BUSE4024A Advanced Liability Insurance and Risk Management 2023 PDF

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM. HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Ms Penny Spentzouris LECTURE 9- LIABILITY FOR ENVIRONMENTAL IMPAIRMENT AND CLIMATE CHANGE Introduction Human activities ha...

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM. HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Ms Penny Spentzouris LECTURE 9- LIABILITY FOR ENVIRONMENTAL IMPAIRMENT AND CLIMATE CHANGE Introduction Human activities have impacts on the environment and these impacts find expression on the legal, political and economic spheres. Risks posed by the interaction between humans and the environment are very diverse and often they are of a catastrophic nature as well. This raises the important question of the insurability of these risks. The risks range from pollution to natural disasters. It is therefore not surprising that of all liability risks on record, environmental risks are undoubtedly the most costly. Environmental risks notably pollution and other forms of environmental impairment depend on the underlying legal and regulatory system whose features may generate uncertainty or limit their insurability. One of the main difficulties to confront environmental insurers in many countries relates to unclear rules leading to unpredictable losses. This has stunted market development in many cases. Why the Environment Matters Policymakers, lenders and multilateral development agencies such as the World Bank started prioritising the environment in their policies in the 1980s. Two developments triggered this shift in international policymaking and lending practice. These are: § The passing by US Congress of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) in 1980, and § Publication by the United Nations of the report titled Our Common Future (also known as the Brundtland Report) in 1987 compiled by the World Commission on Environment and Development chaired by former Norwegian Prime Minister Gro Harlem Brundtland. CERCLA imposed onerous obligations for environmental protection and the sanctions for environmental impairment provided for in this Act forced a paradigmatic shift in the practices of many institutions worldwide. Therefore, in the late 1980s and early 1990s, a number of banks and lending institutions faced liability under CERCLA for lending to companies that were found guilty of pollution. This created the lender liability concept. The Brundtland Report made a compelling case on the strong link that exists between sound environmental management policies and sustainable development. In short, the report argues development that takes place without taking into account environmental safeguards is not durable. In its 1992 World Development Report, the World Bank submits that damage to the environment imposes 3 types of costs on society that are impossible to measure or quantify, namely: § Impairment of human health § Reduction in economic productivity § Reduction in the amenity value of the environment (i.e. reduction in satisfaction derived from living in a damaged environment) 1|Page In short, the environment is humanity’s natural capital that supports all forms of life. There is a link between persistence of poverty in developing countries and poor environmental management policies or in some3 cases, complete absence of them. Identify practices common in developing countries that are harmful to the environment and explain how they contribute to the perpetuation of poverty. There are several practices common in developing countries that are harmful to the environment and contribute to the perpetuation of poverty. Some of these practices include: 1. Deforestation: In many developing countries, forests are cut down to make way for agricultural land or to provide wood for fuel. Deforestation not only leads to the loss of biodiversity and soil erosion but also contributes to climate change. As the forests disappear, so do the livelihoods of the people who rely on them for food, medicine, and other resources. 2. Overfishing: Many developing countries rely heavily on fishing for food and income. However, overfishing has led to a decline in fish populations, making it difficult for local communities to sustain themselves. In addition, overfishing also harms the marine ecosystem and can have long-term consequences for the environment. 3. Use of fossil fuels: Many developing countries rely on fossil fuels to power their economies. However, the burning of fossil fuels is a major contributor to climate change, which can lead to droughts, floods, and other extreme weather events that can devastate communities. In addition, the use of fossil fuels can lead to air pollution, which can have serious health consequences. 4. Land degradation: In many developing countries, unsustainable agricultural practices such as overgrazing and monoculture farming have led to soil degradation, which reduces the productivity of the land. This, in turn, leads to food insecurity and perpetuates poverty. 5. Lack of access to clean water and sanitation: Many people in developing countries do not have access to clean water and sanitation, which can lead to the spread of diseases and further perpetuate poverty. These harmful environmental practices not only have negative consequences for the environment but also contribute to the perpetuation of poverty in developing countries. They can lead to food insecurity, health problems, and the loss of livelihoods, making it difficult for people to escape poverty. Addressing these environmental challenges is crucial to promoting sustainable development and reducing poverty in developing countries. The Nature of Environmental Risks Insurance and risk management literature cites several conditions for a risk to be insurable. These include the fact that losses must be predictable ex ante; the loss must be financially measurable or quantifiable; and that the losses must be idiosyncratic and not covariate among others. Compared to other insurable risks environmental risks hardly conform to these preconditions for insurability. Insurers need accurate information on the likelihood of the insured event occurring 2|Page as well as the possible magnitude of the damage. This enables insurers to determine the appropriate premium and reserves needed to cover the risk. For most environmental risks, reliable data is often unavailable. A key variable used by insurers to assess risk is information on probability and magnitude of the damage. Where this information is missing or unreliable risk assessment becomes difficult. Environmental risks refer to potential harm or damage that can be caused to the natural environment by human activities or natural phenomena. These risks can have various forms, including pollution, climate change, deforestation, habitat destruction, and resource