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Global warming: Increasing liability for directors and officers

Corporations increasingly obligated to disclose any environmental impact of business

Related Special Reports

As federal and state authorities continue to strengthen mandates regarding environmental issues, many corporations find themselves increasingly obligated to provide disclosures on the environmental impact and related financial impact of their business.

Under Regulation S-K of the Securities Act of 1933, Securities Exchange Act of 1934 and Energy Policy and Conservation Act of 1975 with particular emphasis on Items 101 and 303, public companies are required to disclose current and anticipated material effects of compliance with environmental regulations. Item 303 is particularly concerning, as it requires public companies to describe any known trends or uncertainties that may have a material favorable or unfavorable impact on net sales, revenue or income from continuing operations.

The issue

Based on these disclosure obligations, corporate executives of many public companies are facing the increased challenge of communicating the impact of global climate change on their businesses and operations.

As a result, it is safe to assume that the prospect of certain companies failing to disclose or inadequately disclosing their findings could have a negative impact on their businesses (i.e. stock drop, balance sheet impairment, loss of sales, etc.). Failure to properly manage or disclose practices could lead to regulatory violations and potential litigation implicating the corporation and its executives, and thus lead to shareholder litigation.

Historically, corporations and boards have relied on Directors and Officers Liability (D&O) insurance policies to defend against shareholder litigation.

A variety of environment-related violations may trigger coverage under a D&O policy. Hefty fines and violations may cause fluctuations in stock prices and irreparable reputation damage. Should litigation arise implicating directors and officers, the language of the applicable D&O policy could have an enormous impact on whether the policy will respond to these types of claims.

The implication

D&O policies typically contain a myriad of policy terms and exclusions that could come into play, including but not limited to the pollution exclusion, bodily injury and property damage exclusion, personal injury exclusion, personal conduct exclusions, severability, rescission, subrogation rights and allocation.

The cure

As exposures related to global climate change increase, the D&O policy should be tailored to perform when called upon. Express language amending the terms and exclusions referenced above are negotiable in the insurance marketplace and close attention should be paid as environmental issues continue to evolve.

Doscher is director of executive risk for Barney & Barney.

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