Following two waves of climate litigation since 2004, the third may be more nuanced and insurers must be prepared for its effects, participants at an InsuranceERM webinar on the topic explained. Paul Walsh reports
Climate litigation has gained serious momentum in recent years. According to Rachel Delhaise, group head of sustainability at Convex Insurance, over 2,300 climate litigation cases have taken place to date, and around 1,500 of these have occurred since the Paris Agreement was struck in 2015.
In a webinar hosted by InsuranceERM earlier this year on climate litigation and the resulting impact for insurers, Delhaise explained around 70% of actions to date have been against governments, but noted "we're seeing increasing numbers [of cases] against corporates".
Such cases have a direct impact on insurance firms as litigation events have the potential to trigger general liability, directors' and officers' liability and workers' compensation policies.
First and second waves
During the webinar, Robert Reville, CEO at Praedicat, a California-based liability emerging risk analytics and modelling provider for casualty insurers, explained "the first wave" of climate litigation action dates back to 2004. He said this wave involved a set of cases in the US that were filed in federal court on "public nuisance causes of action" and primarily against oil and gas companies, automobile firms and electric power plants.
He cited the case of the American Electric Power Company v Connecticut in 2011 which sought an imposition of caps on and reduction of greenhouse gas emissions from power companies. The United States Supreme Court eventually ruled in 2011 that corporations cannot be sued for greenhouse gas emissions under federal common law.
"[Following the case] for about five years there was no climate litigation and during that time period some people thought that it was gone forever," Reville said.
"In about 2016 though, a second wave emerged and the interesting thing to note about this is the causes of action pursued were a reaction to what the Supreme Court did in the first wave."
Reville explains in the second wave those bringing cases avoided the federal court and instead filed state court cases.
"What you're seeing in the second wave is a proliferation of cases now all largely coming from counties, cities and states and all still making the argument of public nuisance, but with the argument that it's ok they can proceed in state court".
Third wave
Reville explains there's a focus from the legal profession on why cases in the second wave may ultimately fail and talks of a "backlog" of issues to emerge from the second wave which will manifest in a third.
He explains Praedicat has already "done a fair amount of work" on the third wave, referring to its CoMeta/Climate Casualty Toolkit. This involves a set of 13 scenarios designed to help its clients measure how litigation events could aggregate in their casualty books. This offering helped Praedicat win the climate risk analytics solution of the year award at the InsuranceERM Climate Risk & Sustainability Awards 2023.
The most prominent factor about the third wave of litigation, according to Reville, is that "it will not be limited to oil and gas [firms]".
"The early comfort that some of our clients had that they would not be exposed [to litigation] doesn't seem to hold up in legal scholarship," he said.
Particular examples Praedicat have identified include cases around industrial meat production.
"There are widespread methane emissions and methane is a very potent greenhouse gas and some scientists have said that it is responsible for as much as 20% of the greenhouse gas emissions causing climate change," Reville said.
He explained, for example, some legal experts have noted methane emissions "are not subject" to the same issues brought up during the American Electric Power Company v Connecticut case.
"We simulated litigation and found that it could be able to produce losses in the hundreds of billions of dollars if it were to be pursued and successful.
"That's an area heavily covered by insurance, completely outside of oil and gas, and it highlights one potential area that meets the criteria of the third wave."
He also cited the increased focus on the health consequences of climate change as well as the health consequences of the activities that cause greenhouse gases.
Reville referenced diesel emission litigation and in particular cases brought about by Letitia James, attorney general of New York, against bus companies in the state for causing significant air pollution in communities of colour by violating city and state bus idling laws.
He also noted other litigation in the third wave will be more "retrospective" i.e. will focus on events that have happened already rather than prospective actions. Such cases "are more likely to be successful and get traction", he added.
Reville summarised the third wave by noting there will be a "broader range of industries involved".
Convex's Delhaise also discussed how exposed insurers are to new risks under general liability policies.
"I think we'll see that evolve [and] some of these cases will set a precedent."
She added while the majority of cases have been against governments, as more cases come to light, they are capable of "going across" to targeting corporate firms.
Coverage gaps
Alongside these litigation waves, Liz Henderson, head of climate risk advisory and catastrophe analytics at Aon, explained there are three distinct gaps of coverage that exist for the insurance industry relating to climate change. Specifically, the protection gap, the energy transition gap and a climate liability gap.
On the protection gap – the difference between insured losses and total economic losses from a disaster – Aon estimated economic losses from natural catastrophes totalled $380bn for 2023 and 69% of these are not covered by the insurance sector.
"The protection gap has not changed over the years," said Henderson.
"69% is around average for the 21st century, but more and more as the industry is looking at sources of volatility that customers are facing, [it is clear] new products need to be introduced to close that gap."
Similarly, Henderson said the energy transition gap revolves around the need for more insurance products to accelerate the transition towards net-zero emissions.
She explained in order to meet governments' commitment to net zero and to unlock the investment capital that has been dedicated to this transition, "we see a significant increase in need for insurance products to fill that space".
"If you look at investor and government commitments to reducing greenhouse gas emissions, we anticipate around $1.3trn per year to be invested in renewables and carbon offset projects and carbon capture and storage.
"That investment money has been committed, but is not getting deployed quickly enough and one of the main reasons for this is the insurance availability for the energy transition is often limited."
Lastly, on the climate liability gap, Henderson said the insurance sector "is ahead of the game" due to access to better analytics, better awareness on how climate change might impact liabilities for individual organisations, but it must capitalise on this.
"This presents the industry with an opportunity to quantify how much of that [climate] risk is covered in our policies and how much is out there that we should be better understanding and pricing," she said.