depletion. The nature of environmental risks is complex and multifaceted, and understanding them is critical for effective risk management and sustainable development. One of the most significant characteristics of environmental risks is their global nature. Environmental risks can have far-reaching consequences that go beyond national borders and affect the entire planet. For example, greenhouse gas emissions from one country can contribute to climate change that affects the entire planet. This makes it essential to address environmental risks through international cooperation and coordination. Environmental liability risks also pose the additional problem of producing claims that lack precision. How does one go about quantifying damage to such things as soil, air, water, flora and fauna? A further problem is that even where causal uncertainty exists, policymakers and legislators have shown a growing tendency to attribute causality to corporations in particular by using specially devised rules some of which apply retrospectively. Rules such as presumption of proximate cause and the so-called “rule of uncertainty” serve to find someone liable in the face of causal uncertainty in environmental liability cases. According to the “rule of uncertainty”, an insurer is liable for all loss events which show the characteristics of the risk he has assumed unless the insurance policy categorically and unambiguously excludes specific events or facts (Swiss Re, 2001). An example of the rule of uncertainty is in the Swiss Insurance Contract Law of 1908. Article 33 of this law states: Unless otherwise stipulated by the present law, the insurer shall be liable for all events which bear the features of the hazard against whose consequences the insurance was taken out unless the contract excludes specific events from the insurance cover in a definite and unambiguous manner. In other words, the degree of legal risk associated with environmental liability is so high that other insurers simply choose not to enter this market. Strict liability is also common for environmental risks. For instance Paragraph 1 of the German Environmental Liability Act of 10 December 1990 states: Should any person be killed or suffer bodily injury or health impairment or should property be damaged as a result of an effect on the environment emanating from an installation/plant as specified………..the operator of he installation/plant shall compensate the injured party for the loss resulting therefrom. 3|Page Similarly, Article 59 of the Swiss Environmental Protection Act 1983 provides that a proprietor of a plant or installation involving a particular hazard for the environment is liable for the damage resulting from impacts occurring from such hazard. In fact in Europe current efforts in the area of environmental impairment law aim to introduce strict liability in all forms of environmental liability (Swiss Re, 2001). Strict liability attempts to allocate risk of loss to a party who is better able to control it and therefore who is the least cost avoider of harm (OECD, 2003). For most injured parties an environmental risk like pollution is largely an externality against which they have no control. In such cases, strict liability is preferred to negligence liability. Environmental risks like pollution also pose an additional problem of what to do when in cases where more than one polluter is involved in the same accident. Should liability be on an individual basis (proportional liability) or should it be joint and several? The basic aims of liability rules are to ensure compensation to victims and achieve deterrence. If the compensation goal is the priority, then joint and several liability clearly offers a number of advantages. However the deterrence goal requires that each party who causes harm to another pays for the consequences of his/her actions. Wherever possible countries try to incorporate both the compensation and deterrence goals in their systems. However, across the OECD joint and several liability appears to be emerging as a popular rule in environmental liability cases (OECD, 2003). A crucial aspect of environmental risks is their complexity and uncertainty. The natural environment is complex and interconnected, and the impacts of human activities can be challenging to predict. This complexity and uncertainty make it difficult to quantify and manage environmental risks effectively. Additionally, environmental risks are often interdependent, with one risk leading to or exacerbating another. For example, deforestation can lead to soil erosion, which can contribute to floods and landslides, increasing the risk of disaster. Yet another issue associated with environmental risks concerns the scope of damages to be covered. One option is to make the polluter liable for all the harmful consequences of his activity including clean-up costs and damages caused to biodiversity and natural resources such as air, water, soil, flora, and fauna i.e. ecological damage. Damages for ecological damage are paid to the state on behalf of society. This approach is used in the US, Italy, Switzerland and Portugal among others. An alternative approach is to have tougher rules covering traditional damages only as is the case in Germany (OECD, 2003). The long-term nature of environmental risks is another significant characteristic. For example a challenge posed by pollution in particular especially to the insurance industry relates to pollution of a gradually occurring nature. Latency periods involved in such cases raise questions about the applicability of insurance concepts like proximate cause and policy triggers among others. Gradual occurrences lack precision regarding time a phenomenon known as factual uncertainty. Factual uncertainty helps explain why general liability policies in the main exclude pollution risk. The consequences of environmental risks may not be immediate, but they can have long-term effects on ecosystems, biodiversity, and human health. Climate change is an example of an environmental risk that has a slow onset but can have severe and long-lasting effects on the environment and society. 