Why the built environment industry needs to prepare itself for an increase in litigation relating to climate risks

The rise in climate litigation looks set to continue, with companies increasingly accused of causing environmental damage, failing to prevent losses occurring and improperly managing or disclosing climate risks. Implementation of decarbonisation strategies is closely scrutinised, with claims proceeding in many jurisdictions seeking compensation for environmental harm as well as strategic influence over future regulatory, corporate or investment decisions.

Evolving risks associated with rising temperatures have significant implications for the (re)insurance market as policyholders seek to mitigate exposure to: physical damage and financial loss caused by severe weather events; liability claims for pollution, harmful products or ‘greenwashing’; reputational risks; and challenges associated with the transition to clean energy sources.

Litigation trends

Cases in which climate change or its impacts are disputed have been brought by a wide range of claimants, across a broad spectrum of legal actions. Approximately 75% of cases so far have been commenced in the US, alongside a large number in Australia, the EU and UK.

Science plays a central role and can be critical to determining whether litigants have standing to sue. The emerging field of climate physics allows for quantification of greenhouse gas (GHG) emitters’ responsibility, with around two thirds of global emissions attributed to 90 private and state-owned entities. Worldwide, buildings are responsible for over one third of GHG emissions, with production of materials such as cement, steel and aluminium having a significant carbon footprint.

Directors of high-profile companies may be personally targeted in such claims as liable for breach of fiduciary duties to the company or its members, in failing to take action to respond to climate change, or approving policies that contribute to harmful emissions.

Recent cases

An explosion of ‘climate lawfare’ has kicked off in recent years, with the following cases indicative of key themes:

R v Surrey County Council [2024]

The UK Supreme Court (by a 3:2 majority) ruled that authorities must consider downstream emissions created by use of a company’s products when evaluating planning approvals. The council’s decision to grant permission to a developer for a new oil well was held to be unlawful because the environmental impact assessment for the project did not include consideration of “Scope 3” emissions, when it was clear that oil from the wells would be burned.

Verein KlimaSeniorinnen [2024]

An association of more than 2,000 older Swiss women complained that authorities had not acted appropriately to develop and implement legislation and measures to mitigate the effects of climate change. The Grand Chamber of the European Court of Human Rights held that Article 8 of the European Convention encompasses a right for individuals to effective protection by state authorities from serious adverse effects of climate change on their life, health and wellbeing.

Smith v Fonterra [2024]

The New Zealand Supreme Court reinstated claims, struck out by lower courts, allowing the claimant Māori leader to proceed with tort claims against seven of the country’s largest GHG emitting corporations, including a novel cause of action involving a duty to cease materially contributing to damage to the climate system.

ClientEarth v Shell [2023]

The English High Court dismissed ClientEarth’s attempt to launch a derivative action against the directors of Shell plc for alleged failure to properly address the risks of climate change, indicating that claims of this nature brought by minority shareholders will face significant challenges. The court noted that directors need to balance myriad competing considerations in seeking to promote the success of the company, and courts will be reluctant to interfere, making it harder to establish breach of statutory duties.

US ‘Big Oil’ lawsuits

Following lengthy disputes over forum, proceedings against oil and gas companies in the US are gaining momentum, paving the way for the claims to be substantively examined in state courts. Many actions against the fossil fuel industry seek to establish that defendants knew the dangers posed by their products and deliberately concealed and misrepresented the facts, akin to deceptive promotion and failure to warn arguments relied upon in other mass tort claims in the US, including tobacco and opioid litigation.

Implications for policyholders

With increasing volatility and accumulation risk, insurers will look to mitigate exposures through wordings, exclusions, sub-limits and endorsements. The duty to defend is the first issue for liability insurers, given the number of policyholders affected and the potential sums at stake in indemnity and defence costs.

In 2021, the Lloyd’s Market Association published a model Climate Change Exclusion clause (LMA5570). Property policies exclude gradual deterioration, with express wording or impliedly by the requirement of fortuity, and liability insurance typically excludes claims arising from pollution.

Lawsuits have been filed in the US over insurance coverage for climate harm, including Aloha Petroleum v NUF Insurance Co of Pittsburgh (2022) and Everest v Gulf Oil (2022). Policy coverage may depend on whether an “occurrence” or accident has happened, as opposed to intentional acts or their reasonably anticipated consequences (Steadfast v AES Corp (2011)).

Policyholders should review their insurance programmes with the benefit of professional advice to ensure adequate risk transfer and minimise the prospect of coverage disputes arising, fuelled by increasing climate-related risks.

Amy Lacey is a partner at Fenchurch Law