Authors Prof. Dr. Ina Ebert und Dr. Guido Funke

Climate change and liability – Everything you need to know about climate change and liability

In the USA, the debate over climate change is increasingly being held in the courtroom, with a growing number of claims for damages by US states and cities, environmental associations and private persons against energy companies, car makers and authorities. And although courts have thus far offered little encouragement to the plaintiffs in these cases, climate change is nevertheless becoming an increasingly important topic for liability insurance.

Climate change is increasingly becoming an issue of major concern for the public, as the growing weight of evidence strongly suggests that the rise in global temperature is substantially attributable to anthropogenic greenhouse gases. We have even started to see the first climate change lawsuits, primarily in the USA, which now makes it a topic of relevance for liability insurance in addition to the more obvious property exposure. In this article, Munich Re examines the main climate change and liability issues.

What sort of lawsuits are there?

There are essentially three types of lawsuit: Firstly, actions against authorities accused of not making adequate use of the powers given to them by the legislature to control greenhouse gas emissions. The most prominent example of this is the case Massachusetts vs. EPA (Environmental Protection Agency), which the US Supreme Court decided on in 2007.

Secondly, there are lawsuits against private companies which seek injunctive relief against emissions or generally try to prevent activities that would cause more emissions (e.g. Connecticut vs. American Electric Power).

Thirdly, there are claims for damages (e.g. California vs. General Motors, Comer vs. Murphy Oil). Such actions are primarily directed against companies with especially high CO2 emissions, such as the oil, coal and chemical industries, car manufacturers or meat producers. Another option are lawsuits against companies that finance industries with high CO2 emissions and therefore make it possible for climate changae to occur. For example, in the case Friends of the Earth vs. Mosbacher, banks had to defend themselves against the accusation that when awarding loans to companies that use fossil fuels they disregarded environmental regulations, such as information requirements, set out in the National Environmental Policy Act (NEPA).

Such actions are not necessarily directed at an entire company. Shareholders could proceed against individual board members or managers who have failed to prevent liability claims or the imposition of government sanctions against the company, or who have violated a duty to provide adequate information or warnings. This latter case is all the more likely given the fact that there are still no clear guidelines governing the extent to which companies are obliged to provide information about their greenhouse gas emissions or about the de facto and legal consequences of climate change. This means that courts handling lawsuits on such matters still have a very broad scope for discretion.

Who brings these lawsuits?

Most actions so far have been brought by US states, US cities and NGOs (non-governmental organisations). However, initiatives have also come from private persons that have suffered from the effects of climate change such as the victims of Hurricane Katrina (Comer vs. Murphy Oil) or the Inuit people. Actions could also be brought by representatives of other industries that have suffered as a result of global warming, such as fishing or winter sports.

What is the legal basis for such lawsuits?

Actions against state organisations for their failure to act are usually based on violations of environmental protection regulations, especially the Clean Air Act (CAA), NEPA, the Endangered Species Act (polar bears) or the Kyoto Protocol. Claims for damages, on the other hand, are usually based on common law, and have seen a wide variety of approaches tried. As most actions require some form of property ownership (private nuisance) or the violation of a specific duty towards the plaintiff on the part of the defendant (negligence), there is an increasing tendency to try to treat the emission of greenhouse gases as "public nuisance". This requires proof that the rights of the public have been affected. Such infringements may include health hazards or disruptions to public infrastructure, bodily injury and property damage, but also pure financial losses, business interruption and environmental losses.

What are the chances of such actions succeeding?

While lawsuits against state organisations have had varying degrees of success, claims for damages have so far failed. Firstly, so the reasoning goes, these cases involve political issues that need to be decided on by the legislature and executive and not by the courts. Secondly, it does not seem acceptable to blame defendants for "doing nothing more than lawfully engaging in their respective spheres of commerce".