4|Page Apart from factual uncertainty pollution is also susceptible to legal uncertainty i.e. uncertainty introduced by the legal system in place at any given time. Legal uncertainty depends inter-alia on the way legal rules are formulated by authorities as well as how those rules are interpreted and applied by legal actors such as government agencies, local authorities and courts. In an environment characterized by high factual and legal uncertainty, insurance becomes nothing but a gamble and excessive losses are inevitable. Rules such as joint and several liability contribute to uncertainty because insurers will need to assess the risk created by the prospective insured as well as risk generated by other actors who may be jointly liable with the insured. Insurers will also have to bear the risk of insolvency of those actors yet they (insurers) have no capacity to monitor or control them. Environmental risks also have a disproportionate impact on vulnerable populations, particularly those living in poverty. These populations often lack the resources and infrastructure necessary to cope with the effects of environmental risks, such as floods, droughts, and extreme weather events. This can lead to food insecurity, displacement, and further marginalisation. These risks are often caused by systemic and structural factors, such as economic and political systems, and patterns of consumption and production. These factors can create incentives for harmful activities and make it challenging to address environmental risks effectively. Addressing environmental risks requires a fundamental shift in these systems and patterns, which can be challenging but is essential for sustainable development. The nature of environmental risks is complex and multifaceted. They are global, uncertain, interdependent, disproportionately impact vulnerable populations, have long-term consequences, and are often caused by systemic and structural factors. Addressing environmental risks requires international cooperation, a holistic understanding of the risks and their interdependencies, and a shift in economic and political systems. Only by taking action on environmental risks can we promote sustainable development and ensure a healthy planet for future generations. Obstacles to the Supply of Insurance for Environmental Impairment Conventional insurance literature provides that for a risk to be insurable it must satisfy certain preconditions. Among these are – (1) the risk must be predictable ex ante, (2) likely losses from that risk must be measurable in financial terms, and (3) the risk must be idiosyncratic (random) and not covariate in its occurrence. To a large extent environmental risks do not meet these preconditions fully. For example, environmental losses do not produce claims that are clearly defined. Thus while damage to the environment through something like pollution may impair human health, what actually does impairment of human health mean? How can we measure it? There are several characteristics of environmental liability risks that complicate the supply of insurance to cover these risks. Some of them are: § A significant proportion of environmental risks do not produce losses that are sudden and accidental. Some types of environmental damage take decades before it becomes visible. Insurance works well when losses are sudden and accidental. § Environmental risks have the tendency to produce claims that span large geographical areas over a long period of time. Assessing such losses ex ante is difficult. Take the BP 5|Page § § § § § § § § Deep Horizon oil pollution disaster of 2010 for example. By 2015 the disaster had cost BP in the region of US$43bn. Ability of insurance to cover claims of any type depends on the ability to prove causation i.e. the loss must be shown to have been caused by an insured event. In 1st party insurance proof of causation is embedded in the doctrine of proximate cause while in 3rd party (liability) insurance causation is proved when legal liability of the insured is established in line with the applicable legal standard in the jurisdiction in question. Asymmetric information. Information is vital in risk assessment for insurance coverage purposes. An asymmetric information problem that is of particular concern in the context of insurance of environmental risks is adverse selection. Companies that know that their activities, past and present have the potential to damage the environment are more likely to buy environmental impairment insurance. Catastrophic losses. Invariably, environmental losses are catastrophic. In fact, of all the man-made losses on record, those relating to damage of the environment are the most expensive. Only losses from natural disasters can rival them. Imprecise claims. Damage to the environment affects the whole ecosystem including damage to flora and fauna. These are impossible to quantify just like impairment of human health. Uncertainty and complexity: environmental liability risks are often highly uncertain and complex, involving a range of factors such as the type of pollutant, the location and extent of contamination, and the potential harm to human health and the environment. This makes it difficult to assess the probability and magnitude of potential losses, which in turn can make it challenging for insurers to price policies accurately. Regulatory and legal challenges: environmental liability risks are subject to a range of complex and changing regulations at both the national and international levels, as well as legal challenges such as class action lawsuits. Insurers may face challenges in keeping up with these evolving regulations and accurately assessing their impact on potential liabilities. Lack of historical data: many environmental liability risks are relatively new, and there may be limited historical data available to insurers to help them estimate potential losses and set premiums. This can make it difficult to accurately assess risks and determine appropriate pricing for insurance policies. Interconnected risks: environmental liability risks are often interconnected with other types of risks, such as reputational risks or supply chain risks. This can make it challenging for insurers to accurately assess the full range of potential losses and determine appropriate premiums for policies that cover these risks. Because of the above problems and others, insurance of environmental losses is not something that most insurance markets can handle. In a sense, the above obstacles induce market failure of a kind in many countries from the supply side. 6|Page Methods of Insuring Environmental Risks The unique characteristics of environmental risks outlined above have forced insurance markets to respond differently to these risks. Consequently, different approaches to providing insurance coverage for environmental risks have emerged. The main ones include: § The Integrated Risk Management through Product Differentiation Approach. Some argue that for environmental risks, risk management should be the cornerstone of dealing with them with transfer mechanisms such as insurance playing a complementary role. The integrated risk management through product differentiation approach involves provision of insurance coverage on a site-specific basis in order to enhance better risk assessment. Coverage envisaged under this approach is bespoke to the insured’s circumstances i.e. tailor-made as opposed to one-size-fits-all coverage is used under this approach. Conventional insurance theory provides that insurance works well where homogenous insured items are pooled to maximize the benefits from the law