Monday, June 16, 2014

A new role for insurers in climate change compensation?

New role for insurance companies
in Climate Change Litigation
So far insurance companies were mainly on the passive side of climate change litigation lawsuits. However, this might change. The Article “Responding to Litigation Risk from Climate Change – Informed Decision making“ of Mark Baker-Jones and a more detailed blog entry about report referring to a lawsuit of an Illinois insurer against public authorities in the wider Chicago area. The authorities are accused of negligence with regard to their task of storm water management. The negligence is said to have caused damage to the insured, mainly farmers. This case points at a new battlefield of climate change compensation litigation: the battlefield on which insurers oppose authorities.

The move of insurers against authorities might in the future be seen as a decisive move of insurance industry against those causing climate change related damage, though not climate change itself. In the above mentioned case, the authorities are said to be indirectly contributing to the damage, by not protecting against the consequences of climate change. It would only be logic that the insurance industry will sooner or later also attack the polluting industry and their shareholders directly. But when?

It can be guessed that the insurance industry has not yet taken this step because of its own capital interests or its interests in keeping the polluting industry as clients. However, this attitude of the insurance industry might change when climate change damages increase further.

Inside the insurance companies, there might be a discussion on how to make this step without damaging disproportionately the relationship with the polluting industry as clients. To protect the above mentioned interests, the insurance industry might outsource their compensation claims against the CO2 emitting industry to a specialized trust, fund or company (a kind of “bad bank” for (re-)insurance companies). Such a step could be taken by the insurers on their own initiative. Alternatively, stakeholders of the (re-) insurance companies, like investment, could invite the insurance industry to use potential compensation claims. Ideally the insurance industry will make this step as a block in one strike (e.g. managed by the few re-insurance companies) so that the CO2 emitting clients of the insurers cannot threaten anymore to move away to more lenient insurers.

If the direct outsourcing to a specialized trust, fund or company is still regarded as being too risky, the insurance industry will certainly find more elegant ways. E.g., the insurance industry could:

  • Invite auditing companies to point at the missed gains of climate change compensation via a specialized trust, fund or company. To transfer compensation rights to a specialized trust, fund or company would appear to be mandatory under common rules for good business practice if auditing companies were urging the insurance industry;
  • Lobby behind the scenes for business practice laws or standards obliging the insurance industry to realize the financial value of possible climate change compensation claims against CO2 polluters;
  • Sell the compensation claims to legal vulture funds. Legal vulture funds buy legal claims with little success-rate at big discounts.

Thus we can conclude that the insurance industry could, if time has come and intelligent technical solutions developed, turn against CO2 polluters in different ways, either directly or indirectly. Though insurance industry is currently still withhold by opposing interests, intelligent technical solutions might make the balance move earlier.

Update:  After the finalization of this article, the insurance company withdrew the class action against the authorities of the district Chicago. However, the vivid reaction to the class action and various other new events make us believe that the considerations laid down in our article are still valid.