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This article first appeared in Law 360, which covers common issues across various practice areas, industries, and jurisdictions including litigation, policy developments and corporate deals.
Introduction
While many articles have discussed the potential impact of the Security Exchange Commission’s (“SEC”) proposed rule on climate-related disclosures for companies, their management, and professional lines insurers with a focus on financial disclosures, there are also areas of concern for general liability insurers. The rule will essentially be the first time the SEC will require companies to formally report about climate change risks when they make public filings. Exposure to general liability policies could be a particularly important concern now given the fact that in the Suncor Energy case, the US Supreme Court is currently considering whether climate change litigation against fossil fuel companies should be allowed to proceed in state court (which may pose more of a concern to such companies), or should be decided exclusively under federal common law in federal court.[1] This type of litigation is commonly filed in state court and typically alleges tort claims (in the form of public nuisance) or public trust doctrine claims addressing the physical damage climate change has caused and may cause in the future. In addition, the types of claims being brought against companies are evolving, and will likely continue to change with the adoption of the SEC’s new rule going forward, including securities fraud and consumer protection law claims addressing the adequacy of climate disclosures or misrepresentations contained in such disclosures. The pace of filings of these cases show no signs of slowing down, with the London School of Economics issuing a report in June noting that climate change litigation has more than doubled in the last seven years, bringing the total number of cases worldwide to over 2,000.
At a very high level, the SEC’s proposed amendments will require public companies to provide certain climate-related information in their financial statements (the “Proposed Rule”). The Proposed Rule has two main parts. First, the Proposed Rule would require a company to disclose climate-related risks that are likely to have material impacts on its business or financial statements. Second, the Proposed Rule would require reporting on the company’s oversight and governance of climate-related risks, how those risks will have an impact on the company’s business, and disclosures of the following different types of emissions: (a) “Scope 1” GHG emissions that arise from energy sources directly owned or controlled by the reporting company; (b) “Scope 2” GHG emissions that arise from the generation of purchased energy consumed by the reporting company; and (c) “Scope 3” GHG emissions which includes all other indirect emission sources that may arise in a company’s activities (e.g., emissions arising from purchased goods or services, business travel, etc.).
It is expected that the final Proposed Rule will not likely be released until the first quarter of 2023, or possibly later. If the Proposed Rule is adopted, it is expected that there will be legal challenges that could delay or even prevent its implementation.[2]
Areas of Concern with the Proposed Rule for General Liability Carriers
The SEC’s Proposed Rule will not likely present any new independent grounds for liability that would concern general liability insurance carriers. However, there are some areas where the proposed disclosure could come into play that should be concerning to companies and their general liability insurers, including the following:
- Company Integrity
The new disclosures under the Proposed Rule could be raised to challenge a company’s integrity in any climate change litigation if the company did not represent its emissions accurately or did not follow-through on certain representations. For example, to the extent a company makes misrepresentations regarding the climate-friendly attributes of its products or the extent of its carbon emissions, the company’s integrity could be called into question. Moreover, in today’s world of plaintiffs attempting to use litigation strategies to incite fear and anger in attempts to make jurors dislike corporate defendants to justify high jury verdicts, it is possible that plaintiffs would consider using misrepresentations about the company’s potential impact on climate change as a factual basis for such arguments.
- 30(b)(6) Deposition Testimony
Federal Rule of Civil Procedure 30(b)(6) allows a party to depose a corporation, government agency or other organization. This is done by requiring the target entity to designate one or more individuals to testify on its behalf if the notice of deposition describes the issue with “reasonable particularity.” The rule also places the burden on the entity to designate individuals educated to testify on those matters. To the extent a company is required to designate any individual to testify about climate change issues, the new requirements for reporting in the Proposed Rule could potentially increase the scope of such testimony and put companies in more precarious positions by requiring them to prepare experts in new areas of reporting.
- GHG Admissions
A company’s reporting in compliance with the new requirements on reporting Scope 1, 2, and 3 GHG emissions could potentially serve as an admission of the company’s GHG emissions now and in the future. This information will be publicly available and disclosed in the company’s financial reports, so companies will need to be knowledgeable about what is being reported and make sure that their public disclosures are accurate, appropriate, and socially acceptable for the foreseeable future. As the Proposed Rule will make reporting on emissions more transparent and standardized, and will also require companies to give assurances about the reliability of the reported information, it will be easier for plaintiffs to identify what a given company’s emissions were at any point in time.
