Insurance companies are in a tricky position when it comes to the issue of climate change.
On the one hand, virtually all of them insure policyholders facing the risk of a climate change liability claim. The claimants can range from the islanders off the coast of Alaska (whose island is eroding due to loss of Arctic sea ice that protects it during winter storms) to homeowners from the Katrina-ravaged areas of the Southeast to environmentalists seeking to shift the costs of adaptation from those allegedly impacted to those allegedly contributing to the problem.
In the recent wave of litigation, claimants were unsuccessful and faced a wide range of defenses including displacement by the Clean Air Act, the political question doctrine, standing, statute of limitations and preemption. (See related textbox.)
Instead, defendants and insurers argue (as tobacco companies and their insurers did for decades) that the causal link is too tenuous to support a viable claim, and that even if the link was sufficient, the claim would not be covered as an “unexpected” or “unintended” event.
Of course, third-party liability of a policyholder is not the only way in which insurance is implicated in the climate change context. Many insurers also issue first-party policies insuring property against natural catastrophes including hurricanes, tornadoes and superstorms (like Sandy).
In pricing and reserving for these losses, insurers are undoubtedly considering—indeed factoring in—the realities of a changing climate, including the increased frequency and severity of storm activity.
Meanwhile, more and more insurers market themselves as green companies with corporate commitments toward more environmentally friendly practices.
As part of this move, many also agree to enhanced reporting regarding sustainability and climate change issues. Some of these agreements involve voluntary disclosures of information in annual reports or to organizations such as the Carbon Disclosure Project. Regulators also are imposing mandatory disclosure obligations, which may increase over time.
The difficulty for insurers arises when all of these activities—pricing, adjusting, reserving and marketing—converge under the spotlight of disclosure. Specifically, in a world of full disclosure, insurers may have to explain why they consider climate change for the purpose of evaluating their own exposure (and the related pricing for insureds for policies), yet climate change is rejected as unproven science when they are defending insureds (and their own conduct).
In the tobacco and asbestos areas, these inconsistencies prompted a whole different set of claims directly implicating direct liability for insurance companies through conspiracy, concealment and fraud claims. Similarly, climate change can involve significant risk for insurers as separate moving parts in differing segments of a single insurance company conflict, only to be unexpectedly revealed through disclosure.
To avoid the unexpected as disclosure requirements increase, insurers should start now to consider a comprehensive climate change strategy that mitigates and addresses all issues. Any other approach could result in claims of a much more serious kind.