This is the first of a two-part update on climate change risk management and how it might create business risks - ranging from supply chain interruptions to third-party claims for economic damages caused by unusual weather events. In part one, we discuss how climate change may create legal liabilities. Part two will discuss the use of insurance to manage these risks.

Introduction

The potential impact of global climate change has generated proposals for new U.S., Canadian and international laws and regulations, and it is likely that North American companies soon will incur costs to reduce their greenhouse gas (GHG) emissions. Weather conditions, rising sea levels and changing snow and rainfall patterns may also affect operations, supply chains and profitability. Corporations may face investor claims for losses blamed on company operations, and directors and officers may face similar claims for failure to adequately anticipate the effects of climate change or greenhouse gas regulation on company prospects.

Senate Climate Change Legislation

In a related climate change matter, on May 10, 2010, U.S. Senators John Kerry (D. Mass.) and Joseph Lieberman (I. Conn.) released their version of a climate change/energy bill for Senate consideration. Their bill is similar in many respects to the American Clean Energy and Security Act (ACES), H.R. 2454, passed by the House in June 2009.

The Kerry-Lieberman bill would create a federal cap-and-trade program that would reduce U.S. GHG emissions 17% by 2020 and 80% by 2050. Unlike ACES, it would create a federal Renewable Portfolio Standard (a requirement imposed on electric utilities to use electricity generated from renewable resources for a specified portion of the electricity supplied to their customers). It pre-empts state GHG cap-and-trade programs that have been developed to facilitate utility compliance with state GHG control programs (ACES would pre-empt such state programs from 2012 through 2016 only). It also stops EPA regulation of GHG emissions as pollutants causing climate change. Electric utilities would start compliance in 2013 (one year later than under ACES). Large industrial source compliance would not start until 2016. In the early years, GHG allowances would be distributed free to utility emitters to reduce rate increases to customers. It is too early to predict whether ACES or the Kerry-Lieberman bill will become law or even be considered by the Senate before the November U.S. elections.

Property Damage, Business Continuity and Personal Injury

Climate change could exacerbate the physical impact of extreme weather events, alter rain and drought patterns and raise sea levels. These events can cause sudden and material damage to business assets, interrupt business operations directly or disrupt key elements in transportation or support activities. For agriculture, hospitality, energy or similar climate-dependent businesses, changes in climate, sea levels and rain and snowfall patterns can materially impair the value of long-term assets.

Prudent risk management suggests companies should consider ways to anticipate the effect of long-term climate trends.

Third-Party Claims

Lawsuits for damages blamed on climate change could create legal liability for some companies. Plaintiffs have brought lawsuits alleging that a company's GHG emissions contributed to extreme weather events like Hurricane Katrina, which directly or indirectly resulted in property damage or bodily injury. Claimants rely on the common-law nuisance theory that the GHG emissions are a "public nuisance" causing property damage or injury. Companies whose operations emit large amounts of GHG, e.g., fossil-fuel-based energy companies, investor-owned utilities, power generators and large industrial facilities, may be particularly exposed to multiple large claims and may have to bear defense costs, including defense of potential class actions, even against claims that ultimately fail. Some lower courts have dismissed such cases because plaintiffs lacked "standing" to sue or because their claims raised "political" questions unsuited to judicial resolution. However, the Second Circuit Court of Appeals reversed a lower court's dismissal of one such suit in Connecticut v. American Electric Power, finding it appropriate for district court consideration. It is possible more of these cases will be brought, particularly as long as no comprehensive federal climate change legislation exists.

Canadian courts have not yet been asked to consider similar lawsuits. But some Canadian companies may be exposed to the same litigation risk if such claims become more common, even if only in U.S. courts.

GHG Tort Litigation

In Connecticut v. American Electric Power, several states, New York City and three land trusts sued six electric power companies that own and operate power plants. The suit was filed to abate defendants' ongoing contributions of GHGs to the nuisance of global warming. Plaintiffs sought to permanently enjoin each defendant to abate that nuisance by capping carbon dioxide emissions and by reducing emissions by a specified percentage each year.

In Native Village of Kivalina and City of Kivalina v. Exxon Mobil Corp., plaintiff Native Village of Kivalina is the governing body of an Alaskan Inupiat Eskimo village that has approximately 400 people who reside in the City of Kivalina. Plaintiffs allege that, as a result of global warming, the Arctic Sea ice that protects their coast from storms has diminished, and the resulting erosion will require the relocation of the town's residents at a cost ranging from $95 million to $400 million. Defendants are 24 oil, energy and utility companies from which plaintiffs' seek damages.

In Ned Comer v. Murphy Oil, USA, residents and owners of property along the Mississippi Gulf filed a class action suit against multiple defendants alleging that defendants' operation of energy, fossil fuels and chemical industries in the United States caused the emission of GHGs that contributed to global warming that, in turn, caused a rise in sea levels and added to the ferocity of Hurricane Katrina, which destroyed plaintiffs' property and public property. In Comer, a panel of Fifth Circuit Court of Appeals judges reversed a lower court's dismissal of the case. However, during reconsideration of the case by an en banc Fifth Circuit court, the en banc court lost its quorum, so it could not actually re-hear the appeal. Due to this procedural problem, the circuit court appears to have reinstated the lower court's judgment in the case. The Fifth Circuit recognized the right of the parties to petition to the U.S. Supreme Court for review.

Capital Markets and Securities Risks

Public companies face exposure to legal liability for investor losses blamed on failure to anticipate or disclose climate change risks. Public company directors, officers and risk managers should be aware of such exposures.

On February 2, 2010, the U.S. Securities and Exchange Commission (SEC) issued interpretive guidance for publicly traded companies related to climate change disclosure. See Perkins Coie update on the Interpretative Guidance ( http://www.perkinscoie.com/news/pubs_detail.aspx?publication=2473&op=updates). The guidance advises publicly traded companies on how they should apply existing disclosure requirements to climate change matters, including regulatory, legislative and business developments related to climate change, as well as physical changes such as weather and availability of resources, any of which could have a direct or indirect material effect on a company's finances and operations.

Similar to the U.S., in Canada, public companies are required to disclose material risks, including those involving climate change. Later this year, the Ontario Securities Commission (OSC) intends to provide further guidance to publicly traded companies on environmental matters and on how to meet this continuous disclosure obligation in reference to environmental issues. It is likely that the OSC environmental disclosure guidance will include guidance on climate change disclosures. The OSC is a provincial regulator. However, due to the relative importance of Ontario in Canadian capital markets, any OSC guidance will likely affect all Canadian public companies in Canada. It is also likely that the SEC's detailed guidelines will influence the OSC, as well as influence what Canadian investors expect public companies to disclose in respect of climate change-related risks.

Each company must assess its own business and the impact of climate change and GHG regulation on it and, given the relatively rapid developments in potential climate change and GHG-related risks, companies should regularly reassess their analysis and risk reporting. What is not material now could become material later.

Finally, shareholders' resolutions for disclosure of management's responses to climate change are becoming more frequent in proxy statements. Ninety-five such resolutions were filed in the 2010 proxy season alone (http://www.ceres.org/page.aspx?pid=1221).

Conclusion and Insurance

Senior executives and corporate risk managers must increasingly consider the potential risks from climate change on corporate operations. Our lawyers can provide additional detailed information on climate change risks, litigation and disclosure obligations. Businesses have a number of internal tools at their disposal to address such risks, but internal resources may not always be the best solution. Insurance, including typical insurance products, can be an important element in managing these risks. Our next update will examine to what extent insurance products can help companies manage climate change-related risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.