7th International Liability Regimes conference looks into environmental liability

The environmental catastrophe following the explosion of the "Deepwater Horizon" oil platform in the Gulf of Mexico in spring 2010 has again centre-staged the potentially huge environmental damages that industrial / exploration activities can cause.

Against this background, the conference theme: "Exploring environmental liability: an open flank for insurers and their clients" was well chosen. The event, which took place in London 19-20 October, was organised by a committee of leading insurers and reinsurers, including Swiss Re and in cooperation with the Geneva Association. As Swiss Re's Robert W. Hammesfahr, Executive Claims Counsel, commented after the conference: "The Deepwater Horizon disaster underscores the risk of environmental disaster and the extent of the damage. Hundreds of cases have been filed and this litigation is likely to continue for more than a decade. 2010 will also be known as the year that US courts approved climate change litigation proceeding - unless overturned by the US Supreme Court. In Latin America litigation, a multi-billion finding has been recommended for environmental damage to the headwaters of the Amazon. Although isolated, there is a great deal of environmental damage in emerging and developing countries, and the conference noted that transnational businesses could face new risk of environmental liability in these countries".

Evolution of Climate Change Litigation

An aspect of particular interest at the conference was the review of Climate Change Litigation. In 2009,  it had appeared that this area of litigation might pick up speed. The current assessment based on the review of cases brought so far indicates that, while climate change litigation will continue, the initial cases are unlikely to succeed. Environmental liability for climate change is so diffuse that targeted actions against US industry will be difficult to achieve. But the plaintiff's bar will continue to challenge.

Swiss Re's David Bassi, Head of Casualty Centre until mid-2011, led a session on the impact of climate change and environmental liability for D&O insurance. It appears that climate change cases focusing on E&O type risks may be more likely to be successful, as it may be more straightforward to prove causal relationships in architect and engineering projects, for example.  There is ample information available to show that the effects of climate change were foreseeable when building infrastructures and projects.  As underwriters, we need to ensure the insureds are taking the right precautionary steps. In addition, new SEC disclosure guidance has the potential to create issues for D&Os.

David Bassi comments after the session: "We need to remain keenly aware of the changing societal attitudes toward climate change. These attitudes are likely to continue to evolve and have the potential to affect the liability landscape in unforeseen ways. This does not mean that we – as (re)insurers - should shy away from these risks. On the contrary, as underwriters we need to look to the future, and not the past, as we assess exposure without relying blindly on the historical data. Assessing uncertain exposures and providing solutions is the business we are in, and this area provides ample opportunity to put our expertise to work."

Jayne Plunkett, Head of Swiss Re's Asian Casualty Hub, agrees with Bassi's assessment: "Liability with regard to climate change is here to stay", she says, "and is likely to develop differently than the cases we have seen to date". But she agrees  that this is not an immediate concern for the industry since it  is not unique to climate change: in fact the industry had to deal with evolving liability dynamics before in other areas of liability cover. "As enablers of growth and progress, our industry needs to build solutions which respond to the changing dynamics of climate change", she says, "and these solutions must add value both for our clients and for the public."

Lessons learnt for the (re)insurance industry

The broad-ranging review of the evolving landscape of environmental liability yielded a variety of lessons for the industry: NGOs are playing a different role than they have in the past, acting to shape policy. As a consequence, successful companies will find ways to work with the NGOs to build solutions based on a constructive stakeholder dialogue.

The impact of the media has also helped to increase awareness of environmental issues, and this has changed the attitudes of voters and hence political parties. "Green policies" are now mainstream and a "must" concern for all parties aspiring to political influence. Together with active forces working for enhanced consumer protection, this is likely to result in a propensity by politicians to look favourably on initiatives for stricter environmental protection, including liability legislation.

There is already a large gap between environmental exposure and insurance coverage for these exposures. This gap will likely get wider if the industry doesn't do something differently.

Environmental exposure evaluation also requires excellent underwriting expertise and this exposure is not limited to specific Environmental Impairment Liability (EIL) covers.

Environmental damage from oil and mineral extraction in emerging and developing countries could be an emerging threat that should be monitored.

And finally, the USD 20 bn Deepwater spill fund has created a powerful precedent for similar funds in future disasters. This is also a perfect example of how political pressure can override a set legal framework when the impact of the disaster is huge enough.


Published 8 December 2010

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