August 24, 2016

Environment - Corporate environmental responsibility: ‘business as usual’ or facing the inevitable?

Court treatment of pollution-related exclusion clauses unclear when it comes to disclosure of environmental risks

The insurance industry is at the forefront of environmental risks and insurers are working to de­risk their financial exposure. Most directors’ and officers’ (D&O) policies do not specifically address claims relating to climate change. Insurers may be able to invoke pollution-related exclusion clauses but it remains unclear how courts will consider the liability of firms and their officers when it comes to disclosing these risks.

The present case law on this issue – US, mostly – is mixed. A US state court found in Sealed Air Corporation v Royal Indemnity Company the pollution exclusion included in the D&O policy was not triggered so as to bar coverage, but the Court of Appeals for the Fifth Circuit reached the opposite conclusion in National Union Fire Insurance Co v US Liquids Inc.

The insured and its officers were sued in securities and shareholder derivative claims. Shareholders alleged the purchase price of stock was artificially inflated as a result of false statements. Officers were also accused of negligent breach of their fiduciary duties and intentional falsification of the company’s compliance as they knowingly engaged in illegal toxic waste disposal. The Court of Appeals found the pollution exclusion was “unambiguous and clearly barred both coverage and defence costs” and the losses alleged were intertwined with the polluting conduct excluded in the policy.

The Canadian case of Boliden Ltd v Liberty Mutual Insurance Co offers a rare example where shareholders sued a company and its officers after the release of toxic waste involving the collapse of a mine tailings pond dam. The insurer relied on the pollution exclusion and refused to indemnify the company for defence costs. The Ontario Court of Appeal confirmed the allegations of misrepresentation in the offering prospectuses were covered under the D&O policy, but concluded any claim for loss resulting from the discharge of pollution was not.

Claims under commercial general liability policies may not meet with greater chances of success. In AES Corporation v Steadfast Insurance Company, an Alaskan native community village sued an energy company alleging negligent emission of greenhouse gases. The Supreme Court of Virginia found the commercial general liability policy did not apply as the consequences were natural and probable and, as such, were no accident.

Further complicating matters for insurers and corporate leaders, climate litigation is going global. Consider the recent Supreme Court of Canada decision in Chevron Corporation v Yaiguaje. Chevron challenged the competence of a Canadian court for recognition and enforcement of a foreign judgment for $9.5bn for environmental damages in Ecuador. Chevron having no assets in Ecuador, the plaintiffs tried to enforce the judgment in North America. The court held the only prerequisite for juris­diction to exist in an enforcement proceeding is that the foreign court had a real and substantial connection with the litigants or with the subject matter of the dispute. The case returned to a trial judge in Ontario, who will have to determine whether the Ecuadorian judgment can be enforced against Chevron.

There is also a regulatory dimension. For example, in the UK two oil and gas companies – SOCO International and Cairn Energy – have been reported to the Financial Reporting Council concerning alleged reporting failures in relation to climate change risks.

In light of this, it is manifest that corporate boards have a lot to contemplate with respect to environmental risks. Their insurers are no doubt taking note.