A Climate Adaptation Toolkit for the Insurance Industry

On July 21, 2023, the Sabin Center launched its latest report, Modelling Climate Litigation Risk for (Re)Insurers. This report, which forms part of the Sabin Center’s broader Climate Law and Finance Initiative, provides a toolkit to help academics, attorneys, insurance practitioners, and industry regulators model (re)insurer climate litigation risk.

Insurance and Climate Change

The increasingly apparent physical and societal impacts of climate change are “shaking the foundations” of the insurance industry. Stories about climate change and insurance dominate the news, as insurer after insurer pulls out of markets like Florida and California that are at high risk of climate change-driven catastrophes.

In response to the growing threat of climate change, the insurance industry has made significant investments in modelling and quantifying physical climate risks. However, alongside physical risks, companies face a rising tide of climate change-related litigation. The most prominent corporate climate lawsuits bring “mitigation claims” that attempt to hold companies responsible for their contributions to climate change. However, other categories of litigation arise from corporate failures to adapt to climate change, or climate change-related violations of the law. The economic impact of climate litigation can be enormous. In 2019, for example, the utility company Pacific Gas and Electric Company (“PG&E”) entered what has been called “the first climate bankruptcy” after announcing that it faced more than $30 billion in potential liability from a series of devastating fires in northern California that were made far worse by climate change. As the physical consequences of climate change become apparent, companies that fail to adapt their infrastructure and operations to this new reality face increasing litigation risk.

Insurers are exposed to climate litigation through multiple product lines and industries. Fossil fuel companies, sometimes invoking coverage under decades-old General Liability policies, have already asked insurers to defend and indemnify them against expensive emissions-related lawsuits. Other companies, like chemical manufacturers, face lawsuits if they fail to prepare for climate-driven floods, storms, and wildfires, and may make claims under Environmental Insurance policies for damages arising from post-disaster pollutant spills. Even more broadly, a wide range of companies purchase Directors and Officers (D&O) Insurance that covers, among other things, litigation arising from a broad range of corporate misstatements. An increasing number of these companies face climate-related “greenwashing” claims arise from corporate misstatements about climate change or the environmental benefits of their products.

Since the PG&E bankruptcy, insurance regulators around the globe have increasingly demanded that insurers and reinsurers quantify, and plan for, climate litigation risk. However, the emerging risk of climate litigation has proven particularly difficult to model. In 2015 Mark Carney, then-Governor of the Bank of England and Chairman of the Financial Stability Board, warned that climate litigation poses “long-tail risks” for insurers that may be “significant, uncertain and non-linear.” Since that warning, the number of climate-related cases has more than doubled, but insurers and regulators still struggle to identify and quantify exposure to climate litigation risk.

Insurers Must Be a Target For, and Source Of, Climate Adaptation

Protecting the insurance industry from unquantified risks is a worthy goal in and of itself, because the insurance industry, like banking and other financial services, is a critical piece of economic infrastructure. Unanticipated losses from climate change litigation could jeopardize insurers’ ability to underwrite risk more broadly and could ripple throughout the economy. Pricing climate risks to insurers is therefore a necessary climate adaptation measure that will increase the financial sector’s resilience against climate change.

Accurately pricing climate litigation risk is important for two reasons. First, the insurance industry, like banking and other financial services, is a critical piece of economic infrastructure, and pricing climate risk represents a necessary economic adaptation to the realities of climate change. Second, accurately priced liability insurance represents a powerful tool in the fight to mitigate the worst impacts of climate change. At its core, liability flows from real-world harm, and preemptive efforts to limit liability may in turn avert that harm. By creating tools to model and price litigation risk, we can (1) make sure that GHG-emitting companies begin to bear the costs of those activities even before emissions claims win in court, and (2) encourage companies to reduce real-world risk by adopting climate adaptation measures and risk assessment processes.

The Sabin Center’s Newest Report Provides a Toolkit for Modelling Climate Litigation Risk

The Sabin Center’s latest report — Modelling Climate Litigation Risk for (Re)Insurers assembles a toolkit to help academics, attorneys, insurance practitioners, and industry regulators model (re)insurer climate litigation risk. This toolkit was developed through a review of the literature surrounding climate litigation risk assessment and insurance, supplemented and informed by first-hand interviews with 16 specialists familiar with climate litigation risk analysis. The work was supported by a grant from Willis Towers Watson.

Modelling Climate Litigation Risk for (Re)Insurers offers three clear takeaways for academics, insurance professionals, and policymakers attempting to understand (re)insurer exposure to climate litigation:

    • Private sector climate litigation is diverse, and can impact (re)insurers in unexpected and hard-to-avoid ways. Private sector climate litigation arises under a wide array of legal theories, and targets an increasingly diverse set of defendants. Some categories of litigation, like mitigation claims, may be directed towards a predictable set of industries (e.g., fossil fuel companies) and relatively easy to carve out of new liability policies. Others, like adaptation litigation and governance and regulatory claims, turn on complex questions of fact, law, and policyholder behavior. (Re)insurers may struggle to categorically exclude these claims, and may find it commercially impractical to do so for some product lines. For example, companies may be unwilling to buy D&O Insurance that treats climate-related misstatements differently than misstatements in other important areas like cybersecurity or product safety.
    • Existing risk assessment tools are promising, but struggle to capture the full scope of climate litigation. Insurers and industry regulators have already begun to develop a handful of techniques to model climate litigation risk. Climate litigation is a broad and rapidly changing risk, however, and current industry modelling techniques struggle to capture its full scope. Qualitative techniques like “massive tort” models provide historical comparisons for some types of litigation, but do not claim to offer quantitative risk assessment tools or cover the full range of climate litigation. More quantitative techniques, like scenario modelling and “emerging risk” modelling, may be invaluable tools to quantify a limited set of risks, but may be significantly limited by scenario selection choices.
    • Different legal theories may require different modelling techniques and risk mitigation tools. International organizations and governments around the world are providing increasingly clear guidance on how private sector actors, including (re)insurers themselves, should assess and disclose their exposure to climate litigation. However, the wide range of climate claims discussed in this report may require an array of risk assessment and mitigation tools. Mitigation claims, for example, arise from past or anticipated contributions to climate change, and a policyholder’s exposure to those claims will depend, by definition, on the policyholder’s relationship to GHG-emitting activities. Adaptation claims, in contrast, arise from a policyholder’s response, or failure to respond, to the physical and societal impacts of climate change, and effective risk-assessment processes may focus on emerging scientific and legal literature that identifies these impacts. On the other hand, governance and regulatory claims like securities fraud and “greenwashing” often focus on corporate activities and processes, and may be mitigated by assessing, evaluating, disclosing, and adapting to real-world climate risks. While all of these claims represent climate litigation, risk evaluators must be conscious of the differences between these claim categories.


The report was authored by Martin Lockman, Climate Law Fellow at the Sabin Center for Climate Change Law. The full report is available here.

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Martin Lockman is the Climate Law Fellow at the Sabin Center for Climate Change Law