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Climate litigation on the rise: are you covered?

Aloha Petroleum’s case against its insurer AIG raises questions on whether insurance policies will cover climate litigation costs

Climate litigation on the rise: are you covered?

Companies have been encouraged to review their insurance policies to ensure they are covered for climate liabilities and in the event of legal action arising from climate litigation.

The growing awareness and regulation around ESG have emphasized new liabilities for companies who may want to seek protection for it, says Elaina Bailes, commercial litigator and partner at Stewarts.

“UK companies are waking up to the risk of ESG litigation as regulators are increasingly requiring companies to report on their ESG credentials,” she says.

“This is when people start suing companies based on their climate change activities, there’s going to be a step behind that with disputes of insurance of whether or not this is all covered.”

Aloha Petroleum vs AIG

The topic of climate litigation insurance cover has been brought to the forefront after a recent lawsuit between Aloha Petroleum and its insurer AIG raised questions on whether insurance policies will cover the company’s legal fees.

The first of its kind case against an insurer is not surprising as the world of climate litigation heats up, says Bailes.

This is because the majority of insurance policies will have been taken out historically before climate change was on the agenda for insurers, policyholders and brokers, meaning cover may not cover climate litigation costs – something companies may need to review, she adds.

In August, Aloha Petroleum, the Hawaii subsidiary of US-based Sunoco, filed a claim against insurance giant AIG’s National Union Fire Insurance Company of Pittsburgh arguing it failed to cover the mounting legal expenses stemming from a lawsuit by local governments in Hawaii.

Aloha has “incurred more than $880,000 in defence costs in connection with the Climate Change lawsuits, and expects that it will continue to incur significant additional defence costs, as the litigation progresses”, according to the complaint.

Assessing climate-related liabilities

The maturity of ESG is rapidly increasing the risk profile of businesses, as companies become vulnerable to climate-related liabilities in their compliance, supply chain and financial reporting.

“These cases raise risks about general liability, environmental liability, directors’ and officers’ insurance, and more,” says Peter Halprin, partner at insurance recovery firm Pasich.

“[Directors and officers liability insurance] (D&O) is particularly interesting here as there may be issues in relation to ESG-related risks and exposures from these class action lawsuits, securities suits, and even potentially regulators.”

Earlier this year, Shell shareholder ClientEarth accused the oil and gas company’s directors of mismanaging the material and climate risks facing the business.

With directors being held accountable for a company’s performance, this could see director’s insurance rise as they become a higher liability, highlights Bailes.

“The other area that’s quite interesting is companies are seeing increasing risk is in the supply chain as regulation on making sure [companies] are complying with environmental [and] human rights laws, all the way through your supply chain, expose [businesses] to more liability and all of this feeds into financial reporting.”

Unethical aspects of the supply chain not only carry a reputational risk but exposes the company to a potential lawsuit later down the line, says Bailes.

Moreover, science is “becoming better at drawing causal links” of an incident meaning it can be harder for companies to prove which events are accidental and which are intentional, she adds.

As such, insurance companies are starting to tighten their policies, and in some cases, offer climate-liability-related premiums to provide additional coverage for businesses.

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