A perfect storm

The insurance litigation world promises to be a busy one in 2023; an uptick in interest across novel areas – particularly ESG and technology – combined with the squeeze of an economic downturn provides the dramatic backdrop to a period which is likely to see a huge amount of activity.

The ‘E’ of ESG

Arguably the hottest current trend is the explosion of interest in ESG-related litigation, with sustainable insurance, net-zero targets and climate-change claims all taking centre stage. Although actions brought against private companies based on historic emissions are still getting off the ground, cases such as Lliuya v RWE in Germany are illustrative of the potential for success. More established, and rapidly gaining popularity in the UK, are shareholder claims relating to ‘greenwashing’, which target corporations unable to practise what they preach when it comes to sustainability.

The lawsuit filed by ClientEarth against the board of directors of Shell for failing to manage the material and foreseeable risks posed to the company by climate change, meanwhile, has been indicative of the type of forward-looking claims which corporations may face. The construction sector – already bearing the weight of cladding-related claims and anticipating further issues as the provisions of the Building Safety Act are phased in before October 2023 – is also likely to feel an added burden. According to Jonathan Spencer, a partner in Simmons & Simmons’ insurance and construction group, ‘Those working in the industry are increasingly coming under pressure to understand and consider climate-related risks when working on a building project’. This pressure to not only satisfy current requirements, but also future-proof more effectively, is likely to one which businesses and professionals across the gamut of industries feel profoundly in the coming months and years.

The environmental boom is mirrored on the insurer side by the concurrent expansion of portfolios to include, for example, coverage for renewable energy sources. August 2022 saw Marsh, a unit of Marsh & McLennan, launch the world’s first dedicated insurance product for hydrogen energy projects. Insurers themselves are also increasingly adopting net-zero strategies, and the UN-convened Net Zero Insurance Alliance comprises a growing number of leading insurers who have committed to the goal targets set by the Paris Agreement on Climate Change.

Social and governance

Although much of the focus tends to be on the environment and climate change, companies neglect an early focus on the other component elements of ESG at their peril. 2022 heralded an increase in large-scale employment practice liability claims in the UK, with payments more than £1m being dealt out to individuals alleging discrimination. Jonathan Spencer and James Pollock – the latter of whom acts as the global head of Simmons & Simmons’ insurance and construction group – are quick to caution that ‘poor management by businesses of internal and supply chain risks can lead to litigation, regulatory action and associated reputational damage, all of which may result in insurance claims and coverage disputes’.

Over in the US, the SEC’s recently proposed new rules – intended to enhance the regulatory framework for ESG-related disclosures concerning investment funds and advisers – are undoubtedly emblematic of a rapidly increasing level of scrutiny across the pond. The rest of the world seems likely to follow, with the FCA already looking to develop a regulatory regime which will monitor strategies relating to ESG. Particularly in combination with the high levels of civil unrest and activism worldwide, such increased pressures for transparency and rigour will create fertile ground for even more claims.

The tense geopolitical situation that persists also continues to have far-reaching consequences for insurance litigation well beyond the ESG sphere. Supply chain disruption issues – initially triggered by the Covid-19 pandemic and further exacerbated by the conflict in Ukraine – show no signs of abating. Concurrent business interruption claims will therefore continue to be a common sight throughout 2023. Although this trend is of particular concern for the construction sector, industries such as healthcare and shipping are also significantly affected. The rate of corporate insolvencies – already rising rapidly following the curtailing of government measures designed to minimise damage in March 2022 – also looks set to soar under the combined pressures of supply chain disruption, steep energy prices and high inflation rates. Hand in hand with increased financial pressures and potential insolvencies comes the likelihood of fraud being committed and uncovered, leading to a spike in civil fraud-related litigation activity.

Pollock and fellow partner Felix Zimmermann also highlight that ‘while pure economic inflation reasonably gives insurers cause for concern, “social inflation” is another phenomenon that is increasingly worrying insurers in the UK’. This concept was coined in the US, and has seen insurers and defendants facing higher payouts, particularly in ESG cases, with juries seeking to recognise the sensitivity, and the reputational and social value of the relevant issues. Pollock and Zimmermann further feel that ‘while empirical evidence of this phenomenon is still somewhat lacking in the UK, there is a general feeling in the market that “social inflation” is here and is something to be concerned about. This feeling is, understandably, reinforced by a well-established litigation funding market, recent changes to the UK’s class action framework and broad concerns and shifts in attitude around ESG and who should shoulder the burden’.

Tech advances

Despite the sobering realities of the current global situation, innovation in the insurance litigation sphere continues apace, particular in relation to technology. The push to utilise digital tools to bring efficiency to conventional insurance models and develop more accurate risk-prediction models continues to rapidly gain traction. Not only is there sustained investment into insurtechs, but a focused effort to make the most of technological advances is palpable across the sector. Lloyd’s ‘Blueprint Two’ project, which would herald the complete digitalisation of the London insurance market, is billed for completion in 2024.

Technology remains a double-edged sword, however, and with the positives must come the pitfalls. Cybersecurity risks are resulting in more claims for intangible damage and loss being brought, and this remains a rapidly evolving and challenging area. Zimmermann – a partner at Simmons & Simmons with over 20 years’ experience defending claims made against professionals – expects ‘an increase in claims brought against data centres and the operator and/or end-users’ liability insurance policies, as the likelihood of service outages grows with the increase in global energy insecurity, weather irregularities and cyber threats’. In the cryptocurrency space, meanwhile, the recent decision of the Court of Appeal in Tulip Trading v Van Der Laan has been illustrative of juridical willingness to face the demands made by novel technologies head on. However, it remains to be seen whether Lloyd’s exclusion of coverage for some state-backed attacks from March 2023 is symptomatic of a broader approach, and the effect this is likely to have on success rates for lawsuits.

Group actions

Digital advances have also been impactful in another important way; improvements in technology have recently been instrumental in ensuring that group litigation is becoming a go-to method of bringing claims. Not only is this approach an effective solution to funding issues, but it is also another clear expression of the spirit of activism which has so permeated the field in recent times. Although competition, cybersecurity and data protection issues are all providing fruitful ground for such an approach, it is once again ESG claims that are leading the way. In particular, mass tort claims relating to environmental disasters and legacy exposures are increasingly being brought against global corporations; the Court of Appeal’s ruling concerning Municipio de Mariana v BHP, made in July 2022, and allowing the case to proceed within the English court system, was instrumental in cementing the country’s position as a desirable destination for similar disputes. In the wake of such a decision, litigation targeting both the historic – and potentially the future – use of PFAs and plastics is likely to become commonplace. In this context, the ground-breaking class action against Johnson & Johnson, which is now set to proceed in UK courts on much the same basis as its US counterpart, will be critical in determining the way such cases will be treated going forward.

With a widespread hunger for rectification persisting across the world, even as economies are locked into a downward spiral, the stage seems set for a dramatic time ahead in the insurance litigation sphere. Not only is there scope for a flood of D&O claims – triggered by issues as diverse as the climate crisis, rising inflation and supply chain disruption – but the very way in which insurers and claimants operate is being rapidly revolutionised by technological advances. Amid such a perfect storm of exacerbating factors, 2023 promises to be characterised by a profusion of hazards and exposures, with corporations pulled in multiple directions.