In spite of this, plaintiffs have won the odd decision here and there: for example, in Friends of the Earth vs. Mosbacher in 2007 the District Court of the Northern District of California denied the defendant’s motion for summary judgement and went to great lengths to explain this decision. This can be seen as a sign that judges do not view such actions as completely hopeless. An important milestone for the prospective success of compensation claims was the decision by the US Supreme Court in Massachusetts vs. EPA, although the case actually dealt with a failure to act on the part of an authority: the Supreme Court ruled that greenhouse gases are to be considered pollution in the meaning of the Clean Air Act, which had previously been disputed, as greenhouse gases also occur naturally in the atmosphere without any anthropogenic influence. The Supreme Court also accepted the right of US (coastal) states to sue as they face the prospect of direct losses to their territories in the event of rising sea levels due to global warming.

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What legal problems might prevent the success of such claims?

Success on the part of plaintiffs suing for damages is hindered by a range of seemingly insurmountable legal problems. The most important of these are:

a) Justiciability

Is this issue a matter courts have to deal with or is it rather a political problem that needs to be solved by governments and the legislature? Thus far, the courts have unanimously decided that the latter applies, i.e. they have rejected jurisdiction (see Connecticut vs. American Electric Power, California vs. General Motors, Comer vs. Murphy Oil).

b) Right to sue

Losses due to climate change are notoriously difficult to assign to a specific injured party. Who, therefore, is entitled to claim compensation? Up to now, courts have only clearly accepted the right to sue of US coastal states in respect of an impending loss of territory (Massachusetts vs. EPA).

c) Causality

The major problem, however, is establishing causality: firstly, it is not clear whether losses can be attributed to anthropogenic greenhouse gases or whether naturally occurring greenhouse gases alone would have been sufficient to cause the same damage. "Probabilistic attribution science" intends to overcome this hurdle by attempting to prove that anthropogenic emissions are very likely to have been responsible for losses related to climate change.

However, this approach will only be successful if the courts accept a specific degree of probability as proof of causality. Even in this case, plaintiffs must additionally prove that the specific greenhouse gas emissions produced by a specific defendant are responsible for the specific damage suffered by the plaintiff. This appears impossible given only the classic instruments of tort law.

Constructing liability would therefore require that

aa) the burden of proof be shifted or even reversed,
bb) courts accept proportional liability, e.g. as occasionally proposed for medical malpractice lawsuits in Germany but broadly rejected and denied by all courts, or
cc) ) jurisdiction accept market-share liability, which thus far has been recognised only in exceptional cases and subject to narrowly defined conditions. Market-share liability presumes, among other things, that there is a clear causal link between the loss and a faulty product, that significant causation by other factors can be ruled out and that there is sufficient data available to produce an exact breakdown of market shares.

However, liability for the consequences of climate change fails on all of these points. In particular, not only is it impossible to rule out contributory cause of a loss by other factors: it usually exists to a considerable extent. It is also not clear how the market shares of different groups of greenhouse gas emitters, ultimately mankind as a whole, would be divided up. It seems highly unlikely that such options would be viable and that the central principles of tort law would be changed so significantly.

d) Lawfulness of defendants’ behaviour

As a rule, liability presupposes unlawful, if not negligent, behaviour. Although exceptions to this are conceivable, they have so far usually been limited to neighbour law and activities in emergency situations (someone may in exceptional circumstances intervene in the rights of others but must pay for the damage that arises as a result). It is therefore doubtful whether one can be held liable if one has complied with all the regulations (rejected in California vs. General Motors, for example). This barrier to liability could, however, lose importance in the future, given the expected introduction of tougher legal regulation of greenhouse gas emissions: the stricter the greenhouse gas regulations, the more likely it is that the defendant has acted unlawfully by exceeding threshold values or by failing to fully comply with reporting and information duties.

Far fewer legal problems are caused by actions which are not directly based on the emission of greenhouse gases but on unfulfilled information requirements or the non-consideration of climate change in construction projects. However, unlike direct climate change actions, such lawsuits do not raise any new legal issues. In legal terms they are no different from traditional (professional) liability cases based on the breach of legal or other duties (of care).

How are damages assessed in climate change litigation cases?

