Heating up
Insurers push businesses and individuals to get greener
By Dennis H. Pillsbury
Most people look at the insurance industry as a conservative business that changes very little and then only when forced to do so. But the history of the industry is quite different. It has often been in the forefront of efforts to promote safer workplaces, buildings, autos and so on. Of course, these efforts were not strictly eleemosynary; both insureds and insurers benefited from the improved risk profiles.
Today, a similar occurrence is taking place in reaction to climate change, as insurers attempt to proactively mitigate the losses from what William F. Stewart, Esq., co-chair of the Climate Change Practice Group of the law firm Cozen O’Connor, says is “an issue with the potential to affect risk management more than any issue of our time.”
By October 2007, the industry had responded with 422 new climate-related products as reported on the Ceres Web site (www.ceres.org). Ceres is a national network of investors, environmental organizations and other public interest groups working with companies and investors to address sustainability challenges such as global climate change.
Among the products being offered are property coverages that will pay the additional costs for a business or home owner to rebuild “green.” Some companies are offering auto insurance discounts to owners of hybrids based on the belief that drivers of hybrids are more responsible individuals.
It should hardly come as a shock that the insurance industry is gearing up for some significant changes that could certainly impact property insurance coverages, but there also should be great concern about the potential impact for directors and officers of corporations who don’t take steps to become greener.
As Bill Stewart points out, the U. S. Supreme Court’s ruling in Massachusetts vs. EPA on April 2, 2007, concluded that greenhouse gases (GHG) are pollutants. This basically sets the argument for future shareholder litigation against companies that fail to take steps to reduce carbon emissions now and are caught by future legislation, having to play catch up with their competition.
While it is clear that there are costs associated with becoming carbon neutral, there also are long-range benefits to be realized as energy-related expenses decline. Companies that start down that road today will be reaping some of the benefits in a few years, while companies that are still relying on fossil fuels probably will be facing rising costs coupled with the costs associated with having to convert to alternative fuels. It could prove to be a deadly combination.
“There will be winners and losers,” Bill notes. “And I think there will be a large group of losers. Directors and officers of those companies will be held accountable, with the argument being something along the lines of: ‘The Supreme Court said it existed in April of 2007. Why didn’t you do something?’ That’s where people really are going to be exposed,” he continues.
This month, Congress will be considering legislation designed to reduce carbon emissions. “America’s Climate Security Act of 2007” (S. 2191) was sponsored by Senators Joe Lieberman (I-Conn.) and John Warner (R-Va.) and cleared the Senate Environmental and Public Works Committee on December 2, 2007. Chairwoman Barbara Boxer (D-Calif.) has indicated that she will push for passage when the bill reaches the floor.
The bill would create the “core of a federal program that will reduce U.S. GHG emissions substantially enough between 2007 and 2050 to avert the catastrophic impacts of global climate change, while preserving economic growth.”
According to a white paper co-authored by Bill Stewart and Peter J. Fontaine, Esq., co-chair of Cozen O’Connor’s Climate Change Practice Group and Energy, Environmental & Public Utility Practice Group: “The bill places a declining cap on U.S. emissions of five primary GHGs (CO2, methane, nitrous oxide, sulfur hexafluoride and perfluorocarbons, designated Group I greenhouse gases) and on U.S. emissions of the sixth primary GHG (hydrofluorocarbons, designated as the Group II greenhouse gas). A separate declining cap is imposed on U.S. emissions of hydrofluorocarbons from all other industrial activities that emit that gas. For all six gases, the bill uses a common unit of measurement, called a CO2 equivalent.” A CO2 equivalent is the quantity of a GHG that the EPA determines makes the same contribution to global warming as one metric ton of CO2.
“The proposed bill contains extensive provisions designed to reduce costs. It creates a program for trading CO2 allowances and a robust emissions offset program that encourages non-covered facilities to generate allowances from GHG emissions reductions.…
“Importantly, the bill would link emissions trading with international emissions trading programs. An owner or operator of a covered facility can import international allowances to satisfy up to15% of its compliance obligation. The proposed bill would also reward owners and operators of covered facilities who have made early reductions in GHG emissions since January 1, 1994.…
“Finally, like most federal environmental laws in the U.S., the proposed bill would preserve the right of individual states to implement their own GHG control program, so long as they are no less stringent than the federal program. Thus, regional programs like the Regional Greenhouse Gas Initiative in the Northeast and Mid-Atlantic states and the Western Climate Initiative in the far Western states would be preserved.”
Although the Lieberman/Warner legislation may not be successful this year, Bill maintains that “we will have major climate change litigation by 2009, and it will almost definitely be some type of cap and trade system.”
In addition to having an impact on property and D&O coverages, Bill also suggests that professional liability coverages could be affected by climate change. Builders and architects could be held liable if “green” construction fails to produce the promised reductions in carbon emissions, as well as projected cost savings. “And insurance agents and brokers could face E&O problems for not knowing what coverage is out there,” Bill warns.
“More risk managers will be looking for coverage that provides for climate change,” Bill says. “Agents and brokers need to be aware of all the products and services that currently are available, as well as the new opportunities that companies will regularly be adding to deal with the new exposures.
“There are proactive opportunities available for agents and brokers to utilize the new products and services to encourage clients to go green. It also could open doors for new clients.” *