Reporting under the Proposed Rule will also require the companies to disclose board and management oversight of climate risks, as well as how climate-related risks will have an impact on the company’s business. Given the breadth of these requirements, it is easy to foresee plaintiffs attempting to make use of them when filing public nuisance or consumer protection law claims against companies for their allegedly negative impact on a given community or region, or for purposes of trying to allege that the company at issue did not do enough to prevent future risks.
- Scope 3 Emissions Representations
Reporting Scope 3 emissions, which are indirect emissions from a company’s supply chain, could also present unique issues. Specifically, a given company’s emissions disclosures about a supplier could lead to lawsuits by the supplier against the reporting company. Such disclosures could be grounds for trade partners to make claims for libel, slander or defamation if the disclosures are used in any advertising or statements the company makes about climate change that are inaccurate.
- Defense Cost Considerations and Proper Venue
Climate change-related litigation is complex and can be expensive to defend. Over 20 state and local governments in the US have filed litigation against oil companies accusing them of increasing the effects of climate change by misrepresenting how their businesses impact the environment. These cases commonly make significant allegations that could have a material impact on a given company’s finances going forward if there is finding of liability, including the possibility of future copy-cat litigation. As such, these companies are forced to vigorously defend these cases.
In addition, as noted above, in the Suncor Energy case, the US Supreme Court is set to weigh in on whether such litigation should be properly handled in state or federal court.[3] Generally speaking, the plaintiffs in these cases would prefer that they remain in state court because such courts are seen as more plaintiff-friendly. This is a significant issue and one which the US Supreme Court has refused to take on directly in the past.[4]
If these cases are allowed to proceed in state court, they could lead to adverse results. In addition, if the defendant companies are required to make more detailed disclosures about GHG emissions and other climate change-related issues, such disclosures could be cited to support allegations that the companies acted inappropriately. As a result, the costs of defending such litigation would likely increase, and such costs could possibly erode the available coverage.
Conclusion
There is still considerable uncertainty about the scope of the Proposed Rule that will ultimately be adopted by the SEC. While many of the requirements of the Proposed Rule focus on reporting in financial statements, they could also have an impact on litigation that could potentially affect third-party general liability policies. As such, companies underwriting these risks should carefully monitor what requirements the SEC adopts and consider how those may impact their insureds in terms of defending climate change-related litigation.
[1] See Suncor Energy (U.S.A.) Inc., et al. v. Boulder County, et al., case number 21-1550 (filed June 10, 2022).
[2] Such legal challenges could come in the form of, among others, arguments that the SEC lacks authority to adopt such mandatory disclosures or that some of the disclosure would require companies to make comments about their operations that would somehow constitute unconstitutionally compelled and subjective speech. Regarding the SEC’s lack of authority, the SEC has to consider the potential impact of the U.S. Supreme Court’s recent decision in the West Virginia v. Environmental Protection Agency, 597 U.S. ___ (2022) (invoking the “major questions doctrine” to limit the scope of powers granted to the Environmental Protection Agency (“EPA”) under the Clean Air Act and holding that Congress must provide clear direction to the EPA in order for it to regulate greenhouse gas emissions, rather than just broadly delegate power).
[3] See Suncor Energy (U.S.A.) Inc. et al. v. Boulder County, et al., case number 21-1550 (filed June 10, 2022).
[4] See, e.g., BP P.L.C. et al. v. Mayor and City Council of Baltimore, 141 S. Ct. 1532 (2021) (rather than address the defendants’ grounds for removal, the U.S. Supreme Court remanded the case to the Fourth Circuit to analyze whether the case could be decided in federal court on other grounds); Chevron Corp. et al. v. City of Oakland, 141 S. Ct. 2776 (2021) (declining to review City of Oakland v. BP PLC, 969 F.3d 895 (9th Cir. 2020)(wherein the Ninth Circuit held that certain climate change tort claims properly belonged in California state court)).
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