Evolving Liability Conference 2023

Welcome remarks

Jad Ariss, Managing Director, The Geneva Association

Societies are forever changing and it is crucial that insurers anticipate the potential fallout from latent or emerging risks. To shed light on the future commercial liability outlook, The Geneva Association recently surveyed its member firms about emerging trends. The results suggest five key themes:

• The litigation environment increasingly favours plaintiffs.
• Ongoing digitalisation is exposing firms to new types of intangible risks and heightened potential for losses to accumulate.
• Climate change litigation has expanded to incorporate new types of plaintiffs, claimants from different industries as well as different national jurisdictions.
• Liability for industrial contamination, particularly per- and polyfluoroalkyl substances (PFAS), is increasing.
• Focus on corporate social responsibilities and governance is growing.

Assessing future commercial liability exposures, especially the potential for losses to aggregate over time and lines of business, is vital to prevent insurers overstretching their balance sheets through their underwriting activities. Societies need a healthy, well-capitalised insurance industry that can take on risks that are too great for an individual company to absorb, freeing up their resources for more productive investment.

Charlie Shamieh, Chairman, Gen Re

Despite improved financial results in 2022, re/insurers’ historical returns to their shareholders have remained modest relative to the significant risk they absorb. Over the past 10 years, many re/insurers’ average daily share price volatilities have been higher and their realised returns lower than corresponding metrics for the overall stock market. But the risk-reward trade-off is not uniform across all firms connected to the insurance sector. This has implications for the allocative efficiency of risk-absorbing capital.

In particular, firms that service the insurance industry (but which typically do not put their own capital at risk) have tended to earn higher returns than re/insurance carriers without necessarily taking on risk. For example, some of the major insurance broking firms and rating agencies have combined higher shareholder returns with lower equity price volatility compared with many re/insurers. In no small part, this is because of the fee-based nature of their business models.

Moreover, specialist run-off companies who take on the tail risk exposures that mainstream re/insurers no longer want to hold, often earn returns well below their cost of capital. Many of these exposures are linked to latent third-party liability risks covered by legacy policies, such as the fallout from climate change and industrial pollutants. If some of these assumed liability risks were to crystallise and accumulate, this could seriously impair these run-off firms’ solvency, which in turn could have far-reaching consequences on the re/insurance sector’s ability to absorb shocks.

Charlie Shamieh, Chairman, Gen Re; Neil Beresford, Partner & Head of Global Product Liability and Recall Practice, Clyde & Co; Rainer Lohmann, Professor of Oceanography, Marine & Atmospheric Chemistry, University of Rhode Island; Michael Meadows, Senior Product Manager, Swiss Re; Adam Grossman, Vice President Emerging Risk, Praedicat

PFAS litigation has picked up sharply over recent years, as victims seek compensatory damages and regulators introduce tougher restrictions on these substances. The targets of lawsuits and regulatory actions have extended beyond the manufacturers of PFAS to include companies that use PFAS in their products. However, establishing corporate liability is complex – PFAS are everywhere, making it difficult to identify the precise causal links between a defendant’s actions and the harm suffered by a claimant. It is also difficult to fingerprint and date PFAS exposure and, as yet, no ‘signature’ disease has been pinned on them.

Based on recent settlements (e.g. cases against producers of fire-fighting foams), some commentators project that total losses from PFAS liabilities could be very large – as much as USD 180–190 billion – especially once the remediation costs of decontaminating soils and water sources are included alongside damages for bodily injuries. Potential overall claims for microplastics could also exceed USD 100 billion.

The extent to which any liability claims for harm caused by emerging contaminants are covered by companies’ insurance will depend on the terms of their policies. In response to earlier industrial pollutant cases (e.g. asbestos), general liability insurance contracts introduced ‘total’ or ‘absolute’ pollution exclusions, many of which will apply to PFAS. Nevertheless, disputes will almost certainly arise over the language of exclusion clauses, which differ across policy years and insurance markets. Even if claimants are ultimately unsuccessful, corporates and their insurers could incur significant legal costs in defending cases. It is therefore imperative that underwriters remain alert to the evolving situation with PFAS and microplastics to ensure that terms and conditions of coverage remain consistent with re/insurers’ risk appetite and risk-absorbing capacity.

Tom Baker, William Maul Measey Professor, University of Pennsylvania Carey Law School

Insurance is unlike many other products in that the price of coverage is set before the full costs of production are observable. This is particularly evident for liability lines, where claims can take years or even decades to develop.  Liability re/insurers must carefully assess this uncertainty when defining their risk appetite and allocating capital to cover unexpected losses. Protection gaps can emerge or widen when exposures outstrip the capacity of reinsurers to provide cover.

A gap is emerging between commercial liability for mass tort claims and mainstream re/insurers’ willingness to assume related risks. This is creating opportunities for other specialist entities to provide risk management solutions, for example intermediaries who help manage captive insurance vehicles in return for fees or third-party litigation financiers who provide non-recourse loans to plaintiffs’ lawyers in exchange for a portion of any successful settlement.

Could liability re/insurers offer products that better complement and compete with these new risk transfer/management solutions and in doing so narrow the protection gap? To some extent, this is happening already with the growth of contingent risk products such as judgement preservation insurance that guarantees a plaintiff will receive all or part of a judgment regardless of what happens to the judgment on appeal, or, in some cases, after a retrial. But there is scope for more innovative solutions, including designing insurance contracts that enable insurers to share the costs of claims (perhaps alongside upfront finance) with defence lawyers and/or that provide opportunities to (re-)price the liability risks at selected intervals rather than solely when the policy is first taken out.