of large numbers. Clearly environmental risks do not lend themselves to that conventional logic if the integrated risk management approach is anything to go by since coverage derives from differences in risk as opposed to similarities. § Pollution Risk Pools. One of the biggest challenges arising from attempts to insure pollution damage whether through 1st or 3rd party insurance is that this risk requires much larger capacity compared to other risks. Most insurers do not have sufficient capacity to provide the required limits of cover. To overcome this challenge, a number of countries among them France, Italy, Spain and the Netherlands have formed risk pools to cover pollution. Pools are a way of combining resources of many risk carriers under one facility. A clear advantage they offer is increased capacity beyond what the individual participants can provide on their own. § Different Products for Different Needs. Sophisticated insurance markets especially in Europe have developed a range of products to cover different types of environmental risks that arise from different operations. Among these products are: (1) Environmental Impairment Liability Insurance, (2) Pollution and Clean-up Covers, (3) Contractors’ Pollution Legal Liability Cover, and (4) Transporters’ Pollution Liability Cover. This differentiation of products seeks to enhance better risk assessment something that could be compromised by attempting to cover all the environmental claim types under one product. § Alternative Risk Transfer (ART). The term ‘alternative risk transfer’ of ART refers to a range of risk transfer products that serve as alternatives to conventional insurance. A common characteristic of ART products is that they offer tailor-made risk solutions specific to the needs of the buyer. They also cover risks regarded as uninsurable under conventional insurance. Common ART products include Financial Reinsurance, Finite Risk Covers, Discounting Covers and Risk Securitization. Most ART products are multi-year contracts unlike conventional insurance which operates on a year by year basis. In addition, the primary focus of ART is providing financing support to the buyer unlike conventional insurance that focuses on indemnifying the insured. 7|Page Conventional insurance relies on the law of large numbers to enable insurers to accept risk. Explain why this law may not be a relevant factor in the insurance of environmental risks. There are different approaches to providing insurance coverage ie. different products, for environmental risks which has its own unique characteristics and is designed to address specific environmental risks. As the impact of climate change continues to grow, it is likely that new approaches to environmental insurance will continue to emerge. Below are a few examples of each different product: 1. 2. 3. 4. 5. Environmental Liability Insurance: This type of insurance is designed to protect individuals and organizations from financial losses resulting from environmental damage. It covers a wide range of risks, including pollution liability, contamination liability, and natural resource damage. Environmental liability insurance can be purchased by businesses, government agencies, and individuals. Pollution Legal Liability Insurance: This type of insurance is specifically designed to cover liability for pollution-related claims. It covers the cost of legal defense and any damages awarded in a lawsuit. Pollution legal liability insurance is typically purchased by businesses that handle hazardous materials or engage in activities that are likely to cause environmental damage. Environmental Impairment Liability Insurance: This type of insurance provides coverage for environmental risks that are not covered by traditional liability policies. It can cover a wide range of risks, including pollution, contamination, and natural resource damage. Environmental impairment liability insurance is typically purchased by businesses that operate in environmentally sensitive industries, such as chemical manufacturing or waste disposal. Climate Risk Insurance: This type of insurance provides coverage for losses resulting from climate-related events, such as floods, hurricanes, and droughts. It can be purchased by individuals, businesses, and governments. Climate risk insurance is becoming increasingly important as climate change increases the frequency and severity of weather-related events. Green Insurance: This type of insurance encourages environmentally responsible behavior by offering discounts or other incentives for individuals and businesses that adopt environmentally friendly practices. It can include coverage for energy-efficient buildings, sustainable transportation, and renewable energy systems. Lender Liability for Environmental Damage Lender liability for environmental damage refers to the legal responsibility of lenders for the environmental harm caused by their borrowers. This is a complex and evolving area of law that has significant implications for both lenders and borrowers. Financial institutions in developed countries now consider the environmental impact of corporate borrowers as part of their lending decision. This implies that environmental considerations may influence the level of financial support available for economic development (Coulson & Monks, 1999). The United Nations Environment Programme (UNEP) has plays a key role in outlining the views of the international bank community on the environment and sustainable development. There has been and continues to be considerable debate on the degree to which a bank should be held responsible 8|Page for the activities of its borrowers. And key question in this discourse is: Why should a bank be liable for activities of its borrowers causing environmental damage yet if the same bank were to lend money to a client to buy a car and that car kills someone there is no question whatsoever that the bank is not liable. What is it about the environment that makes things rather different? The issue put simply is that a bank can be held liable for the activities of its borrowers if they are harmful to the environment. The legal basis for lender liability for environmental damage can be traced back to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, also known as the Superfund law. Under CERCLA, any person who has owned or operated a contaminated site or who has arranged for the disposal of hazardous substances may be held liable for the costs of cleaning up the site. This includes lenders who have foreclosed on a property or who have provided financing for a project that results in environmental harm. Liability can arise in several ways. For example, a lender may be held liable if they knew or should have known that the borrower was engaged in activities that could result in environmental harm. This is known as "lender knowledge" or "constructive