Following the recent article, in this three-part series, we will explore possible solutions available to help corporations manage their climate-related physical, transition and liability risks in respect of liability risks.

What are climate liability risks?

Liability risks can arise in relation to climate change. Businesses can face potential shareholder litigation and or regulatory enforcement if they do not adequately consider or respond to the impacts of climate change. This liability can have implications for businesses and directors' duties.

Corporate regulators around the world require companies to proactively assess, disclose and manage climate risks. Already, businesses are being held liable by regulators (e.g. the Australian Securities & Investments Commission or ASIC) for 'greenwashing' or overrepresenting the extent to which their practices are environmentally friendly, sustainable or ethical. Liability can also arise in relation to 'green hushing' or omitting sustainability-related information.

In September 2024, Vanguard Investments Australia was ordered by the Federal Court to pay a $12.9 million penalty for making misleading claims about environmental, social and governance exclusions. This is the latest but not last penalty that will be handed out in relation to 'greenwashing' conduct. Since 1 April 2023, ASIC has made 47 regulatory interventions relating to alleged 'greenwashing' (see REP 791 ASIC’s interventions on greenwashing misconduct: 2023–2024). The Australian Competition & Consumer Commission (ACCC) is also active in greenwashing investigations and enforcement in sectors other than financial services.

In terms of climate litigation, the 2023 United Nations Global Climate Litigation Report found that there has been 2,180 cases filed in 65 jurisdictions within international or regional courts, tribunals, quasi-judicial bodies or other adjudicatory bodies (as at 31 December 2022). Notably, ClientEarth, an environmental law charity, brought a derivative action in 2023 against Shell's Board of Directors alleging that they had breached their obligations under company law by failing to properly manage climate risk facing Shell, thus compromising the company's long term viability. Although ultimately dismissed by the UK courts, this case highlights the risk of similar actions being brought against directors regarding climate-change strategies. Notably, in Australia, the Australian Centre for Corporate Responsibility (ACCR) commenced proceedings in 2021 against Santos Limited over alleged misrepresentations regarding its climate claims. The trial occurred in late 2024.

It is expected that climate liability risk will increase with the implementation of climate-focused regulations including the mandatory climate reporting regime which starts for larger entities for reporting periods from January 2025.

NOTE: Regarding the mandatory climate reporting, there is a three-year modified liability regime that applies to an entity's financial and directors' reports. This will provide reporting entities with immunity from civil claims by private litigants regarding certain disclosures and representations made in sustainability and auditors' reports. Immunity will not extend to any action, suit or proceeding brought against a person or entity that is either a criminal action or brought by ASIC.

What are the relevant insurance products?

Directors & Officers (D&O) insurance

D&O insurance will play a key role in providing protection against emerging climate liability risks. D&O insurance can provide coverage in relation to shareholder claims against a company and/or individual directors/officers. It can also cover regulatory enforcement investigations/proceedings arising from alleged 'greenwashing', 'green hushing' or other climate-related disclosure issues. A D&O policy may also cover costs incurred in responding to non-routine regulatory investigations into the company's affairs or the conduct of directors/officers.

Notably, most D&O policies contain pollution exclusions, which may exclude claims 'arising out of, based upon or attributable to or in any way involving directly or indirectly pollutants'. In the US and Australia, there is some recognition that carbon dioxide (and other greenhouse emissions) falls under the classification of 'pollutant'. See 7 Massachusetts v Environmental Protection Agency 529 U.S 497; Walker v Minister for Planning [2007] NSWLEC 741. Further, policies may even expressly define carbon dioxide or other greenhouse gases as a pollutant.

However, some policies include certain write backs to the exclusion or provide extensions for shareholder pollutions claims and/or standalone defence costs which are often sub-limited.

For example, Zurich's Directors and Officers Liability Insurance policy contains an 'environmental violation' extension, which provides cover to an insured person and/or the company in relation to 'the financial loss that arises from an environmental proceeding made against such insured'. The policy defines 'environmental proceeding' to mean 'any claim based upon, arising out of or attributable to an environmental event if and to the extent such claim:

3.21.1 is a securities claim;

1.21.2 is an employment practices wrongful act; or

1.21.3 is against an insured person for wrongful acts in connection with an environmental event and/or in connection with misrepresenting or failing to disclose information related to greenhouse gases or actual or alleged global warming or climate changes.

'Environmental event' is defined to mean 'the actual, alleged or threatened discharge, release, escape, seepage, migration or disposal of pollutants or greenhouse gases into or on real or personal property, water or the atmosphere' or 'any direction or request that the company or insured persons test for, monitor, clean up, remove, contain, treat, detoxify or neutralise pollutants or greenhouse gases, or any voluntary decision to do so, whether or not such greenhouse gases are pollutants'.

Another aspect that may be relevant is statutory liability insurance, which covers 'penalties' that an insured becomes liable to pay following a contravention of an 'Act of Parliament'. This type of insurance only covers penalties as defined and associated legal costs, specifically excluding other types of loss e.g. damages.

