The insurance industry is in many ways on the front of environmental risks. This explains why many insurers are working to de-risk their financial exposure to the impacts of climate change.

That said, most D&O policies do not specifically address claims relating to climate change. Because most policies include pollution-related exclusions, insurers may be able to invoke such clauses to denying coverage in some circumstances. What is less clear, however, is how the courts will consider the liability of companies – listed ones in particular – and their directors and officers when it comes to disclosing climate change risks to their investors.

This was a point driven home last week in Toronto by Bank of England Governor Mark Carney. He cited figures showing that only a third of the world’s top 1,000 companies are offering effective disclosure to investors about the potential impact of carbon pricing on their businesses.

Carney, also chairman of the Financial Stability Board, further warned that there may be a “lurking issue” for the insurance industry as it pertains to the liability of D&Os in lawsuits involving climate risk disclosure.

At the present, the case law – American mostly – is mixed on insurance coverage for claims alleging inadequate disclosure of a listed company's environmental liabilities.

Though there is a case where a State Court has found that the pollution exclusion included in the D&O policy was not triggered so as to bar coverage[1], here's one where the Court of Appeals for the Fifth Circuit reached a completely different conclusion. In National Union Fire Insurance Co. of Pittsburgh, PA v. U.S. Liquids, Inc., 03-20542 (Court of Appeals, 5th Cir. 2004), the insured company, U.S. Liquids, and its directors and officers were being sued in securities and shareholder derivative claims. In the securities action, the shareholders alleged that they purchased common stock the price of which was artificially inflated due to "reliance on materially false and misleading statements presented in press releases issued" by the company and the documents it filed with the SEC. In the derivative suit, the directors and officers were accused of intentional and negligent breach of their fiduciary duties causing the company to violate federal environmental and securities law, by falsifying the company’s compliance with state and federal law, and by inflating earnings as they knowingly engaged in illegal toxic waste disposal. In affirming the district court's decision, the Court of Appeals found that the pollution exclusion was "unambiguous and clearly barred both coverage and defence costs". The district court had correctly found that the losses alleged in both claims were intertwined with the polluting conduct excluded in the policy.

Canadian case law on this subject is even thinner. The case of Boliden Ltd. v. Liberty Mutual Insurance Co.[2] offers a rare case where shareholders sued an insured company and its directors and officers, alleging misrepresentations in the Canadian mining company’s prospectus. The collapse of a dam at a mine's tailings pond caused the release of toxic waste into the surrounding area. The insurer relied on the pollution exclusion and refused to indemnify the company for costs incurred in defending the directors and officers. The Ontario Court of Appeal affirmed the motion judge's decision who found that the allegations of misrepresentation in the offering prospectuses and construction defects were covered under the D&O policy, but concluded that any claim for loss resulting from the discharge of pollution was not.

Companies may also look to their CGL insurers for climate change risk coverage, but may not meet with greater chances of success. In The AES Corporation v. Steadfast Insurance Company[3], an Alaskan native community village sued AES, an energy company, for damages brought on by the emission of greenhouse gases. In the complaint, the community alleged that AES "intentionally emits millions of tons of carbon dioxide and other greenhouse gases into the atmosphere annually.” The suit claimed that the company had been negligent, as it "knew or should have known" that its action would cause damage. The consequences were not only foreseeable, but also "natural and probable". The Supreme Court of Virginia found that the natural and probable damages were no accident and affirmed the Circuit Court judgment that found that the CGL policy did not apply.

These are early days and climate change litigation is sure to evolve over the next few years, even if the pace of change appears to be slow. In 2010, the U.S. Securities and Exchange Commission issued the Commission Guidance Regarding Disclosure Related to Climate Change "to assist companies in satisfying their disclosure obligations under the federal securities laws and regulations." (In Canada, the Ontario Securities Commission has only stated that environmental risks are material to investors, and as such might be subject to disclosure obligations.) In so doing, the SEC acknowledged the investors' needs for sound information on the risks they face due to climate change, even if a report issued by Ceres, a non-profit organization advocating for sustainability, revealed in 2014 that the SEC's efforts yielded little improvement since 2010.

That may change sooner than later. In late fall 2015 and at the eve of the Paris Climate Conference, it has been reported that Exxon Mobil, one of the leading giants in the oil and gas industry, was being targeted by a federal investigation demanded by environmentalist groups: it was accused of misleading the American public by not disclosing information about climate change risks in order to protect its profits. In fact, several states, New York and California among them, have been investigating Exxon Mobil’s statements to investors on climate change risks to determine whether any are inconsistent with findings by the company’s own in-house research scientists who have written unequivocally about the effects of global warming. At the time of the research, the company allegedly funded publicity challenging the reality of climate change. What’s more, Exxon Mobil projected for the future that oil and gas will still dominate the energy industry in 2040, but in making these projections, it is unclear if the company took into account a scenario where the global demand for oil and gas may drop due to the enforcement of measures put into place to curb the effects of global warming. In the latter scenario, the investments made in reliance on the projections as well as any financial profit would melt.

If it turns out the information disclosed to Exxon Mobil’s investors regarding the consequences of climate change risks on the oil and gas industry and on the company's future performance is incomplete or misleading, the company and its directors and officers could face an array of potential claims, from class actions to shareholder derivative claims. The company would then likely turn to its insurers and seek indemnification under their policies. Further complicating matters for insurers and corporate leaders, climate litigation is going global.

Consider the Supreme Court of Canada decision last year in Chevron Corporation v. Yaiguaje[4] – a decision that illustrates cross-border reach of corporate environmental liability. The case invoiced, Chevron Corporation and Chevron Canada Limited, who were challenging the competence of a Canadian court sitting on a proceeding for recognition and enforcement of a foreign judgment condemning it to the payment of over US$9.5 billion for environmental damages caused in Lago Agrio, Ecuador. Chevron had no assets in Ecuador, so the plaintiffs tried to enforce the judgment in the U.S. and in Canada. The top court held that for jurisdiction to exist in a recognition and enforcement proceeding, there is no need for a real and substantial connection between the defendant or the action and the enforcing court. The "only prerequisite is that the foreign court had a real and substantial connection with the litigants or with the subject matter of the dispute, or that the traditional bases of jurisdiction were satisfied." The act of service based on the foreign judgment grants the enforcing court jurisdiction over the defendant. In conclusion, the Supreme Court of Canada found against Chevron. The case returned to a trial judge in Ontario, who will have to determine whether the Ecuadoran judgment can be enforced against Chevron.

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.