Summary:
The risk of being involved in complex or novel litigation is increasing, and the ensuing reputational damage can be significant for both the individual directors/officers and the organisation.
Scenario example: High-profile court case:
The Federal court dismissed an Indigenous community’s challenge against a large energy and resource organisation’s gas pipeline and allowed the organisation to continue its gas works project.
In a bold and uncommon manoeuvre, the energy organisation is pursuing the environmental groups that supported the traditional owners’ claims and is seeking to recover its legal costs from them instead of the Indigenous community claimants.
The energy organisation successfully obtained subpoenas against three of the groups because these organisations stood to gain ‘political or ideological objectives’.
Importantly, these charities were not plaintiffs in the legal action, and they were not witnesses in court.
Allegedly the only involvement these organisations had with the litigation was their provision of moral support using social media and celebratory remarks in their annual reports.
The risk of climate campaigning:
From an insurance perspective, the legal precedent set by the successful subpoenas showcases the heightened risk exposure for directors and officers of environmental groups, non-government organisations (NGOs), and not-for-profit (NFPs) that provide moral support to traditional owners of lands and waterways involved in litigation and, more broadly, to any litigated social justice or environmental causes.
Crucially, the support does not need to be financial. It can merely be a social media post. Even championing the conduct of such plaintiffs can be risky.
From the perspective of Management Liability or D&O Insurance, Professional Indemnity and Media Liability Insurance, given the high stakes, any director or officer involved in high-profile litigation will face significant defence costs not to mention potential settlements or fines and penalties.
While not every type of fine or penalty is insurable at law, every allegation must be defended and even innocent conduct must be defended.
Such defence costs are the most common payment for insurance policies such as Management Liability or D&O, Professional Indemnity, and Media Liability.
Defence costs can and often outweigh the amounts of any settlements and effective defence cost insurance is a key shield to protect reputational risks.
The uncertainty of how new and developing areas of legal liability will play out only adds to the risks and potential costs of such defences.
Earlier this year, UK research from the Grantham Research Institute on Climate Change and the Environment (opens a new window) published its sixth annual report on global trends in climate change litigation.
Approximately 230 new climate cases were filed in 2023.
2023 saw an increase in greenwashing cases, with a success rate of over 70%.
Putting the above mentioned legal suit in a broader context, the Institute noted that anti-ESG cases are increasing, particularly in the USA.
As the above-mentioned legal suit attests, given Australia’s vast natural resources, the risk landscape for Australian directors and officers may increase if they support plaintiffs in environmental litigation.
The emergence of more innovative claims will inspire potential claimants and encourage traditional landowners to take legal action.
It is uncertain whether resource and energy companies will also attempt to recover legal costs from NGOs and NFPs supporting these types of environmental campaigns.
However, it is reasonable to assume that they will seek out legal defences to ensure stakeholder satisfaction and maintain profitability, with the above mentioned case serving as a catalyst for this.
D&O considerations for NGOs and NFPs:
Litigation related to environmental concerns often involves establishing new duties of care, as our legal systems have not historically addressed such issues.
Efforts to create new duties and expand the scope of existing ones are becoming reasonably well entrenched and only likely to continue.
Multiple cases in Australia exemplify a global trend of litigant groups pursuing claims to establish new duties of care in the sphere of environment and social justice.
To reduce the risk of claims or costs orders against NGOs and NFPs that support public interest litigation, these organisations need to ensure:
Comprehensive Management Liability or D&O, Professional Indemnity, and Media Liability policies that offer broad and flexible coverage are in place. The cover for insurable fines and penalties amongst these insurances should also be assessed.
Robust risk management.
‘Stress test’ the organisations’ Management Liability or D&O insurance policies along with the director’s deeds of indemnity. The interaction, or lack thereof, between these legal contracts can significantly impact the protection available for managerial or corporate governance conduct.
This is especially crucial for directors and officers, as the cost to defend environmental or social just claims or novel legal liability is usually catastrophic and can cripple the company balance sheet which can also expose directors to their unlimited personal liability at law.
It may be sometimes assumed that directors or officers of NGOs and NFPs are held to a lower standard than directors and officers of large corporations.
This is simply not true. Under the Corporations Law, all directors and officers are held to the same duties and responsibilities and they all have unlimited personal liability at law.
This is why a best-in-class Management Liability and corporate insurance program is essential. These insurances are not mandated by the Insurance Contracts Act 1984 Cth, so there is no ‘minimum’ level of cover that all insurers are required to provide.
During soft markets, insurers are incentivised to carve out cover to keep premiums cheap, which can lead to dire consequences in a catastrophic loss claim.
Looking ahead; insurers' reaction:
Some insurers are now launching insurance products focused on environmental, social, and governance issues, such as Shareholder Activist Protection and specific products for non-executive directors. It is increasingly important to speak with a specialist broker with global capability but a niche and specialised focus in these types of insurance to ensure that your Management Liability or D&O, Professional Indemnity, and Media Liability insurances stay ahead of the curve at all times.
Contents of this publication are provided for general information only. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. Lockton arranges the insurance and is not the insurer. Any insurance cover is subject to the terms, conditions and exclusions of the policy. For full details refer to the specific policy wordings and/or Product Disclosure Statements available from Lockton on request.
