Tradecraft kEvIn BInGHAm, DOuG RICHTER, AnD ROBERT WEnDEL
d & o coverage, climate risk,
and a Greener Boardroom
WHEn THE ECOnOmY DETERIORATES, litigation tends to
increase as a byproduct of a company’s financial stress. Given the
challenging economic environment of the past few years, directors and
officers throughout the united States are now facing an increase in class
action litigation activity from shareholders experiencing lagging returns
from the companies in which they invested. According to Stanford
Law School’s Securities Class Action Clearinghouse and Cornerstone
Research, federal securities fraud class action litigation jumped to
223 lawsuits in 2008, followed by 169 filings in 2009.
Shareholder suits for fiduciary malfeasance or mismanagement due to
the credit crisis and exposure to Ponzi
schemes, negligent compliance with
federal and state notice disclosure regulations, as well as other investment-related
issues have provided directors and officers
with many sleepless nights over the past
couple of years. Is it possible that there are
yet more exposures to contemplate?
Unfortunately, the answer is yes.
There are additional liability exposures
that many companies haven’t even begun
to address related to climate risk. From
environmental programs and corporate
accountability for controlling various
emissions to government mandates, exposure will continue to rise as plaintiff
attorneys find new legal fodder in the
greening sensitivities of businesses. Companies facing a plethora of legal liability
arising from shareholder suits have only
just begun to realize that climate risk alone
has the potential to keep lawyers across
the U.S. busy for many years to come.
Directors and officers in certain
sectors are more exposed than others. Of particular concern are the
transportation, energy, and manufacturing sectors. These sectors, which
are inextricably tied to the use of fossil
fuels, face considerable exposure to
suits targeting their ability to control
CO2 emissions and for failure to adequately disclose their climate-risk
exposure in their annual reports.
Previously unforeseen liability
Several large energy companies have
already faced issues with the New York
State Attorney General’s office. In 2007,
a New York-based electric company was
affected by a large settlement arising
from inadequate climate-risk management. This particular electric company
ended up paying a $4.6 billion settlement
for environmental cleanup and remediation for its coal-fired electricity plants.
The settlement forced the installation of
carbon dioxide scrubbers in 46 coal-fired
power plants. Of the $4.6 billion awarded
(as reported on MSNBC.com on Oct. 9,
2007), $60 million was to clean up and
remediate the pollution caused by the
plants and $15 million was for civil fines
and penalties, with the remainder split
between legal fees and the installation of
the scrubber units.
In many scientific studies, environ-
mental pollution has been a proximate
contributor to increased levels of CO2.
Shareholder resolutions have been filed
requesting additional information on how
management is dealing with a company’s
climate-risk exposure and the result-
ing risk management steps that senior
management is taking to address these ex-
posures. Directors and officers now face
additional risk arising from areas such as
the failure to disclose the full extent of a
liability, compliance with state and federal
environmental regulations, cap-and-trade
liability, and even the failure to properly
design and implement new alternative
energy strategies. In addition to their own
company, directors and officers must con-
sider whether their major suppliers in the
company’s product life cycle are compliant
with climate-risk mitigation. These suppli-
ers could prompt environmental suits or
regulatory fines if they don’t have adequate
environmental protection liability policies.
It doesn’t take a creative plaintiff attorney
long to figure out where the next deep
pocket is. In order for company directors
and officers to protect themselves, analy-
sis and remediation efforts should now
extend to each of their major suppliers
in order to determine what counterparty
risk exposure they might pose. Exposure
to climate risk throughout all stakeholders
in the product development cycle has the
potential to drastically increase the num-
ber of suits against directors and officers
across the United States.
insurer vulnerability
Insurers are in one of the most precarious positions regarding climate-risk
liability. In addition to insuring the
directors and officers exposure of their
policyholders, insurance companies
need to be concerned about managing
their own climate-risk exposure.
Proper disclosure of the insurance
company’s own climate-risk exposure,
within both its investment portfolio
and company operations, was mandated
in 2009 by the National Association of
Insurance Commissioners (NAIC). On
March 28, the NAIC voted to revise its
climate-risk-disclosure survey for insurers with annual premiums greater than
$500 million from a required to a voluntary submission, including a revision
that now makes any such insurer submission confidential. Insurers’ directors
and officers must not only direct their
own risk management activities but now
must be cognizant of the ever-changing
duties owed to policyholders, regulatory
