Disclosure Pressure Ratchets Upward - Will D&O Policies Provide Cover?

Disclosure Pressure Ratchets Upward - Will D&O Policies Provide Cover?

February 16, 2010 02:42
by J. Wylie Donald

I concluded that I needed to pay more attention to climate change issues when I attended a seminar in 2005 and one of the speakers commented that inadequate climate change disclosures would not be covered under a D&O policy because of the pollution exclusion. Could it be so?

The argument was deceptively simple. Carbon dioxide was a "pollutant." The inadequate disclosure "arose" out of the "release" of carbon dioxide. There is no coverage for same. Q.E.D.

Thoughtful analysis, however, dispatches this canard. As we have written previously, carbon dioxide should not be classified as a pollutant. It does not irritate or contaminate: it is biologically benign except at impossibly high concentrations, and it is found in the atmosphere in billions of tons, a natural and essential constituent. And because it does not make the atmosphere impure, it is not a pollutant.

But one does not even have to reach that conclusion. Any liability alleged against a director or officer for inadequate disclosure of risks from rising CO2 levels, arises from the inadequate disclosure not from the release of carbon dioxide. Cf. Owens Corning v. National Union Fire Insurance Co., No. 97-3367, 1998 WL 774109 (6th Cir. Oct. 13, 1998) (alleged inadequate disclosure of asbestos risk); Boliden Ltd. v. Liberty Mutual Insurance Co., Dkt. No. 05-CV-284493PD1, 2007 CanLII 11309 (Ont. Super. Ct. Apr. 3, 2007) (ore processing risks); Sealed Air v. Royal Indem. Co., 961 A.2d 1195, 404 N.J. Super. 363 (App. Div. 2008) (asbestos risk). But see National Union Fire Insurance Co. v. U.S. Liquids, Inc., 88 Fed. Appx. 725 (5th Cir. 2004) (per curiam) (pollution exclusion applies to allegations of improper disclosure of illegal toxic waste disposal).

The requirements for disclosure are ratcheting upward. It started with activist shareholders requesting climate change disclosure at their companies' annual meetings. Next came the Carbon Disclosure Project, which over time has enlisted over 2000 companies in their annual reporting. See cdproject.net. In 2007, New York Attorney General Cuomo served subpoenas on certain publicly traded electric utilities and a coal company (based far from New York), seeking information on their climate change disclosures. New York has settled with three of the five companies, Xcel Energy, Dynegy and most recently with AES Corp. Dominion Resources and Peabody Energy remain in the dispute. The National Association of Insurance Commissioners weighed in with their disclosure requirements for insurance companies in 2009 (effective 2010). And now, with the publication of the SEC's recent interpretive guidance on climate change disclosures, it is only a matter of time before some investor's prescience is not rewarded and he or she or it concludes that the fault lies not in the stars, but in a corporate prospectus.

 

Should that come to pass, we anticipate the corporation will tender the claim to its D&O insurer for a defense. Undoubtedly the insurer will consider asserting the application of the policy's pollution exclusion. The ultimate result will depend on all the facts. One fact will be the extent and timing of disclosures. Another, however, could be that the policyholder had the pollution exclusion endorsed out its policy. That is a step the risk manager could be taking right now, regardless of what the corporate lawyers ultimately conclude about disclosure.

Carbon Dioxide | Climate Change | Insurance | Greenhouse Gases

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