The cost of climate change: Will companies pay in court?

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By Jill Rosenblum | 04 October 2013

Potential litigation in the climate change arena could put large greenhouse-gas-emitting corporations in the hot seat. As Walter Stahel of the Geneva Association, an international insurance industry think tank, describes, “[Climate change] has within a very short time become a ‘risk iceberg,’ a real hazard of which only a minor part is visible, but the shape and size remain unknown.”1 In spite of the massive amounts of attention drawn to the subject, climate change remains surrounded by a multitude of questions and uncertainty. A 2010 study by Trucost, a global environmental research company, estimates that the environmental damages resulting from human behavior will reach $28.6 trillion in 2050. In light of the lack of existing coverage for damages resulting from climate change and its resulting environmental impact, it’s unclear where this money will eventually come from. Does the potential exist for litigation to cover the cost?

 

Climate change: The next mass tort?

According to the U.S. Environmental Protection Agency (EPA), “Climate change is happening. Our Earth is warming... Small changes in the average temperature of the planet can translate to large and potentially dangerous shifts in climate and weather.”2 These environmental changes could translate to big costs for the property and casualty insurance industry. Of these estimated costs, property liability is the most obvious business line that would be affected as a result of an increase in frequency or severity of natural disasters. Other casualty lines that may be affected include flood, product, directors and officers (D&O) liability, and environmental, among others.

“Most of the observed warming since the mid-20th century is due to human-caused greenhouse gas emissions,” the EPA concluded.3 Furthermore, “The majority of greenhouse gases come from burning fossil fuels to produce energy, although deforestation, industrial processes, and some agricultural practices also emit gases into the atmosphere.”4 If future litigation is able to demonstrate a link between environmental damages and greenhouse gas emissions by large corporations, could environmental damage caused by climate change be the next mass tort?

Currently the biggest case tried on the topic is the 2011 U.S. Supreme Court case of American Electric Power (AEP), which pitted five large-scale private electric power companies emitting greenhouse gases against the City of New York and eight additional states. Dr. Richard H. Murray, special advisor to the Geneva Association, describes the case’s verdict as “unusually opaque, generating a multitude of conflicting interpretations.”5 While little was decided by the case, Murray explains, “The decision may fairly be described as either approving, or not specifically disapproving, of any of the avenues for climate risk liability that were presented in the case. That is why the U.S. floodgates of liability claims will be open for the foreseeable future.”6 This is evocative of the tobacco litigation of the mid-1990s. Michael B. Gerrard, director of the Columbia University Law School Center for Climate Change Law, explains, “They lost the first cases; they kept on trying new theories and eventually won big.”7 So while the AEP case may not have specifically created a path to indemnification, the fact that it didn’t rule out any possible future litigation efforts speaks volumes. The ruling may be an indication that such potential efforts may in fact be successful in the future.

Litigation characteristics

A defining characteristic of greenhouse gas emissions is the ambiguity of event isolation, like that related to the long latency period of asbestos-related diseases. A major obstacle in litigation on the topic will be demonstrating a cause and effect relationship between damages and emissions, both overall and in identifying a specific defendant. When the argument made is not that an event is uniquely created, but that an already existing event is increasing in both frequency and severity, the burden of proof becomes much more complex. For example, take the case of natural disasters occurring more frequently because of climate change resulting from greenhouse gas emissions. It’s impossible to identify Hurricane X as the result of the harmful behavior, while assuming that Hurricane Y would have occurred regardless. Indefinite characteristics could be paving the way for mass tort litigation attempts characterized by groups of plaintiffs and defendants in a single case. A 2005 Asbestos Litigation study by the RAND Institue for Civil Justice explains the adaptation of litigation techniques regarding grouped plaintiffs and the resulting successes, “Initially, asbestos manufacturers vigorously defended themselves against workers’ claims, raising a host of issues... By the mid-1980s, however, plaintiff law firms in parts of the country where people were heavily exposed to asbestos... had learned that they could succeed against asbestos defendants by filing large numbers of claims, grouping them together, and negotiating with defendants on behalf of the entire group.”8

The vagueness of climate change litigation characteristics could also promote jurisdiction shopping in order to find the most advantageous legal environment. The same RAND study explains the success of plaintiffs in asbestos litigation through forum shopping, “The U.S. system of federalism provides strong incentives for plaintiffs to structure their lawsuits in ways that allow them to file in favorable forums, and for defendants to seek ways of vetoing these choices and moving cases to jurisdictions that they believe will be more favorable to them.”9 These characteristics set the stage for big trials involving massive amounts of damages, high defense costs, and the acute attention of the public.