knowledge." Lenders may also be held liable if they fail to conduct adequate due diligence before providing financing or if they fail to monitor the borrower's activities to ensure compliance with environmental regulations. The practical implications of lender liability for environmental damage are significant. Lenders may face substantial costs for cleaning up contaminated sites or for compensating third parties for environmental harm caused by their borrowers. This can include the costs of remediation, legal fees, and damages for personal injury or property damage. Lenders may also face reputational damage and regulatory scrutiny, which can impact their ability to do business in the future. Under this concept, a bank foreclosing a property as security for a loan could become liable for liabilities attached to the property as the owner or operator of the site (Coulson & Monks, 1999). As a result, of CERCLA a number of cases came before US courts where lenders were held liable for clean-up costs at borrower sites. A landmark case in this regard is United States v Fleet Factors Corporation [1990] where a bank was found to have participated in the financial management of a borrowing company to the extent of influencing the corporate treatment of hazardous waste. Accordingly, the court held the bank liable for clean-up costs attached to the contaminated land. Following this decision, US banks rejected loan applications by companies with the highest potential to pollute. This eventually led to legal reform notably the passing of the Asset Conservation, Lender Liability and Deposit Insurance Protection Act 1996 that enables companies to avoid the sort of liability imposed by CERCLA. The above notwithstanding, potential liability fears remain and banks in jurisdictions where the issue of liability has been considered now integrate environmental risk management considerations into their lending policies. In the UK the cost of failing to recognize a potential environmental liability when taking possession of property was highlighted in the Midland Bank case of 1995. The case involved Midland Bank taking possession of a site unaware that it was previously used as a dumpsite for old tyres before. Some of the tyres were contaminated with oil 9|Page and when authorities became aware of the pollution they prosecuted the owner of the site for unlawful deposit of waste and the bank was prosecuted as mortgagee in possession and occupier under the UK Environmental Protection Act 1990. Midland Bank was also served with a notice requiring it to remove the tyres illegally dumped on the site and the cost of compliance to the bank ran into tens of thousands of pounds (Coulson & Monks, 1999). On the question of lender liability under English law the greatest danger for the lender would arise where the lender becomes too closely involved in its borrower’s affairs and knowing that the borrower was breaching environmental law, the lender fails to use its power or influence to stop such breach (Hooley, 2001). Consequently, involvement in the management of the borrower’s business creates a liability risk. Likewise, the nomination of a director to the board of the borrower’s company may also be risk. Case law in the UK appears to suggest that as long as the lender does not foreclose or take possession of the mortgaged property he can avoid liability for environmental risks incurred by the borrower. Under English law, a lender who forecloses and takes possession of the mortgaged property in order to sell it may be liable for clean-up costs. In the US the Asset Conservation, Lender Liability and Deposit Insurance Protection Act 1996 as we have already seen protects the lender post-foreclosure when seeking to sell the borrower’s property. It can therefore be concluded that lenders in the UK are in a more precarious position compared to their US counterparts as far as liability for environmental damage is concerned (Hooley, 2001). To mitigate their exposure to lender liability for environmental damage, lenders must take a proactive approach to environmental risk management. This includes conducting thorough due diligence before providing financing, monitoring the borrower's activities, and incorporating environmental risk management into their lending policies and procedures. Lenders may also require borrowers to provide environmental indemnities or to purchase environmental liability insurance. Lender liability for environmental damage is a complex and evolving area of law that has significant implications for both lenders and borrowers. While lenders have a legal obligation to mitigate environmental risk, they also have a responsibility to protect their own interests by implementing effective risk management strategies. As the impact of environmental risk continues to grow, it is likely that lender liability for environmental damage will become an increasingly important consideration for lenders and borrowers alike. Climate Change and Global Warming Climate change and global warming is a hotly debated and divisive topic. Some argue that the issue and its consequences for humanity is exaggerated while others argue that denial of obvious evidence instead of acting now only serves to make the impact worse in future. The World Economic Forum ranks climate change and global warming as one of the biggest risks facing humanity. Disagreements aside, there is now a credible body of evidence showing that climate change is a real threat all of us. 10 | P a g e Climate change and global warming are expected to have more negative impacts on developing countries even though developed countries account for a greater proportion of greenhouse gas emissions associated with the phenomenon. Several reasons are cited to support the proposition that climate change will hit developing countries hardest. They are: § Geographical location: In terms of average temperatures, developing countries are located in regions that are already warmer on average compared to developed regions. Many are located in areas that are particularly vulnerable to the effects of climate change. Any more increase in average annual temperatures will bring dire consequences. For example, low-lying island states are at risk of sea-level rise, while countries in arid regions are at risk of droughts and water scarcity. § Vulnerability to extreme weather events: developing countries are more vulnerable to extreme weather events such as hurricanes, floods, and droughts. This is because they often lack the infrastructure, resources, and technology to cope with these events. Extreme weather events can cause significant damage to crops, infrastructure, and property, leading to economic losses and displacement of people. § Dependency on agriculture: many developing countries depend heavily on agriculture for their livelihoods. Agriculture is the most climate-sensitive of all economic