Maryam Golnaraghi, Director Climate & Environment, The Geneva Association; Nigel Brook, Partner, Clyde & Co (on screen); Joana Setzer, Assistant Professorial Research Fellow at the Grantham Research Institute on Climate Change & the Environment, LSE (on screen); Ina Ebert, Leading Expert Liability & Insurance Law, Munich Re; Lucian McMahon, Senior Manager Liability Analytics, Verisk Extreme Event Solutions
 

The number of climate litigation cases has more than doubled since 2015. Many of the latest lawsuits against companies are at the early stages of adjudication. There is consequently a great deal of uncertainty about the pathways to liability. In particular, cases that aim to hold companies directly responsible for the effects of climate change face significant legal hurdles, not least proving a causal link between a defendant’s activities and the adverse consequences of global warming.

Other types of cases, especially in relation to false or misleading communications, may be more successful, for example negligently misreporting a firm’s environmental achievements or falsely advertising the green credentials of its products and services. Claims, including those seeking to change a company’s environmental strategy rather than compensation for alleged damages, may also be able to appeal to new duties based on human rights and due diligence obligations.

Despite the significant uncertainty surrounding climate change liability, modelling the potential exposures can still be very useful. Such models help to assess the possible scenarios that could give rise to significant claims against companies and their advisors, the cost of which might ultimately be picked up by their insurers through liability policies.

Beyond modelling, precise policy wording about coverage for climate-related liability is important so that insurance remains accurately priced. This includes potential for changes in sub-limits, conditionality in coverage and possible exclusion clauses, although definitive language for the latter may prove difficult to craft. Such actions by insurers can incentivise firms to actively manage climate risks and limit the impact of potentially harmful operations.

Moderator: Darren Pain, Director Cyber & Evolving Liability, The Geneva Association; Speaker: Christopher Sirota, Product Manager of Emerging Issues & Innovation, Verisk Analytics

There is no widely agreed definition of the metaverse. Various commentators stress different defining features, ranging from a more engaging extension of the internet to a parallel and highly immersive, three-dimensional online environment with virtual avatars and its own set of tradable assets and property. Uncertainty also persists about how far and fast the metaverse might develop from current applications in the online gaming world to mainstream commercial adoption.

Some technical advances may be more influential than others in shaping the journey towards the metaverse. Distributed ledger technology such as blockchain and smart contracts are likely to be pivotal. The adoption of virtual/augmented reality is also important, although access and engagement with virtual environments may still progress through traditional devices such as laptops and mobile phones.

Although the outlook is uncertain, over two thirds of conference delegates expect the metaverse to become a typical channel for various online services within the next 10 years. This could amplify many of the (liability) risks currently associated with the internet, e-commerce and social media. In particular, the metaverse could be especially vulnerable to cyberattacks and associated liability to third parties, including the potential for more extensive privacy breaches. Metaverse users could be prone to unauthorised transfers to third parties of their personal and biometric data and physical harassment through technology like haptic vests that simulate the sensation of being touched.

Litigation is so far sparse and laws around standards of care and legal duties within the metaverse are still developing. Nonetheless, re/insurers need to monitor developments in this area, staying alert to both  existing risks that may transform in the metaverse yet still be covered by traditional property and liability policies, as well as new risks.

Anthony Sebok, Joseph and Sadie Danciger Chair in Law & Co-Director, Jacob Burns Center for Ethics in the Practice of Law, Cardozo Law School; Susanne Augenhofer, Professor of Law, University of Innsbruck; Fiona Chaney, Senior Investment Manager & Legal Counsel, Omni Bridgeway; Harold H. Kim, Chief Legal Officer, U.S. Chamber of Commerce; Jane Mandigo, Senior Vice President, Swiss Re

Third-party litigation funding (TPLF) has a long pedigree. Lawyer-directed funding, in which a funder finances a law firm's contingency cases, can be distinguished from client-directed funding, where a funder transacts with a claim holder rather than counsel. The latter can be further broken down into finance for personal injury plaintiffs (as well as other individual consumer cases) and financial backing for commercial cases, typically involving disputes between firms or other organisations.

TPLF has grown rapidly in recent years and many commentators project that the market will continue to expand significantly. In principle, this can work to widen access to justice for victims, permitting individuals to pursue litigation and retain legal representation they otherwise could not afford. At the same time, suspicions have been raised, especially within the re/insurance industry, that TPLF promotes frivolous and/or vindictive litigation that unduly influences settlement dynamics and otherwise allows intermeddling by non-parties in the conduct of litigation.

There is no consensus on whether TPLF is positive for society. This is not helped by the lack of transparency over the degree of control that funders exercise. Representatives of the TPLF industry strongly maintain that they do not interfere in litigation strategy – saying that practically, they have little time to do so – and funders often expressly disclaim any control rights. In addition, the non-recourse nature of their finance means they have no incentive to support unmeritorious cases.

Enhanced disclosure of funders’ involvement might help allay fears among re/insurers and demonstrate that TPLF genuinely helps to level the playing field between plaintiff and defendant. A number of policymakers in different jurisdictions are considering how such information could be shared, including how to navigate important issues like protecting lawyer-client confidentiality.