Climate Change Litigation Set To Explode, Creating Opportunities, Perils For Insurers

Should private companies and their insurers be held accountable for the effects of climate change? That is the critical question being raised in court by a growing number of litigants, potentially creating new risks and opportunities for carriers, one major reinsurer and an environmental attorney warn.

For now, the courts have been reluctant to step into the fray on this controversy. In one decision detailed below, still on appeal, a federal district judge declared the courts do not have jurisdiction to impose their will in what is essentially a political issue.

However, according to a report issued recently by Zurich, Switzerland-based insurer Swiss Re, the drivers of global litigation spurred on by the success of the U.S. class-action model could eventually mean private companies will be held liable for their contribution to greenhouse gases that are considered the major driver of climate change.

The report–titled "The Globalization of Collective Redress: Consequences for the Insurance Industry"–traces the rise of asbestos litigation from the first incident in 1908 to successful litigation against private companies in 1966.

Swiss Re points out that its analogy has nothing to do with the health conditions associated with asbestos, or even the total cost that it says amounted to between $200 billion and $265 billion by 2001.

Instead, Swiss Re is raising the prospect of "the speed at which an issue can become a widespread topic for collective actions."

"We expect…climate change-related liability will develop more quickly than asbestos-related claims, and believe the frequency and sustainability of climate change-related litigation could become a significant issue within the next couple of years," the report said.

Richard Faulk, partner and climate change practice leader at the law firm of Gardere Wynne Sewell, LLP in Houston, said Swiss Re's report is not hype but reflects the reality within the legal community.

In April, Mr. Faulk warned of the rising tide of climate change-related litigation and regulatory changes here in the United States, speaking during a webinar sponsored by the Property Casualty Insurers Association of America.

"Everyone needs to be vigilant," Mr. Faulk told National Underwriter concerning the growing trend of litigation on this issue.

He described two developments in this arena that insurers need to watch.

o First, the "traditional plaintiff's bar" has been silent on this issue.

"They are not trumpeting this," he said. "In my view, they are working very hard legislatively and in the regulatory arena. But if that fails or moves too slowly, I think the trial bar will get very active behind this just like they did over tobacco and asbestos."

He said "the engines of the common law" were turned loose when no regulatory or legislative answers materialized concerning tobacco and asbestos, and the same can happen with climate change.

o Second, litigation has yet to mushroom because there are no standards yet for determining a nuisance complaint, which is the basis for the actions to date.

The courts, he said, have no standard of reasonableness to measure against. However, once standards are in place, whether set by the courts, a treaty or a regulatory agency, judges will feel comfortable proceeding with litigation.

The consensus among plaintiff's attorneys Mr. Faulk has spoken to is that the standards will develop through a combination of congressional action on new clean air legislation and regulations by the U.S. Environmental Protection Agency.

"There's going to be a host of standards out there. I don't know what they are all going to be, but the plaintiff's lawyers are going to say, 'Oh no, under these circumstances, your honor, there are standards to determine that these particular defendants have acted unreasonably.' I think that is the threshold they are waiting for."

The litigation will eventually cast a wide net, he predicted.

For example, there are lawsuits filed in New York Federal Court (CV 04:5669 and CV 04:5670) before Judge Loretta A. Preska, now on appeal, and another in U.S. District Court in San Francisco (4:08-cv-01138), which is still pending.

In these cases the groups of defendants are small, keeping the cases manageable, noted Mr. Faulk. Typically, the defense seeks to expand the liability by adding more responsible parties with the aim of spreading the risk and making the case more complicated.

In a New York case, the State of Connecticut and Open Space Institutes (acting as lead plaintiffs) sued American Electric Power Company over its emission of greenhouse gasses being a public nuisance. In this case, Judge Preska ruled the court has no jurisdiction because it is a political matter outside of the realm of the judicial system.

In the San Francisco case, the Inupiat Eskimos in Alaska are suing 24 energy producers and subsidiaries for damages caused to their native village of Kivalina.

Approximately 400 people are being displaced because global warming is allegedly destroying their village, and they must relocate at an estimated cost between $95 million and $400 million. They blame the emissions caused by the companies for their plight and are seeking damages to help with the move.

Adding to insurer concerns is the recent initiative by the National Association of Insurance Commissioners to compel insurers to report their carbon footprint, noted Mr. Faulk.

Added to this is pressure on public companies to measure and report their carbon footprint in order to identify the financial health of the company from the standpoint of vulnerability to global warming litigation.

Swiss Re noted that as litigation grows globally, the need for liability coverage will also grow.

"The further development of consumer protection will maintain pressure on producers to manage their liability risks by way of adequate insurance cover," Swiss Re observed. "The insurance industry is well-positioned to offer that risk transfer, provided it is allowed to operate under market, regulatory and judicial conditions that enable risk-adjusted liability premiums."

What this means for insurers, according to Mr. Faulk, is both responsibility and opportunity. "There is potential for new business," he said. "With any new risk there is always new opportunity from it."