Even if the courts found a defendant liable in a climate change case, it would remain unclear how the amount of damages to be awarded to the plaintiff should be calculated. There would be four problems:

Precisely what share of the greenhouse gases are man-made?To what extent have greenhouse gases emitted by a specific defendant harmed a specific plaintiff?How could the fact that most people also benefit in some way from global warming (e.g. lower heating costs, new agricultural opportunities) be considered when calculating the loss?How could the contributory cause on the part of the plaintiffs be included in the calculations, since nearly everyone contributes to the existence of greenhouse gases (e.g. as a car driver, by eating meat or dairy products)? This is a calculation which is just as difficult as determining the defendant’s share of the damage.

What claims should insurance cover?

Even if one cannot assume at this stage that the legal hurdles will be overcome, it is still worth taking a look at some coverage issues. First of all, it depends which of the above-mentioned types of lawsuit applies.

a) Lawsuits requesting someone to act/not to act

Lawsuits which aim to force official authorities to take action are by their very nature not a topic for liability insurance, which indemnifies insureds for damage allegedly sustained and claimed by third parties. Because such lawsuits are not covered by liability policies, there exists neither an obligation to defend claims against the policyholder nor to assume the costs involved. Only lawsuits that seek to obtain compensation are covered. In principle, this also applies to lawsuits against the authorities, provided they have liability insurance.

b) Lawsuits seeking damages

In the case of lawsuits seeking compensation, public and product liability policies cover only bodily injury and property damage, but not pure financial losses (apart from special exceptions). Therefore, all that can be covered are claims resulting from genuine property damage, such as the destruction of property following a natural catastrophe, but not, for example, claims for a reduction in the value of a property that may be affected by rising sea levels in the distant future.

Professional liability and D&O insurance cover pure financial losses. Professional liability covers pure financial losses suffered by the policyholder as a result of errors or omissions committed in the pursuit of one’s activities and especially a breach of the obligation to provide advice to third parties. This could involve, for example, the requirement that an architect provide information and advice concerning a particular method of construction. D&O insurance, on the other hand, covers violations of duty on the part of a company’s board members (board of management and supervisory board of a joint-stock company, director of a private limited company) in carrying out their duties as managers of a company.

Occurrence: Does the emission of greenhouse gases constitute a loss event?

The idea of what constitutes a loss event changed in most countries in the 1970s and 1980s. The term event suggests a degree of suddenness or randomness. Where policies used to refer mainly to accidents, the definitions and interpretations have been extended over the course of time to include loss causes that are less sudden. At any event, cause and consequence must be clearly identifiable.

Furthermore, a loss event should incorporate an element of fortuity. However, these requirements can hardly be said to exist in the case of intended and approved emissions of greenhouse gases within the context of normal business operations. It may be a different situation if relevant amounts of greenhouse gases enter the atmosphere as the result of an incident or malfunction. However, it can be assumed that incidents with relevant emissions are virtually impossible given the industrial processes in place today.

What role does the so-called "pollution exclusion" play?

If cover is affirmed in principle, the question is then whether losses due to contributory cause of climate change are excluded, particularly through the environmental damage exclusions. In accordance with international environmental exclusions, CO2 emissions will usually come under the "pollutants" exclusion. This interpretation is supported by the decision of the US Supreme Court in the case Massachusetts vs. EPA (the definitions of "pollutant" in the US Clean Air Act and ISO are similar in this respect).

As is the case with general liability policies, environmental damage is normally also excluded from D&O policies. Even if compensation claims are therefore usually sidelined, the legal costs involved may be covered. It remains to be seen whether the chequered history of coverage disputes about "pollution exclusions" will promote or hamper clarity regarding climate change in future claims.

Prof. Dr. Ina Ebert is an expert on liability law and emerging risks in Munich Re’s Risk, Liability and Insurance Department. Her specialist areas are mass litigation, personal injury and liability issues related to violations of personality rights and new technologies.

Dr. Guido Funke is an executive manager responsible for Corporate Underwriting Casualty at Munich Re.

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