ESG mis-selling: how to make sure your insurance wording is robust

Greenwashing has the potential to be the next big mis-selling scandal for financial service companies. Here’s what you need to know from an insurance perspective.

When was the last time you got through the week (or even the day) without someone mentioning ESG?  An acronym unknown to most until a few years ago has become 2022’s equivalent of the Millennium Bug.  

Like its 1999 counterpart, ESG raises a whole host of regulatory and client service issues, but a sudden reprieve at the stroke of midnight is highly unlikely. 

Sustainability is undoubtedly the right way forward. But in adapting to the necessary ESG remit, regulated entities will face new and increased exposures. This will have implications for insurance.

Let’s look at how Professional Indemnity and Directors’ & Officers’ policies are likely to respond – and we’ll provide some tips on issues of concern.

Sustainability assessments on products and related disclosures are at the heart of the EU Sustainable Finance Disclosure Regulation and incoming UK regimes affecting asset managers and life insurers¹.

As regulators focus on board level responsibility², resilience to the financial risks of climate change³ and climate change disclosures⁴, there will also be concerns that regulator supervision may turn to (i) investigations and enforcement; and (ii) breach of director duty claims in relation to ESG issues more generally.  Listed companies will also be concerned that shareholder activism will spill over into the ESG space, with securities actions under Section 90 and or 90A of FSMA a possibility.  ClientEarth’s recent action against directors of Shell demonstrates potential issues facing directors⁵.

When insurance will cover ESG claims – and when it won’t

The good news for insureds is that, in the main, good policies will provide coverage for ESG claims and investigations of the sort envisaged in this article.  A breach of duty that results in a greenwashing or mis-selling claim is no different to any other breach of duty claim from a PI perspective.  Similarly, a D&O policy will cover acts, errors and omissions of directors in a broad sense (or of a company, in relation to securities claims), and there is no reason why an ESG related indiscretion will not fall within the scope of that cover. 

However, that is not the end of the story, and insurance policies may contain a number of traps for the unwary.

The Law of Unintended Consequences?

If George Orwell had been a broker, he may have noted that some insurance policies are more equal than others.  Here are three issues of concern:

• An overly broad exclusion may (intentionally or otherwise) remove ESG cover.  For example, a greenwashing claim may arise from an investment that turns bad after it is revealed that a supposedly green industrial plant has been leaking chemicals into a nearby river.  If an exclusion excludes claims that are “indirectly” related to pollution, a claim regarding advice that an investment into that plant was ESG friendly may be caught.  At the very least, insurers will have an argument to reject coverage, leading to additional time and expense to prove the claim is covered (which may fail).   In addition to pollution, look out for bodily injury, property damage and climate change exclusions, which could also bite in the ESG context.
• Removal of Entity Investigations Cover and even reduction in investigations cover for directors has been a feature of the more difficult (or “hard”) insurance market.  As ESG marshals in a host of additional regulatory requirements, there is an evident possibility of investigations for both companies and individuals.  Ensuring investigations cover provides appropriate protection will be increasingly important.
• Appropriate aggregation language is essential for those at risk of mis-selling claims from multiple clients.  Broad language (“originating source or cause” for example) makes it more likely that claims will be grouped together and, collectively, climb above the policy deductible paid by the insured.  Narrower language could mean that each separate claim is subject to a separate deductible and (in an extreme case) insurers’ money never reached.

When is an Extension an Exclusion?

A hot topic affecting financial institutions will often be followed by extensions or new products promising to provide protection against new exposures.  Whilst packaged as something new, an extension for ESG may actually limit cover by imposing a financial sub-limit (say, 10% of the policy limit) on something that was covered already under the main insuring clauses of the policy.  In that way, an extension, effectively, becomes a partial exclusion.

Entirely new products have also started to emerge in the ESG space, and many will have a useful function in covering matters not previously dealt with under insurance policies.  Anything purporting to provide professional indemnity, D&O, or investigations type coverage should be viewed with some caution.  Although there may be some advantage to additional or ring-fenced ESG limits, policyholders may want to ask themselves three questions if offered ESG specific insurance:

1. Am I already covered for this?
2. Does the new policy contain exclusions beyond those I am used to seeing?
3. Would it be more cost effective to buy more limit under pre-existing policies?

Conclusions

The key takeaway is that good PI and D&O policies should provide the cover needed for financial services firms and their directors in relevant ESG areas.  An insurance policy is merely a contract, and so terms can vary, with potential traps for the unwary.  With a modest level of intervention, it is to be hoped that insurance is one area whose waters will be relatively untroubled for those navigating the choppy seas of ESG.

This article was authored by members of Howden’s Legal, Technical & Claims team. The Legal, Technical & Claims team is made up of senior insurance lawyers and experienced claims professionals, and provides support on insurance claims, policy wordings and legal and regulatory developments as they impact your business. If you have any queries on the issues raised, please feel free to contact a member of the team directly.

James Wakefield, Claims Handler:

T: +44 (0)2038 087561 E: [email protected]
 

Neil Warlow, Divisional Director:

T: +44 (0)7923 208441 E: [email protected]
 

Sam Vardy, Divisional Director:

T: +44 (0)7719 928600 E: [email protected]
 

Carey Lynn, Executive Director:

T: +44 (0)7923 229882 E: [email protected]