing enough to play a full part in the fight against global warming and climate change. However their focus, which has for so long been on energy companies such as oil gas and coal producers, is starting to shift with an ever wider range of businesses now facing challenges over their climate credentials.

It is not only the businesses themselves which find themselves forced to defend a legal challenge. Senior management teams are now facing litigation for issues which in the past would not have been on their radar and the insurance sector is now increasingly aware of the risks and the potential exposures to their liability policies.

It is not just climate performance and emissions levels that are subject to scrutiny: companies are being held to account in the delivery of their ESG strategies with ‘greenwashing’ now seen as an exposure that has to be recognised and addressed.

Whether successful or not, the new wave of court decisions is building a precedent which will have wide raging implications for the future as the development of climate litigation and its rules takes ever more sophisticated shape.

Ian Summers, Global Business Leader, AdvantageGo

Gallagher Re has sought to examine and address the issues around the changing dynamics of climate litigation in its latest gray rhino research series. The metaphor ‘gray rhino’ was first coined by Michele Wucker, an American policy analyst specialising in the world economy and crisis anticipation, replacing the idea of the ‘black swan’ (a rare, unforeseeable, unavoidable catastrophe) with the reality of the gray rhino – a preventable danger that we choose to ignore.

Matt Harrison, casualty head of Technical Sales at Gallagher Re explains that while climate risks are an evolving risk the industry needs to ensure they are aware of the potential threat they may pose, both to itself and its clients.

“The point we are trying to make is the need for the industry to raise awareness of the potential risks that climate and environmental related legislation may pose,” he explains. “From a risk perspective a lot of the focus has been on the physical and regulatory risks that climate change can create.”

“We need to understand and recognise the litigation risk which is very different to the regulatory risks and the concerns around the changing severity and regularity of major weather events, around the physical risks we face. The litigation risks are not simply around pollution liability risks, we are seeing activities and, in some cases, shareholders taking a wider approach when it comes to the responsibilities arising from climate change.”

Harrison adds: “We have seen cases which seek to hold energy firms to account around the causation of climate change, but increasingly we are seeing legal challenge around the issues of greenwashing. It comes when companies have been public around the efforts they will make around environmental, social, governance (ESG) responsibilities. However, if they are viewed to have failed to meet the targets they have set, then they will be accused of greenwashing. It means the net has been spread that much wider in terms of the companies that may face legislation.”

Evolving legislation

He adds that there is no clear idea of its future direction of travel. “The uncertainty around this type of litigation is high,” Harrison continues. “The legal arguments we have seen are new and they continue as new types of cases are heard and different approaches are taken by those seeking to hold businesses and senior management to account.”

“As such, at present we simply do not know how big this issue will be in the future. What we recognise is that we have to be aware of it. At this moment in time we are still at the point where it is not a definitively known risk, which adds to the need to be aware of how this might develop.”

“The legal environment which will support these risks and provide a degree of clarity does not exist at present. It is still early days although the cases are coming to court. The legal arguments in areas such as attribution are not there at present. Having said that, those legal arguments are evolving all the time.”

Different objectives

Harrison adds that at present the cases which are coming to court have a different dynamic to many liability cases:

“What we are seeing is those activists who are bringing these cases are looking for change, rather than a monetary settlement. Financial recompense is not the primary objective. Indeed we have seen cases brought against governments seeking to force greater enforcement of standards.”

For insurers, issues around policy wording may well be about what needs to be in the cover rather than ambiguity in the existing wordings, he suggests.

“The majority of pollution coverage is for sudden or accidental risks,” says Harrison. “When it comes to climate change, it would be very difficult to argue it falls into a sudden or accidental event. Looking to the future it may well be a discussion about inclusion rather than an exclusion problem.”

What makes climate related litigation more complex is that it is not based around a single issue. The uncertainty around the development of litigation means that at present insurers might need to turn to their crystal balls as evidence is thin on the ground.

“The legal arguments are expanding across different issues and in different ways so you would need multiple crystal balls if you were looking to predict what the future would hold,” he says.

On the question of whether this poses a risk or opportunity for the industry, Harrison says that underwriters will often take the approach that every challenge brings with it opportunity. However, the legislation is not yet at a level of maturity to enable the industry to take an informed view on the question.

“At present we would like to see a focus on awareness and the beginning of a debate on the issues that this legislation is and will create,” he concludes, “The industry needs to be aware of the risks and be in a position where it can take the appropriate action when it is required. What we have to avoid is to ignore the potential risks and end up with a shock sometime in the future.”