The upcoming renewals will continue to be driven by a highly competitive insurance market under pressure. Comprehensive risk analyses combined with a presentation of the risks will be necessary for a successful renewal.

It is common knowledge that the insurance market is navigating through a difficult period. A lot has been said about increasing premiums and decreasing limits. However, little attention has been paid to the changing risk landscape and the impact that these changes could have on insurance contracts.
 
Bricks are turned into batteries“, “WE CARE. For PEOPLE the PLANET and the FUTURE“, “Adding the Extra to the Ordinary” are examples of corporate vision statements and headlines of articles that are published on the internet, in print media, company reports and on websites.
 
Among other things, these statements mirror the ability of innovation and sustainability and offer a glimpse into the future development of companies. At first glance these statements have absolutely nothing to do with changes in the risk landscape. Bricks have been used as a building material for thousands of years, sustainability is an age-old principle in many business sectors, and machine-driven products such as elevators have been produced and serviced for decades.

ESG efforts change liabilities

Looking deeper, however, it quickly becomes clear that these statements also contain significant changes in risks and show similarities. A brick that is not only used as a building material, it also provides the storage space for electricity, representing at least another, if not higher, product liability risk.
 
Less obvious is the fact that companies’ sustainability statements may result in new liabilities. ESG is a voluntary contribution by businesses to sustainable development that has been increasingly codified in laws. A violation therefore no longer remains without sanctions but comes with enormous penalties and might lead to claims for damages.
 
For example: In Italy, ENI was sentenced to a fine of 5 million EUR for describing a diesel product as “green” and thus deceiving consumers. In the Netherlands, a ruling by a civil court required Shell to change its guidelines and requirements to ensure that the Shell Group’s CO2 emissions in 2030 would be 45% lower than in 2019.
 
ENI’s “green” diesel was probably more expensive than “normal” diesel. Consumers could claim for damages because they had trusted the environmental friendliness of the green diesel, refuelled their cars with it, and then sued ENI for the additional expenses they had. Looking at the judgement against Shell, a similar situation might arise. If Shell does not achieve the target set out in the court decision by 2030, and if, for example, harvests fail due to environmental influences that can be traced back to climate change, farmers affected by crop losses might sue Shell for damages as a contributor to the climate change.
 
Not only product changes, but also changes in the company’s offerings may lead to new risks. The statement “Adding the Extra to the Ordinary” is just one of many examples that clearly shows that more and more manufacturing companies are evolving into system providers. Over and above typical maintenance services, companies have added a wide range of services to their portfolios, including software solutions or product trainings. Manufacturers therefore not only have to consider production risks but also risks associated with the provision of services.
 

EU Interests: Consumer Protection

These developments are accompanied by the EU paying more and more attention to consumer protection. From today’s perspective, the exemplary claims for damages against ENI and Shell are rather unlikely in most European legal systems, since class actions, common in the USA, are not possible in most European countries. However, the recent diesel scandal has shown that such claims could in principle also be raised in Europe.
 
Unlike in the USA though, far more stringent legal conditions would apply. This current lack of class actions can be seen as a kind of protection of European companies against the risk of extremely high consumer compensation claims.
 
This protective cloak might soon be lifted. In November 2020, the European Parliament passed the “Directive on representative actions for the protection of the collective interests of consumers” to protect collective consumer interests from breaches by companies under EU law. The directive is to be implemented in national legal systems by 31 December 2022. This new guideline will not only lead to changes in the basic liability of companies but will greatly increase their risk of being faced with extremely high compensation claims.
 

“We are well insured in any case”

This statement is often heard in connection with claims. In view of the changing risk landscape, however, the question arises whether the existing insurance solutions also offer the expected and necessary protection. Claims for damages from services generally comprise financial losses that are not derived from personal injury or damage to property (so- called “pure financial losses”). A violation of ESG rules can also result in property damage or personal injury, but the greater number of possible damages will be associated with pure financial losses.
 
In contrast, covers from traditional business and product liability insurances are specifically geared towards property damage and personal injury. Including pure financial losses is only possible to a limited extent. Even if so-called “open pure financial losses” are included in a liability contract, the limits agreed for this extension will not be enough to cover the sums claimed in the event of a violation of ESG rules.

Corporate financial loss coverage

D&O insurance usually offers managers protection against ESG claims. But what about the companies, are they adequately protected? In most European legal systems, third parties cannot directly claim damages from managers, only from companies. Should they be found liable for that damage, they can take recourse to managers for compensation payments. The insured event according to D&O is only triggered when the company claims compensation from the manager. To insure this recourse, companies bear the burden of enormous advance payments when it comes to ESG claims. Whether the D&O insurer pays the damage at the end of the day or whether the D&O insurer’s services are limited to defending the manager depends on each individual case and cannot be foreseen. Adequate insurance protection for the company itself can only be built up by means of appropriate financial loss coverage. Currently available insurance products, like the employer’s practice liability, provide only partial protection against ESG risks. Notwithstanding that, the insurance market is increasingly under pressure to insure companies against ESG losses in their entirety. To better address this need, insurers will have to come up with appropriate product innovations.
 
Already, the market is reacting to the changing risks of manufacturing companies that are evolving
into service-led businesses. Various insurers offer products that specifically address the risk of pure financial losses for companies offering software solutions in addition to their products.
 
The upcoming renewals will continue to be driven by a highly competitive insurance market under pressure. Comprehensive risk analyses combined with a presentation of the risks will be necessary for a successful renewal. The related work should be used to check the extent to which individual companies’ risks have changed and whether existing insurance policies still offer sufficient protection.

Thomas Herndlhofer

Practice Leader Liability

T +43 664 822 20 59

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