Insurance lawsuits could try to seek compensation for climate disaster claims like wildfiresIf climate liability suits succeed in the case of climate impacts like wildfires, insurers could be the next group to sue fossil fuel companies. Photo credit: Josh Edelson/AFP/Getty Images
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By Kaitlin Sullivan

Lawsuits filed by insurance companies against the fossil fuel industry seeking to recoup payouts to policyholders for climate damages could become the second wave of climate change litigation.

That possibility exists if the first wave of climate lawsuits—communities suing the industry under public nuisance and other laws to hold them liable for the impacts of climate change—starts to be successful, legal experts say. 

The next kind of lawsuit could come from insurance companies attempting to recover part of what was paid to policyholders for damage caused by climate disasters. These are called subrogation claims, and are commonly used in the U.S. by insurers who try to prove those losses were caused by a third party, which should be held liable for those damages.

“Subrogation claims are unlikely until liability is established in other litigation. Once a precedent is set in these cases, it will be a blueprint for what happens with subrogation,” said Jason Reeves, an attorney at Zelle International in London who specializes in disputes involving energy, property and power. “But there are still a lot of hoops to go through.” 

Last year, insurers paid out $90 billion worldwide to policyholders impacted by natural disasters. Sixty-four percent of those losses were incurred in the U.S., where subrogation is an established part of insurance law. As massive wildfires and rising sea levels increasingly cause damage to property, insurers may consider pursuing subrogation against those found responsible for climate change. Increasingly, researchers have been able to identify the proportion of global warming caused by the major fossil fuel producers, called the Carbon Majors.

“Once a court finds a carbon major liable for causing climate change-related damage to the property of a private plaintiff or government entity, we expect that the litigation flood gates will open, and many other parties will bring damages lawsuits against greenhouse gas polluters, relying on the same type of evidence and arguments that the court found satisfactory,” Reeves wrote in a recent article

There is already some precedent for subrogation claims involving climate, said Stephanie Morton, an insurance lawyer with Client Earth, a non-profit legal organization based in London.

“The link with climate change presents new opportunities for subrogation and the cases currently in the courts are very relevant for insurers. Subrogated claims in connection with climate risk are not without precedent. We have seen insurers explore this before and we may see them do so again,” Morton said.

Morton said that precedent was set in 2014 when Farmers Insurance Group filed nine class-action lawsuits Cook County, Illinois–– which includes Chicago –– on behalf of 600 property owners who were paid insurance claims for flood damages in 2013. At the time, it was considered an extreme example of subrogation. The lawsuit alleged that public agencies failed to take measures to prevent at least some of the damage caused by the floods. Farmers  dropped the suit just two months after filing it and according to a company spokesperson at the time, the purpose of the suit was to serve as a warning that municipalities must do more to reduce risks of flooding. 

“Climate subrogation in the short term is a real thing and quite active,” said Donald Hornstein, professor of law at the University of North Carolina.

The decision may not even rest in the hands of the insurance companies, who commonly sell their subrogation rights at a discount to third parties such as hedge funds. Those parties can then choose to bring claims at a later date, Hornstein told Climate Liability News. For example, many insurance companies paying claims after recent California wildfires no longer own those subrogation rights.

“Many of the insurance companies sold their subrogation rights at a discount to a hedge fund in Boston. Now it owns them and can bring them when it wants,” said Hornstein.

That hedge fund could sue PG&E, the large California utility that has already been deemed liable for some of the major fires its equipment sparked. PG&E filed for bankruptcy earlier this year, faced with an estimated $30 billion in wildfire liabilities. Or, it could consider targeting the fossil fuel industry itself.

Establishing Blame Presents Challenges

Both Hornstein and Reeves say that even if one of the current cases successfully holds climate majors liable for climate change damages, a subrogation claim will still be difficult. 

“Climate change is hard to pin on just a few companies,” Reeves said. 

The companies that extracted hydrocarbons aren’t necessarily the ones that used them, which in subrogation, could potentially make anyone who has consumed fossil fuels liable for the damage climate change has caused. 

But, as science definitively ties global warming to the burning of fossil fuels, insurance companies could use the same arguments being used in the current lawsuits: that the industry has known for decades that its products drive global warming and not only still sold them, it actively worked to cloud public understanding of the issue and lobbied against climate action.

“Developments in science are making it easier to foresee the impacts of climate change,” Morton said. “Governments and companies need to adapt to those foreseeable risks and if they fail to do so, they open themselves up to legal exposure. Holding municipalities and companies accountable is becoming much more feasible.” 

Subrogation will not necessarily be contained to losses on behalf of policyholders. Liability insurers also have the ability to recoup losses associated with their clients being sued. In either circumstance, insurance companies have a huge stake in climate change litigation. 

“Climate change is expected to lead to more extreme weather and this has implications for insurance companies that are exposed to this. It’s important that insurance companies compliment premium adjustments with other techniques such as legal action to reduce risk and recover losses,” Morton said. 

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