sectors. Climate change can cause changes in rainfall patterns, soil quality, and temperature, which can lead to reduced crop yields and food shortages. This can have a significant impact on the economy and the well-being of people in developing countries. Negative impacts at household level from poor agricultural performance quickly translate into macroeconomic problems. § Limited financial resources: low incomes earned in these countries render their populations more vulnerable because they lack capacity to cope with climate change risks or to develop strategies to improve resilience. Options for adapting to the impacts of climate change are also limited. There are often limited financial resources to invest in climate change adaptation and mitigation. This can make it more difficult to implement strategies to reduce greenhouse gas emissions or adapt to the impacts of climate change. § Limited access to technology and resources: developing countries often lack access to the technology and resources needed to mitigate the effects of climate change. For example, they may lack access to renewable energy sources, energy-efficient technologies, or clean water. This can exacerbate the effects of climate change and make it more difficult to adapt. No one knows the full spectrum of social and economic problems that will arise from climate change hence there are many hypotheses that are shaping debate on this issue. Climate change is expected to create problems on issues such as food production, water provision, quality of human life and health, as well as increasing incidence of natural disasters and their intensity among others. 11 | P a g e Climate Change and Global Warming: The Emergence of a New Liability Regime There is a growing trend in terms of which companies and administrative agencies are being sued for failing to enforce regulations and policies on climate change or for engaging in activities that contribute to emission of greenhouse gasses. Lawsuits of this nature have been reported in over 30 countries including the USA, the UK, Australia, the European Union, New Zealand, Brazil, Canada, India and Spain. By far, the US accounts for a majority of these claims. Available evidence shows that climate change claims fall into 3 categories: § Administrative Claims. These are claims brought against government departments, administrative agencies and regulatory bodies for failure to implement or enforce climate change laws and policies. § Delictual Claims against Corporations. These claims are brought against companies whose business practices are seen as contributing to global warming and climate change. § Claims brought by Investors. These are brought against firms or their agents for failure to account for or report possible risks from climate change that may arise from their business activities or models. Climate change litigation started in the 1980s in the USA. The coming into force of the Kyoto Protocol in 1992 that extended the UN Framework Convention on Climate Change was a turning point that saw an increase in climate change litigation. So far, evidence on the ground shows that most of these claims are not successful. A major stumbling block is proving causation. However, there is no doubt that the whole question of climate change and global warming is marking the development of new jurisprudence. The most prevalent claims are administrative suits focusing on failure to mitigate or reduce greenhouse gas (GHG) emissions. Below is a synopsis of some of the cases: • • • In 1986, a lawsuit was filed by a group of plaintiffs among them the Cities of New York and Los Angeles against the National Highway Traffic Safety Administration. However, the claim failed because the court found that the plaintiffs could not prove that their alleged injury from global warming could be traced causally to the Administration’s decision not to consider environmental impacts. Following the coming into force of the Kyoto Protocol that extended the 1992 UN Framework Convention on Climate Change in 2005, administrative climate change cases increased dramatically. In Massachusetts v EPA 549 US 497 (2007) the US Supreme Court found in favour of the state of Massachusetts and order the Environmental Protection Agency (EPA) to fulfil its responsibilities under the Clean Air Act. These relate to the regulation of GHG emissions. In 2005, a case was filed in the Federal Court of Nigeria on behalf of a local community against Shell Corporation. The Federal Court ordered Shell and the Nigerian government to stop flaring gas in the Niger Delta due to the practice’s adverse effects on the health of inhabitants. The court also ruled that flaring gas contributes to emission of GHGs thus contributing to climate change –Gmebre v Shell Petroleum Development Co of Nigeria Ltd et al (Federal Court of Nigeria, 2005). 12 | P a g e • • In 2015, the Pakistani Appellate Court ruled that the Pakistani government’s failure to implement the 2012 National Climate Change Policy offends the fundamental rights of citizens. In Urgenda Foundation v Kingdom of the Netherlands (2015), the court said the Dutch government owed a constitutional duty of care to the people of the Netherlands to prevent reneging on commitments made by previous government to mitigate climate change. The leading case for regulatory administrative actions against governments and public entities in respect of global warming and climate change litigation is the Urgenda Foundation v. the State of the Netherlands (2019) case. In this case, the Urgenda Foundation, a Dutch environmental group, sued the Dutch government for failing to take adequate action to reduce greenhouse gas emissions. The foundation argued that the government had a legal duty of care to protect its citizens from the harmful effects of climate change and that it had breached this duty by failing to take sufficient action. The case was heard in the District Court of The Hague in 2015, and in a landmark decision, the court ruled in favor of the Urgenda Foundation. The court held that the Dutch government had a legal obligation to take stronger action to reduce greenhouse gas emissions and ordered the government to reduce emissions by at least 25% by 2020 (compared to 1990 levels). It is significant because it established that governments have a legal duty to take action to protect their citizens from the harmful effects of climate change. It also set a precedent for other climate change litigation cases around the world, including the Juliana v. United States case in the US and the Friends of the Irish Environment v. Ireland case in Ireland. the Urgenda case highlights the growing importance of climate change litigation in holding governments and public entities accountable for their actions (or inactions) in addressing the global climate change. Since this case, there have been several other cases globally that have followed a similar approach. Here are a few examples: 1. Juliana v United States: In this case, a group of young people sued the US government for violating their constitutional rights to life, liberty, and property by contributing to climate change. The case was initially filed in 2015, and after several appeals, it was finally dismissed in 2020. However, the case helped to bring attention to the issue of climate change in the US and spurred action from some local and state governments. 