Law firm partner says insurers may need to take a leaf out of cyber insurance’s book with ‘explicit exclusions’

Insurers looking to incorporate climate change-related liability risks into policy wordings should look to the cyber market as an example, as it uses “explicit exclusions” for “cyber exposure that was lurking in mainstream policies”, said Nigel Brook, partner at law firm Clyde and Co.

Speaking at S&P Global’s European Insurance Conference 2020, in a panel discussion titled Understanding how climate change impacts the insurance model, Brook noted that liability risks surrounding climate change is a key facet for insurers to consider.

Despite most “modern policies” having “pollution exclusions”, Brook said that “insurers might think more broadly about this if they see this as a growing threat – maybe they want more explicit exclusions”.

In this respect, he believes “cyber may offer some clues here” as to a way forward.

He explained: “Lloyd’s told syndicates last year ‘you either write cyber explicitly or you exclude it’.

“They wanted to take out silent cyber, the cyber exposure that was lurking in mainstream policies, property and liability, that hadn’t been priced in and terms didn’t take account of it properly.

“That’s had a major effect on the Lloyd’s market. You could see a day, potentially, where the same approach could be adopted to climate risk.”

An insurer’s risk appetite, he added, will also play a part – for example, will they seek information on an insured’s investments to help inform decision-making?

Liability risk

Setting the scene for online delegates, Brook said that most litigation surrounding climate change liability risks was currently targeted at governments, however a rising number of cases are proceeding against corporates.

These are more strategic in their aim – it’s behaviour changes that are sought rather than financial damages.

Typical policies that may be drawn on during this process include directors’ and officers’ (D&O) and professional indemnity.

“This will be regarded as just another form of the breach of fiduciary duty so unless you have specific exclusions, those may well respond,” Brook added.

In the cases Brook has seen, corporates have been targeted for a failure to adapt their business to accommodate climate change factors, not taking account of climate change advice, or misreporting or misstating the organisation’s green credentials or results.

Product liability may also be a factor if corporates have been misleading about their products, for example if they contribute to man-made climate change.

Brook added that senior judges are taking climate change-based cases more seriously too – this aligns with the 1 July ‘Dear CEO’ letter issued by the FCA, which instructed firms to take account of climate change.

He said: “Senior judges in UK, Australia and elsewhere have been giving warnings over the last 18 months.

”One key warning that they’re giving is that the old thinking that the bottom line is all that matters, all the director has to think about is that, everything else is secondary – that, if it was ever right, is no longer correct.

”Not least because the environmental impact of a company and the climate risk it faces do also hit the bottom line anyway.”

Three-pronged approach

The other risks associated with climate change are the physical risks and the transition risks.

Transition risks, according to the Bank of England, “can occur when moving towards a less polluting, greener economy.

“Some firms are now choosing to reduce investments into sectors like coal to help manage these risks.

“As companies disclose more information relating to climate change, financial firms will be able to make more informed decisions.”

Linda Freiner, group head of sustainability at Zurich, said that insurers need to “use both sides of the balance sheet” in order to tackle transition risks.

In terms of underwriting, Freiner told virtual attendees that transition risks are not “fully understood” so they are hard to price. Zurich has sought to address this as a priority, working with its corporate customers to review their climate strategies and offer help.

Some sectors, such as travel, will have higher transition risks, however.

Bronwyn Claire, senior programme manager at ClimateWise, added that there are also challenges around disclosure when it comes to climate change risks as there is a lack of suitable data – businesses need to have confidence in their presentation of data if it is to be made public.

Freiner agreed that the quality and quantity of data is essential, and that it can aid underwriting.

The panel discussion was chaired by Dennis Sugrue, senior director at S&P Global Ratings.