CLIENT ALERT: Shell’s Board of Directors Sued in Climate Change Suit

Eleven directors serving on Shell’s board have been named in a derivative lawsuit filed in the UK alleging mismanagement of climate risk, representing a breach of duties under the UK Companies Act.  The claim was brought by environmental law firm ClientEarth, a shareholder of Shell, with support by several other large institutional investors. Shell has denied the allegations.

Oil major: Shell board of directors sued over climate strategy (cnbc.com)

This is not the first lawsuit brought by ClientEarth alleging climate change concerns.  Their website notes actions against TotalEnergies, the UK Government, the EU Commission, and Dutch airline KLM.  In the UK, sixteen climate-related shareholder resolutions were tabled in 2021, compared with just five the year before.  In the US, major oil & gas producers (including Shell, BP, Chevron and ExxonMobil) have been targeted in similar climate change lawsuits filed in California and New Jersey alleging that production and marketing of fossil fuels are contributing to global warming. In 2019, Exxon prevailed in a case by the New York Attorney General’s office alleging that they misled investors about the toll that climate related regulations could take on its business.

The current claim against Shell is unique in that this is the first time a climate change related suit is brought by shareholders as well as the first time individual directors or officers are named as defendants. In addition to increased litigation, there has been an increase in regulatory scrutiny, including the SEC’s proposed rule that would require public companies to provide detailed reporting of climate related risks, emissions and net zero transition plans.

How does your D&O policy respond?

Most D&O policies are meant to respond to these type of claims and there should be nothing in the policy that precludes coverage for climate related allegations. Even pollution exclusions have largely fallen off D&O policies for publicly-traded insureds, replaced by clean-up cost exclusions. CAC Specialty recommends Insureds review their policy to understand the impact of the following coverage grants:

• Derivative investigation costs coverage may be triggered in the event of a shareholder derivative matter like the Shell litigation. This would typically provide a sublimit for costs of outside counsel assistance in investigating the merits of plaintiff derivative demands (the actual trigger varies by policy / insurer).
• Claim vs Pre-Claim: If your company is a named defendant in a broad industry claim (vs. a targeted shareholder derivative claim), consider whether the matter triggers your D&O program under any PreClaim Inquiry type of coverage and the pros and cons of reporting it at that stage.
• Crisis Fund Coverage may be triggered, and sublimited coverage may extend to costs incurred by the insured to hire a crisis management firm or attorneys as a result of a negative news event, sometimes including activist actions.
• Entity Investigation Coverage: Many policies also include varying degrees of coverage for investigations of the company itself. Understanding when and how coverage extends to the entity is important when considering the full potential impact of claims on the D&O program.

For more information, please reach out to your CAC Specialty contact.