2. Friends of the Irish Environment v. Ireland: In this case, the Friends of the Irish Environment, an environmental group, sued the Irish government for failing to take adequate action to reduce greenhouse gas emissions. The case was heard in the Irish High Court in 2020, and the court ruled in favor of the plaintiffs, finding that the government's climate action plan was not sufficient to meet its legal obligations under the Irish Constitution and the European Convention on Human Rights. 3. Plan B Earth v. Secretary of State for Transport: In this case, the environmental group Plan B Earth sued the UK government for approving a third runway at Heathrow Airport. The group argued that the decision was not compatible with the UK's legal obligations under the Paris Agreement on climate change. The case was heard in the UK Court of 13 | P a g e Appeal in 2020, and the court ruled in favor of the plaintiffs, finding that the government's decision was unlawful because it did not take into account the UK's commitments to reduce greenhouse gas emissions under the Paris Agreement. These cases, along with others, show that climate change litigation is becoming increasingly important in holding governments and corporations accountable for their actions (or inactions) in addressing the global climate crisis. They also demonstrate the potential for legal action to drive policy change and increase public awareness of the urgency of addressing climate change. Private corporations are also facing increasing lawsuits for alleged emission of GHGs contributing to climate change and global warming. Most delictual/tort cases against private companies began in the early 2000s and many of them were unsuccessful. The main legal hurdle in these cases revolve around two issues – the plaintiff’s locus standi (i.e. right to sue) and proving causation. It is difficult to prove that GHGs emitted by a particular company’s activities caused injury to a particular individual. The emissions are difficult to trace and injury is invariably indirect. Similarly, it is very difficult to prove that rising extreme weather events or rising sea levels result from a particular company’s activities. However, it is only a question of time before courts circumvent the hurdles around the causation issue in climate change lawsuits. Climate Change Claims and the Causation Problem To date, most claims seeking compensation from perpetrators of acts that contribute to climate change or the emission of greenhouse gasses have not succeeded primarily because of the problem of proving existence of a causal link between the alleged act and the harm. Proving causation is central in the attribution of liability. There is a disconnect between causation in the scientific sense and causation in the legal sense. Scientific causation is probabilistic in nature and how it attributes causality. It models probabilities to arrive at degrees of confidence to draw a valid conclusion. By contrast, legal causation is deterministic and relies fundamentally on the ‘but for’ test to attribute causality. It seeks to determine from available evidence if activity A caused outcome B. The required standard is proof on a balance of probabilities. Even on this standard, it is impossible based on current scientific and technical knowledge to conclude that climate change ‘caused’ a particular event using a deterministic approach because natural factors and their variability always influence outcomes. Legal and scientific causation are not mutually exclusive. They can be used concurrently. Therefore, while climate change may have played a part in the scale and intensity of Hurricane Sandy that devastated the east coast of the US in 2012, it is impossible to conclude that the hurricane was caused by climate change. Alternative Tests to Causation in Climate Change Claims Earlier we pointed out that climate change and global warming is contributing to the development of new jurisprudence. Nowhere is this more visible that on the question of causation and how to determine it. It is clear that the conventional ‘but for’ test for causation is inappropriate for dealing with climate change and global warming claims. Therefore, new tests for causation are beginning to emerge in some jurisdictions. Some of these emerging tests are examined below. 14 | P a g e § § § § § 15 | P a g e Partial Causation Test. Courts in Germany have accepted the principle of partial causation. The essence of this test is that if even though greenhouse gas emissions by the defendant company are not wholly responsible for a particular outcome or harm, liability can still be attributed to that company on grounds of proof of partial causation. It is not clear whether there is some threshold that partial causation must meet to result in liability e.g. should the partial causation be 20% or more or 30% perhaps? In other words, how is significant partial causation measured? Proximate Cause Test. This test is used in the US in cases where determining causation using the deterministic approach to causation is impossible. The test relies on probabilistic estimates of the relationship between a particular act and the injury/harm to attribute liability. Material Contribution Test. This test for causation originated in England in the 1950s and has since been adopted in other countries such as Australia and Canada among others. The test first emerged in claims for long latency disease in England. The test holds that causation is proved if a claimant is able to prove that the conduct of the defendant materially contributed or increased the risk of suffering the injury or harm that forms the basis of the claim. The test has been used in many cases such as McGhee v National Coal Board [1973] 1 WLR 1 and Sido John v Central Manchester & Manchester Children’s University Hospitals NHS Foundation Trust [2016] EWHC 407 (QB). In these and other cases, if the traditional ‘but for’ test of causation had been used, the claims would not have succeeded. Doubling of the Risk Test. Like the material contribution test, the doubling of the risk test of causation originated in England. It relies on statistical evidence to determine causation in cases where more than one cause could have caused the harm in question. Consider a person who develops lung cancer. It is found that the person was exposed to asbestos but he was also a smoker. Smoking