Climate-related liabilities and litigation: Part 1 & 2

Part 1

Mark Maroon:

So, hey everyone. Welcome back to Climate Check. This is Mark Maroon, vice president and head of portfolio management and reinsured at American Modern and Munich Re company. Today we're joined by Lucas Beckmann, chief casualty underwriting officer for Munich Re's faculty and corporate Programs. Lucas, thank you so much for joining us today. And can you maybe tell us a little bit about what you do for the company?

Lucas Beckmann:

Yes, of course, Mark. The division I'm working for is responsible for what we call single risk coverages on a worldwide basis. We do cover these risks either through faculty reinsurance or as a primary insurer. This is mainly in the corporate space. I am responsible for the casualty business, which means general liability, directors and officers, professional indemnity, and all other casualty classes of business. Currently, we serve as more than 4,000 clients on a worldwide basis.

Mark Maroon:

Perfect, thank you. So in this series we've spoken to a number of experts in the field of impacts associated with climate change and how those increasing risks can be mitigated. We've touched a little bit on the impact of natural disasters to communities and how to increase resilience when we have to build that, how the insurance industry can boost green technology by warrantying newly developed products and unique challenges and solutions in various areas around the world. But today you're going to be speaking to us about another important consideration in the field of climate change risk, and that's the litigation that can arise out of physical climate related impacts and help businesses or organizations or even governments need to be thinking about how to protect themselves in the basis of expanding liability. So maybe just to start, could you maybe give us a little bit of a real world example of how a physical impact of climate change has resulted in an entity facing scrutiny or criticism that maybe even litigation related to their actions or maybe a lack of action potentially?

Lucas Beckmann:

Actually, Mark, there are so many litigations. Since 1998, mid-80s, we have about more than 2000 litigations against many different companies and also governments. And I think a couple of them, which also hit the news were in the Netherlands, there was Shell, the company, which was allegedly not taking care of human rights and the duty to take care of the Dutch people by emitting too many greenhouse gases. And the Dutch court actually ruled out that Shell has to redo their plan to reduce their greenhouse gas emissions, which then in turn led to a D&O allegation where investors claimed against Shell that they didn't do enough. So basically that was one example.

And another one which is very prominent in Germany, is that there is a Peruvian farmer who said that due to the climate change, a glacier will melt. And that is basically exposing his village and he has to spend three and a half million to protect his village, and he's claiming a German energy provider, RWE, to pay its part of the greenhouse gas emissions. So there are various litigations going on.

Mark Maroon:

So is there a general theme around who we tend to be the plaintiffs in these types of litigation? Does it normally involve governments or is it usually individuals or corporations? Who tends to bring these types of suits?

Lucas Beckmann:

So far, the plaintiffs are often NGOs and often governments are the target to basically force them to reduce or strengthen legal frameworks for greenhouse gas emissions. And there are many different cases, but also, for example, that... I'll give you another example. The city of Baltimore suit the carbon majors, so corporates for basically their greenhouse gas emissions because the city of Baltimore is arguing that their very long coastline of 60 miles is far higher exposed to storm flooding, flooding in general due to the rising sea level. And there are many different types of litigation going on. And we try to sort it out because some of them impact the insurance as such more than others, but most of them are currently not focused on compensation payments, but more on changing legal framework and legislation.

Mark Maroon:

That's pretty interesting. So already maybe [inaudible 00:04:32] other side of the coin, what about the entities that tend to find themselves as the dependents in these sorts of matter? So what types of organizations do you think are more at risk and what types of exposures tend to be the greatest liabilities for them?

Lucas Beckmann:

So in general, I would say that everyone who emits a large part of greenhouse gases is a target. On the other hand, a litigation or a claim made for greenhouse gas emissions as such has been unsuccessful so far for different reasons. I can explain a bit more detail later. So there are these greenhouse gas emissions, which is what we call the carbon majors. So oil and gas exploration companies, producing companies, companies who emit a lot of greenhouse gases like cement producers, truck companies. In Germany also, the large German motor companies have been sued to stop manufacturing combustion engine models much earlier than its plant can release. So it's really a very wide variety. But all the corporates who have a large greenhouse gas emission are basically at target of the claimants.

Mark Maroon:

Do you tend to see that this is a little bit more regionally dependent across the globe? So potentially Europe, North Americas needs to have more of these lawsuits than places like maybe China or India or something like that?

