Key threats for financial lines

by Resolve Editor Kate Tilley

There are key threats on the horizon for the northern hemisphere financial lines insurance market, according to London-based Patrick Hill, Partner and Head of Professional Risk at DAC Beachcroft.

He painted a worrisome picture in an address to the AILA National Conference.

Mr Hill said ESG (environment, social and governance) criteria were impacting on how companies are run and the investments they make. ESG began as an investment term but had morphed into a much broader concept.

Environmental criteria consider how companies safeguard the environment, including corporate policies for tackling climate change impacts. Social criteria examine how companies manages relationships with employees, suppliers, customers and the communities in which they operate. Governance deals with companies’ leadership, compliance executive pays, audits, internal controls and shareholder rights.

Mr Hill said activist investor groups have developed that lodge claims against companies that don’t meet ESG criteria. “It’s not about money, it’s about changing corporate behaviours.”

Climate strategy failure

For example, environmental law group ClientEarth is taking action against Shell. A March 2022 ClientEarth media release says: “ClientEarth has started legal action against the board of directors of Shell, arguing that their failure to properly prepare the company for net zero puts them in breach of their legal duties.

“The organisation has notified Shell, in its capacity as a shareholder, of its claim against the company’s 13 executive and non-executive directors – in the first ever case seeking to hold company directors personally liable for failing to properly prepare for the energy transition.

“ClientEarth argues the board’s failure to adopt and implement a climate strategy that truly aligns with the Paris Agreement is a breach of their duties under the UK Companies Act. Under that Act, Shell’s board is legally required to act in a way that promotes the company’s success and to exercise reasonable care, skill and diligence.”

Mr Hill said ClientEarth’s March action follows Shell being ordered by a Dutch court in May 2021 to reduce its group-wide emissions by net 45% by the end of 2030. ClientEarth said directors had “since rebuffed parts of the verdict, calling it ‘unreasonable’ and …  essentially incompatible with its business”. Shell has appealed against the Dutch ruling.

Mr Hill said it was significant as the “first climate change decision against a private company”. “ClientEarth is a sophisticated group, it invests in companies to get a seat at the table. They’re difficult to deal with because they are not after money but changes in behaviour.”

He predicted a likely increase in similar actions globally.

Greenwashing claims

Mr Hill said ClientEarth already had been successful in taking legal action against a planned coal mine in Poland, which did not proceed.

He predicted directors will face claims they have not taken steps to protect companies against the impact of climate change and against greenwashing claims.

“The legal framework is available under the UK Companies Act to take action against directors for not optimising the success of a company.”

UK boards also face a directive they must have minority members on boards and Mr Hill said a movement towards creating diversity and inclusion in boardrooms will continue.

In Germany, a new supply chain due diligence act, which comes into force on 1 January 2023, will force companies to consider who they interact with. It has the potential for large fines, for example, 2% of turnover.

The Act aims to force companies to ensure or improve compliance with human rights and environmental protection standards in supply chains.

Corporate responsibility

Mr Hill said auditors could be at risk of negligence claims if they fail to ensure companies invest in climate change mitigation. There was a “desire to impose corporate responsibility”.

Class action filings were increasing in Europe with only 49 filed in 2018, but 110 in 2021. “There’s a desire to prevent a US-style explosion but an increase in collective actions and the funding market has grown.”

Mr Hill said plaintiff firms were seeking similar claims to the UK-based “dieselgate” action against VW. Volkswagen had admitted 11 million cars were involved in falsified emission reports and earmarked more than US$7 billion to fund rectifying vehicles’ software.

In the UK, a class action for more than 91,000 VW owners is in progress, seeking greater compensation for being sold vehicles VW knew did not meet the promised emissions standards.

Mr Hill said a UK action against Google for clandestine tracking and collation of personal information from more than four million iPhone users’ browser history had sought about £3 billion, but was defeated in 2021 because the UK Supreme Court found the claimants were required to show proof of material damage. “It fired a warning shot to plaintiff firms, but it shows them what evidence they need to win,” Mr Hill said.

Geopolitical risks

The European Commission requires EU member countries to have implemented frameworks for group litigation. Despite a requirement for loser-pays mechanisms “to stop frivolous claims”, Mr Hill said “class actions are on the rise at a steady pace” and litigation funding is permitted under the EC directive.

The northern hemisphere also faced geopolitical risks and a “significant disruption to global markets because of the Ukraine war”. He said Russia had no deep-water ports and, with no mountain range between Russia and the Ukraine, there were no natural barriers to curtail the Russian invasion. Mr Hill said many companies had withdrawn from Russia; others were assessing relationships because of the D&O risk. “There will be a realignment in traditional alliances.”

There was “a major question about Russian Government control of cyber attack threat actors”. In the UK, insurers were adding more cyber exclusions to policies.

Mr Hill said the UK was facing an increase in cyber attacks, particularly ransomware against professional services firms because they hold so much confidential and sensitive data. Two major barristers’ chambers had been hit in 2022 and “threat actors are specifically targeting law firms”. Mr Hill warned litigation was at risk because cases could be jeopardised if legal opinions were publicised.