Time to act

A contributing factor to potentially imminent litigation efforts is that society is currently disinclined to turn a blind eye to the fact that companies could be knowingly causing damage to the environment without consequence. Lindene E. Patton, chief climate product officer of Zurich Financial Services explains, “Society as a whole is unwilling to tolerate the destruction of or damage to natural resources as a result of human activities.”10 The absence of a proactive plan of action is no longer an option in our sophisticated world. In fact, current greenhouse gas emission disclosures required by the EPA may be laying the path for a specific proof of knowledge. If documentation exists proving that a corporation was aware of its harmful operations, avoiding the consequences becomes more difficult. In the 1998 tobacco litigation, documents proving the tobacco companies’ knowledge of health risks lead to a massive settlement. The companies were no longer able to argue that they had no knowledge of the harmful effects. It seems reasonable to believe that any future climate change litigation decisions may have retroactive effects for behavior that currently exists, as was the case with both tobacco and asbestos mass tort litigation.

So what are the involved parties doing now to address the problem of costs due to greenhouse gas emissions? The answer still appears to be: not much. A recent report by Ceres, a network of investors, companies, and public interest groups who advocate for sustainability leadership, describes, “Policymakers have failed to act with the level of urgency and clarity the problem requires. The need for more decisive action by investors, by business and by policymakers is increasingly clear.”11 There is a lot of buzz surrounding the issues and most large corporations are researching and exploring the topic. However, the output of all this activity is surprisingly quiet. Potential paths to explore include:

  • Government programs, in partnership with greenhouse-gas-emitting industries, developing a means for funds to be pooled and set aside for the damages
  • Companies, either individually or as a group, taking a proactive approach to provide funds to cover losses, in an effort to appeal to consumers
  • Insurers developing a means to provide the funds for these losses, potentially through the use of catastrophe models

The EPA is partnering with the private sector in various programs targeted at measuring and reducing greenhouse gas emissions, but there are currently no programs in existence to collect funds to pay for damages. Margareta Wahlstrom, United Nations Special Representative of the Secretary-General for Disaster Risk Reduction has said, “It is critically important to examine how insurance can become an effective measure for reducing disaster losses along with other financial and socio-economic instruments. Insurance has the potential to become an effective tool to reduce disaster risk if paired with the right incentives. Government regulation is critical.”12 It would be advantageous to all parties involved for a proactive solution to be explored, in an effort to avoid the high costs of defense and litigation that may come from a less assertive approach.

Very little is known about the potential effectiveness of litigation on the subject of climate change. This uncertainty and our society’s current state could be creating an ideal situation for the next mass tort of our generation. The money to pay for the damages will have to come from somewhere and it remains to be seen just where that deep pocket may be hiding.

1Liability Issues Related to Climate Risk. (June 2011). The Geneva Association. Retrieved October 4, 2013 from https://www.genevaassociation.org/media/185056/ga2011-rmsc5.pdf.

2Climate Change: Basic Information. Environmental Protection Agency. Retrieved October 4, 2013 from http://www.epa.gov/climatechange/basics/.

3Causes of Climate Change. Environmental Protection Agency. Retrieved October 4, 2013 from http://www.epa.gov/climatechange/science/causes.html.

4Climate Change: Basic Information. Environmental Protection Agency. Retrieved October 4, 2013 from http://www.epa.gov/climatechange/basics/.

5Liability Issues Related to Climate Risk. (June 2011). The Geneva Association. Retrieved October 4, 2013 from https://www.genevaassociation.org/media/185056/ga2011-rmsc5.pdf.

6 Ibid.

7 Ibid.

8 Carroll, S., Hensler, D., Gross, J., Sloss, E. Schonlau, M., Abrahamse, A. & Ashwood, J.S. Asbestos Litigation. (2005). Retrieved October 4, 2013 from http://www.rand.org/content/dam/rand/pubs/monographs/2005/RAND_MG162.pdf.

9 Ibid.

10The Geneva Association. Liability Issues Related to Climate Risk. (June 2011). Retrieved October 4, 2013 from https://www.genevaassociation.org/media/185056/ga2011-rmsc5.pdf.

11Global Investor Survey on Climate Change. (August 2013). The Networks of the Global Investor Coalition on Climate Change. Retrieved October 4, 2013 from http://www.ceres.org/resources/reports/global-investor-survey-on-climate-change-2013/view.

12. Dobie, G. Governments must work more closely with insurers to reduce impact of natural disasters, says Geneva Association. (June 5, 2013). Insurance ERM. Retrieved October 4, 2013 from https://www.insuranceday.com/generic_listing/catastrophes/governments-must-work-more-closely-with-insurers-to-reduce-impact-of-natural-disasters-says-geneva-association.htm (subscription required).