Lucas Beckmann:

When you look at the last 30 years of these developments, we know since long time that climate change is happening, and I think Munich Re is first time announced it or talked about that in the early 70s. So we can basically look at three ways of these climate change litigation history. And the first way was probably out before mid-80s to 2007, and that was mainly focused on the US and Australia. And then more and more European companies were on risk. And since the Paris Agreement, the litigation and the claims has really spiked by more than half of the current... More than 2000 cases have been put to courts after the Paris Agreement. So there is a clear way that it's more and more broadening. And of course countries like you mentioned China and India, who one of the major emitters of greenhouse gas on carbon dioxide, there we haven't seen a lot of cases. Actually for China, I don't know anyone.

Mark Maroon:

That's pretty interesting. So I guess how do we address these liabilities then? So I imagine there are different levels of protection that insurance coverage can offer based on the types of liability.

Lucas Beckmann:

Yes. And we have looked at it when we analyze these whole climate change litigation world, we looked at different types of claims and we basically have on the one hand side these direct, what we call a direct liability, and that is based on greenhouse gas emissions as such. And that is very complicated. And so far, again, none of these claims has been successful. Why has it not been successful? Because there are different ways you have to look at it from a legal point of view. The one is that what we call the political doctrine. So basically that people say, is it really something the courts have to take care of or is this not a problem the governments have to take care of? Because we know for a very long time that carbon dioxide is not healthy. That has a quite significant impact on climate change and we still drove forecast, we bought the products, and this is nothing new. So that's the argument, can really these carbon majors held liable for something which also drove our economy for a long time?

Mark Maroon:

Yeah, it makes sense that this would create a problem of identifying specifically who should be held liable. Now, you said that this was one of the reasons that direct liability claims are tricky, so I'm guessing that you have another reason. But if you don't mind, let's go ahead and pause here and we'll pick up the conversation in our next episode.

So listeners, please tune in for part two of my conversation with Lucas Beckmann and go to munichre.com/climate for more information on this topic. We'll see you next time.

Part 2: 

Mark Maroon:

Hey, everyone. Welcome back to Climate Check. This is Mark Maroon, Vice President and head of Portfolio Management and Reinsurance for American Modern, a Munich Re Company.

Today, we're continuing our conversation with Lucas Beckmann, Chief Casualty Underwriting Officer for Munich Re's Facultative and Corporate Programs. Lucas, thanks again for joining us to continue this conversation about climate-related litigation risk.

In our last episode, you were explaining why direct liability claims are so difficult to prove. In fact, so difficult that there hasn't even been a successful one yet. You had mentioned the first reason was that it's been hard to make the claim that this is a matter for courts to resolve. Rather, courts have determined government should resolve these matters through policy changes since their citizens continue to, for example, purchase and drive gas-powered vehicles despite the known climate impacts. Is there another reason direct liability claims have not yet been successful?

Lucas Beckmann:

The second reason why they have not been successful is basically causality, and that's what you need in liability. You have to prove that a certain action of someone led to a very specific result. While no one is arguing that climate change is happening, that carbon dioxide emissions are heavily adding to climate change, it is possibly even we are able to say who of the carbon majors had a certain percentage of the worldwide greenhouse gas emissions. But what we definitely cannot do at this point in time, it's saying like that a certain emission of a certain emitter caused a very specific loss. So far, that is something we need to really have someone keep liable or make someone liable for for losses. That is what makes it difficult.

But we have other things, where we have really claimed, which is what we call this greenwashing. You've probably heard the term greenwashing a lot. It's basically that you make yourself look better than you are in terms of what you do against climate change. As I said in the beginning, Shell, for example, the directors of Shell have been sued by their investors because the investors said, "You haven't prepared our company well enough to deal with greenhouse gas emissions and climate change, and that brought the stock price down." That what they claimed. That is an ongoing, ongoing claim, for example.

Then, not to make it too detailed, we have these indirect losses, and there where I think where really liability plays a role, and that our example would be an architect who builds a house today near the seashore, they have to think about climate change. If they don't take that into account when they build a house or build a dam or whatever, they clearly can be held liable. Then that's also where I believe our insurance policies will respond to. On the other side, where they said the direct claims, I think it's very difficult, and we don't think that this will lead to insurance losses. But again, that's not our biggest problem.

Mark Maroon:

This is potentially a big nerd question coming from a math guy who's stepping his toe into the legal space on this one, but it does seem like, especially on the US side, when you're bringing a suit, to your point, there needs to be somebody, a person, directly impacted by the actions of a company or what have you. Do you think there's ever potential that that could potentially change? Somewhat how you alluded to, maybe there's potential for some sort of class action suit because climate change does have an impact on a lot of people. While there may not be a direct individual impacted just in aggregate, there's enough that we need to come up and say, hey, you know what? Maybe there is an issue here that needs to be addressed.