A D&O policy may provide some coverage for climate change exposures however it may not necessarily respond to all related losses and liabilities. Given the evolving regulatory landscape, it is important for a business to have a legal professional review its D&O policy and advise on any significant gaps in coverage.

Professional Indemnity (PI) insurance

Increasingly, professionals across many industries are being expected to provide their expertise in relation to complex climate-related issues. For example, architects are expected to provide services to public and private clients that help them assess their options for protecting their physical assets against future climate hazards and minimising their carbon footprint. To do this, architects must keep up to date with key developments, the changing regulatory/policy landscape and the costs for integrating new systems, materials and technologies.

PI insurance is relevant for claims against an insured party (e.g. architects, engineers etc.) for breach of their duty in the provision of professional services and costs incurred in responding to regulatory investigations. If climate-related claims allege such a breach, a PI policy may provide cover subject to certain policy terms including the definition of 'professional services' and 'professional loss'.

There is an increasing demand for environmental consultants who analyse and advise on policies guiding the design, implementation and modification of government or commercial environment operations and programs. This type of professional may be responsible for carrying out environmental impact assessments for development projects, proposing solutions to address negative environmental impacts of a development project as well as developing conservation and management policies.

Insurers such as Newline have created PI products that cover 'Environmental Consultants' against potential losses arising out of acts, errors and omissions from a wide variety of professional services provided including advice on pollution, waste control and land fill schemes, land management and climate change management.

Given the rapidly changing legal and technological environment, it is vital to have a legal professional review your PI insurance (or the adequacy of any contractors' PI insurance) and advise on any significant gaps in coverage.

Product Liability / Public Liability insurance

Product Liability and/or Public Liability insurance may be relevant depending on the nature of the business and the substance of any climate-related allegations made against it by third parties.

For example, emitters of greenhouse gases may face liability for failing to address or reduce climate change impacts including 'downstream' impacts. Notably, in the US, there have been multiple lawsuits filed by municipal bodies seeking to hold the fossil fuel producers liable for their contribution to climate change (for example, City of Chicago v. BP p.l.c. (2024CH01024); Bucks County v. BP p.l.c. (2024-01836-0000), Metro v. Exxon Mobil Corp. (3:24-cv-00019), People v. Exxon Mobil Corp. (CGC23609134)).

Cover may include damages or compensation payable to third parties and legal costs incurred in defending such claims. However, standard liability insurance policies often:

• do not cover gradual pollution;
• exclude loss arising from specific contaminants or group of contaminants;
• are linked to damages that an insured becomes legally obligated to pay to third parties;
• exclude liability for civil fines and penalties; and
• limit the cover of third party property damage and rarely extend to cover diminution in value, natural resource damage or biodiversity damage.

Environmental Pollution insurance, which is discussed below, provides cover for third-party environmental losses that are often excluded under a standard liability policy.

Environmental Pollution insurance (EPI)

EPI (sometimes called Environmental Liability insurance) can provide businesses with financial protection against liability associated with pollution releases and other events that harm the environment.

Depending on the specific circumstances and nature of each risk, EPI may provide cover for:

• bodily injury and property damage to third parties as a result of environmental damage first discovered during the policy period, including the costs to clean up a third party site;
• costs for on-site clean up of conditions discovered during the policy period and ordered by a government authority;
• pollution releases caused by transportation;
• personal liability for clean up made against Directors and Officers;
• environmental civil fines and penalties (where allowable by law);
• legal expenses in defending any action brought by a third party or government authority alleging environmental contamination;
• business interruption and extra expense as a result of an environmental impairment claim; and
• reimbursement of a loss in the value of property or commercial value loss as a result of environmental damage.

This type of policy may be appropriate for businesses that operate at premises they own, lease or licence. EPL insurance can cover single sites or portfolios.

Policies can also be taken out to cover environmental liabilities arising from a contractor's operations caused by the introduction of new pollution conditions or the exacerbation of existing pollution conditions. For example, Aon arranges Contractors Pollution Liability insurance which protect clients from liabilities and costs arising from pollution conditions which result from specified contracting activities. If a contractor is arranging cover, a Contractors Pollution Liability policy covering the contractor and subcontractors engaged in the project may be appropriate. However, if the contractor's principal is arranging cover, a CPL policy with an Owner Controlled Insurance Program endorsement may be suitable.

As the impacts of climate change intensify, it is important for businesses to accurately identify and protect themselves against the associated liability risks through comprehensive risk management processes and or transfer solutions such as insurance.

At MinterEllison, we can assist you and your business with:

• identifying how you (or your suppliers) may be exposed to the liability risks associated with climate change, noting your particular vulnerabilities;
• assessing whether there are any coverage gaps in your insurance or alternative risk management solutions; and
• advising you in relation to obtaining relevant risk transfer solutions to fill any gaps such as environmental proceedings coverage and or environmental pollution insurance

Get in touch with our MinterEllison experts today to identify and mitigate the physical impacts of climate risks for your business.