The Heat Is Online

Swiss Re Factors GHG Policies into Liability Coverage (May, 2003)


Insurers Weigh Moves to Cut Liability for Global Warming

Directors, Officers Could Face the Denial Of Coverage After Rules Are Implemented

The Wall Street Journal, May 7, 2003

Here's what companies' directors have to worry about these days: accounting scandals ... earnings problems ... oh, and global warming.

With all the talk of potential shareholder lawsuits against industrial emitters of so-called greenhouse gases, Zurich-based insurance powerhouse Swiss Re is considering denying coverage, starting with directors-and-officers liability policies, to companies it decides aren't doing enough to reduce their output of the gases.

Swiss Re plans to start mailing out questionnaires in the next few weeks in which it will ask the buyers of directors-and-officers insurance what they are doing to prepare for imminent government restrictions on greenhouse-gas emissions. If Swiss Re decides a client isn't doing enough, it may consider refusing the company D&O coverage when, in a few years, certain countries begin implementing those rules.

Directors-and-officers liability coverage protects a company's directors and named officers from personal liability from lawsuits alleging they mismanaged the company's affairs. This insurance already has grown tougher and costlier for companies to get amid the spate of corporate scandals.

"Emissions reductions are going to be required. It's pretty clear," says Christopher Walker, managing director for a unit Swiss Re set up in 2001 to look at the corporate implications of global warming. "So companies that are not looking to develop a strategy for that are potentially exposing themselves and their shareholders."

Swiss Re plans to send out similar questionnaires later this year to an even bigger group of its clients: the primary insurers that underwrite corporate insurance policies and buy backup, or reinsurance, coverage from Swiss Re.

Swiss Re isn't the only insurer raising alarm bells about global warming with its clients. Munich Re says it, too, is asking customers about the issue, though in informal underwriting discussions rather than through a written questionnaire. Munich Re doesn't provide directors-and-officers liability insurance, but the Munich, Germany, company is a big rival of Swiss Re in the reinsurance business, a market in which both companies are major players.

"We want all the parties to be informed about this issue," says Thomas Wollstein, a Munich Re executive. "If we have individual cases where we get the impression it is not being dealt with properly, then we might, in this individual case, exclude the risk."

Behind the insurers' moves is the Kyoto Protocol, the international treaty that seeks to curb greenhouse-gas emissions. The treaty hasn't yet been ratified by enough countries to put it into effect, and the U.S. has rejected the document. But European countries, working with the European Union, are expected to impose caps on greenhouse-gas emissions starting in 2005, and other countries are expected to follow. Swiss Re's Mr. Walker says he worries that even U.S.-based multinationals could face legal and financial risk stemming from the treaty, since most of them have factories in countries that have signed the document.

Word of Swiss Re's coming questionnaire already is starting to turn corporate heads.

"When the insurance companies are debating things, they're debating them because they're beginning to see there may be practical consequences. And when that happens, you've got to pay attention," says Bill Blackburn, vice president and chief counsel overseeing environmental matters at medical-product maker Baxter International Inc., which gets some of its directors-and-officers liability coverage from Swiss Re. He adds that Baxter has moved to reduce its greenhouse-gas emissions even without government caps.

To be sure, Swiss Re has an interest in spreading worry among corporate officials about global warming. The insurer is trying to start up some businesses that aim to profit from helping companies deal with their ostensible climate-change risks. "I do see this as a potent business driver," Mr. Walker says.

One possible money-making venture, he says, is peddling insurance to smooth the introduction of an international market in so-called greenhouse-gas emissions credits. The fledgling market is hobbled by uncertainties, including how a buyer can be guaranteed that a seller really has produced the emissions cuts the credits represent.

In Mr. Walker's view, directors and officers could face legal liability if they fail to act early to reduce their companies' greenhouse-gas emissions, exposing their companies to higher catch-up costs for factory overhauls or emissions credits once government mandates take effect.

Not all insurers express such concerns. "Global warming has just not surfaced in our universe as a subject," says Tony Galban, a vice president and manager of directors-and-officers liability underwriting at Chubb Corp., Warren, N.J., one of the leading D&O providers. "Not that I'm discounting the issue and not that I'm suggesting it should be discounted."

A spokesman at New York-based American International Group Inc., another big D&O provider, declined to discuss what factors AIG considers in its D&O underwriting.

Mr. Walker says he proposed the global-warming questionnaire to top Swiss Re officials after watching global-warming-related shareholder resolutions against U.S. companies gain ground. The number of such measures has doubled over the past year. While none has passed, one got 26.9% of shareholder votes in April at American Electric Power Co., the nation's largest electricity producer. Shareholder activists say, and the Columbus, Ohio, company doesn't dispute, that AEP is the nation's biggest emitter of carbon dioxide, the chief suspected greenhouse gas. A similar proposal at General Electric Co., Fairfield, Conn., in April got 22.6%.

Companies typically ask shareholders to defeat the shareholder measures, a stance Mr. Walker argues could emerge as "Exhibit A in potential lawsuits down the line."

Mr. Walker says the insurance industry has an interest in focusing corporate attention on global warming today much as it prodded clients during the 1990s to prepare for the expected Year 2000 computer glitch. But the Y2K problem never proved as serious as many had feared. And today, plenty of lawyers are skeptical that a global-warming-related lawsuit against a company would go very far in court -- particularly one against a U.S.-based company.

"With the federal government firmly and repeatedly saying, 'We do not support mandatory limits,' to say you had an obligation to act is a tough case to make," says Mary Anne Sullivan, a partner specializing in energy issues at Hogan & Hartson, a Washington-based law firm. "I think early action makes a lot of sense. But a lawsuit based on that particular theory strikes me as a tough lawsuit to win."