Lucas Beckmann:

Yeah. At the end, you never know. What we say in underwriting is if you're in front of a court or on the sea, you never know what happens. You're in God's hand basically. No.

But I think you're right. We definitely should not completely ignore that there's a possibility that legislation or even the court would change. However, the claim is also working on that insofar that there are certain areas in the US law, for example, be it Constitutional law or state law or whatever, which they base their allegations and claims on.

For example, on the greenhouse gas, their claim is that the carbon majors knowingly played down the risk of fossil fuels, that they're knowingly and deliberately spent money on anti-science campaigns, and that at the end, oil as a product as such is a hazardous substance. That's what they're claiming. Will that be successful? Very difficult to say. But I guess you're right, we should not completely rule that out. But currently, we think it's not very likely.

Then you have in the US something like what happened in the early '70s is a market share liability that was used on pharmaceutical products. But their one subjectivity is that you bring together all the market participants. For greenhouse gas emissions, this is not possible because basically every one of us who drives a car emits carbon dioxide. You're heating the house emits carbon dioxide. So that's a very difficult part. That basically everyone is an emitter makes it, of course, difficult to point to a specific claimant.

Mark Maroon:

It sounds like there are successful paths for litigation on the indirect and greenwashing side. Then what kinds of actions should these entities be taking right now to be mitigating the risk of those liabilities?

Lucas Beckmann:

At the end, I think it is very important that nobody, or let's say nearly nobody, disagrees that climate change is happening. Also know that we have to do something to stop that and, if possible, keep the climate change below the two degree threshold, or at 1.5 degrees in the Paris Agreement. Therefore, many of these companies have made clear commitments to transition from a more fossil fuel-based industry into a different type of energy and being based on solar and wind and so on. I think that's what they do. They make clear commitment. They define the pathway, what they want to achieve in a certain time. That is the best thing what they can do and what we need as a society. So I think that basically all of these larger companies are going away in that direction.

Mark Maroon:

It definitely seems like there's a trend in that area. Maybe to play devil's advocate a little bit, I would expect there are a handful of folks who just don't want to phase out of oil and gas, for example. Do you think they're finding it easy to obtain the coverage that they need to protect them against litigation damages, or is that landscape shifting right now as well?

Lucas Beckmann:

If you look at the insurance industry in total, we also have made clear commitments. Munich Re has made clear commitments that we want to reduce our carbon dioxide emissions also on the liability side, meaning when we write risks. It will be more and more difficult to obtain cover. The insurance industry is a dilemma there because on the one hand side, we see our industry as being enabling. So we want to enable solutions. And on the other side, there are certain boundaries when we have to be disabling. We do that by having defined clear milestones within our company, what we want to achieve until when. We talk to our clients. We try to basically solve this problem together. On the other hand, we also offer coverage for new technologies.

For example, it's also been discussed in the risk managers' forum in Europe, where they said, "We have two problems. We have on the one hand problem that we need insurance for the old style carbon dioxide heavy industries. On the other hand side, we can't get coverage for the new technologies, renewable energy, solar power, what have you."

Munich Re is working on both sides. I think that's [inaudible 00:08:05] what we need to do on the one hand side phased out on the carbon dioxide heavy industries. We again, we have made clear commitments and more work into these green technology solutions area, which we do since many years. Munich Re is offering on the solar panel coverages since 20 years, I think.

Mark Maroon:

Yeah, I think that's right. In terms of the reinsurance or the insurance space really going more in the direction potentially of a disabling role, to your point, in some of these areas that are producing high levels of CO2 instead of embracing the green solutions, do you think that will have a meaningful impact on climate change in the long term?

Lucas Beckmann:

Absolutely convinced that if everybody plays a role, then we can change that. If that wouldn't have any impact, I can't see why some corporates basically voice out that it's hard to buy coverage for certain industries. Therefore, I think we can make a change, and that is our part of what we have to do as part of the society. I think that at the end, more and more in the insurance industry, companies defining similar rules or similar target that Munich Re, and I am convinced that that will make a change.

Mark Maroon:

It definitely feels like the industry is shifting in that direction, and it's pretty cool to see. I feel like reinsurance can help move the needle for us in a more positive climate future.

Lucas, thank you so much for joining us today to talk about these climate change liability considerations. We really appreciate you coming on.

Lucas Beckmann:

Thank you very much, my pleasure, and it's always good to talk about these topics and then also know that what other people think and how we can change it.

Mark Maroon:

Absolutely. It's always fascinating to dive into this.

Listeners, if you want to hear more about some of the other surprising intersections between climate change solutions and the risk mitigation industry, please subscribe to our podcast. For more information, head on over to munichre.com/climate. We'll see you next time.