and exposure to asbestos could each have caused the cancer. In such a case it is impossible to say which of these two potential causes actually caused the cancer. However, statistical evidence shows that the risk of developing cancer from asbestos exposure is more than double that of contracting cancer from smoking. On this basis, asbestos exposure is the cause of the cancer not smoking. It is on the basis of this test that the case of Heneghan v Manchester Dry Docks Ltd [2016] 1 WLR 2036 was decided. Market Share Test of Causation. This test of causation was developed in the USA to deal with claims in which a claimant is unable to prove the exact proportion of his/her injury or harm that a particular defendant’s product or activity actually caused. This test applies where there are multiple defendants who could have contributed to varying extents to the injury of the claimant e.g. injury from a drug manufactured by several companies on a common licence. A claimant may not be able to prove which of the several companies that manufacture the drug actually manufactured the actual unit they took. The California Supreme Court held that in such a case liability should be apportioned among all the manufacturers of the drug on market share basis i.e. a manufacturer with 20% market share for the drug bears 20% of the claim and one with 40% pays 40% of the claim and so on. Name a liability rule/principle that can be used in place of this test. It is logical to say some of these tests of causation may start to find their way into claims for climate change and global warming. Each of the above tests has been developed to deal with claims where it is impossible to apply the traditional ‘but for’ test of causation. Since climate change and global warming claims belong to that category of claims, there is a real prospect that some of these tests will begin to filter into these claims as well. In the last 10 years, there have been several significant developments for the challenge of causation in environmental liability claims. Here are a few examples: 1. Multiple causation: there have been several cases in the last 10 years where courts have accepted the concept of multiple causation in environmental liability claims. One such case is Exxon Mobil v. Commonwealth of Massachusetts, where the Massachusetts Supreme Judicial Court held that multiple defendants can be held liable for their proportional share of environmental harm caused by a combination of factors, including past and present emissions. Another example is Bell v. Cheswick Generating Station, where the Third Circuit Court of Appeals held that a plaintiff can establish causation even if multiple sources of pollution contributed to the harm. 2. Scientific Evidence: courts have become more willing to accept new scientific evidence in environmental liability claims in recent years. For example, in Spokeo v. Robins, the Ninth Circuit Court of Appeals accepted a study that linked lead exposure to cognitive impairment, allowing the plaintiff to establish causation. In addition, in General Electric v. Jackson, the U.S. Supreme Court held that scientific studies can be used to establish causation in environmental liability claims. 3. Proximity: the concept of proximity has been increasingly recognized in environmental liability claims in recent years. One example is BNSF Railway Co. v. Chevron USA, where the Supreme Court of Texas held that a plaintiff can establish causation even if there is no direct evidence linking the harm suffered to a specific source of pollution, so long as the plaintiff can show that the harm occurred within the proximity of the defendant's activities. 4. International law: international law principles have been increasingly applied in environmental liability claims in the last 10 years. For example, in Aguinda v. Texaco, the Second Circuit Court of Appeals applied international law principles to hold that Chevron (which had acquired Texaco) could be held liable for environmental harm caused by Texaco in Ecuador. Similarly, in Akpan v. Royal Dutch Shell, the Hague Court of Appeals 16 | P a g e held that Royal Dutch Shell could be held liable for environmental harm caused by its subsidiary in Nigeria, applying international law principles. There have been several important cases in South Africa relating to environmental liability and climate change challenges. Here are some notable examples: 1. Fuel Retailers Association of Southern Africa v Director-General: Environmental Management, Department of Agriculture, Conservation and Environment (2007). This case concerned a challenge to the government's decision to require fuel retailers to reduce their greenhouse gas emissions. The Fuel Retailers Association argued that the decision was unlawful and that the government did not have the authority to regulate emissions. The court rejected this argument and held that the government had a duty to regulate emissions in order to protect the environment and public health. 2. Maccsand (Pty) Ltd v City of Cape Town (2012): in this case, a sand mining company challenged the City of Cape Town's decision to impose environmental conditions on its operations. The company argued that the conditions were unreasonable and would make its operations unviable. The court upheld the conditions, holding that the company had a duty to minimize its environmental impact and that the conditions were necessary to protect the environment and public health. 3. Earthlife Africa Johannesburg v Minister of Environmental Affairs and Others (2017): which case concerned the government's decision to proceed with a proposed nuclear power plant. The environmental group Earthlife Africa argued that the decision was unlawful and that the government had not properly considered the environmental impact of the plant. The court agreed, holding that the government had not complied with its legal obligations to consider the environmental impact of the plant. 4. Climate litigation in the Cape High Court (2019-2020): in 2019 and 2020, several climate change lawsuits were filed in the Cape High Court by environmental groups and activists. The lawsuits sought to compel the government to take more aggressive action to address climate change, including reducing greenhouse gas emissions and mitigating the impacts of climate change on vulnerable communities. The lawsuits are ongoing, but have already generated significant public attention and debate in South Africa. In conclusion, these developments demonstrate that courts are not only increasingly recognising the complex nature of environmental harm and are willing to apply a range of legal principles to address the challenge of causation in environmental liability claims, but they are becoming increasing more willing to intervene to protect public health and safety. Albert Mushai / Penny Spentzouris (Reviewed 2023) 17 | P a g e