A directors and officers liability (D&O) insurance policy can provide some level of coverage for climate change exposures, but cover is typically not comprehensive and gaps may exist, especially given climate change is a relatively new and evolving risk in the context of insurance. In recent years, climate change has evolved to become more than an ethical environmental issue. It has become a matter of corporate governance, with regulators both locally and abroad increasing oversight and pressure on greater corporate disclosure of climate change risks.
In Australia, the arrival of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 marked a significant milestone in the Australian Government’s commitment to strengthen the regulatory framework for financial market infrastructure, and driving for quality and consistency in climate-related financial disclosures to help investors make informed decisions.
The legislation first came into effect on 1 January 2025 and required Australian organisations to produce comprehensive climate-related disclosures as part of their annual financial reporting. We are now well into phase 2 of the legislation rollout, with Group 2’s mandatory reporting period and requirements kicking into effect from 1 July 2026. (For key dates and implications of the legislation, read our article Australia’s mandatory climate-related disclosures legislation.)
Tighter regulations alongside growing public awareness and scrutiny have led to increased exposures for organisations and their directors and officers as litigation related to climate change exposures continues to pick up pace in recent years.
This article explores potential protection offered under a D&O insurance policy as well as potential gaps in cover for climate change exposures against the changing landscape.
The breadth of D&O insurance cover
While D&O insurance policies are designed to protect the personal assets of directors and officers, they might not always respond to a climate change risk in the manner expected.
In part, the issue stems from the fact that D&O insurance was established long before climate change emerged on the global political and economic agendas. Consequently, climate change risks do not fit neatly within the scope of existing insurance policy definitions and exclusions, leading to potential gaps in cover.
A typical D&O policy covers directors and officers for all acts, errors or omissions arising from their conduct as directors and could therefore include matters relating to climate change risks, even if not explicitly stated within the policy wording.
If the D&O policy contains ‘company securities cover’, coverage may also be available for the entity itself in the event of shareholder litigation. This is a real risk, particularly for publicly listed companies as share prices have been known to plummet following adverse news on climate change exposures.
In most D&O policies, critical definitions such as ‘claim’, ‘loss’ and ‘wrongful acts’ are broadly defined so far as coverage for directors and officers is concerned.
Potential gaps in D&O cover for climate risk
Pollution exclusion
Most D&O policies contain a pollution exclusion. It is important for directors to have a sound understanding of the scope of such an exclusion. Some exclusions are worded in absolute terms, e.g. to broadly exclude claims ‘arising out of, based upon or attributable to or in any way involving directly or indirectly Pollutants’. Other exclusions may use narrower language to only exclude claims ‘for’ pollution.
The rationale behind a pollution exclusion under the D&O policy is that pollution-related claims are typically addressed by other insurance policies, e.g. property, public liability, environmental liability insurances to name a few.
When applying this exclusion to climate change risks, the issue becomes about determining whether greenhouse gases are considered ‘pollutants’. This is defined in most D&O policies as any solids, liquids, gaseous or thermal irritant or contaminant.
While the debate continues as to whether carbon dioxide (along with other greenhouse emissions) falls under the classification of ‘pollutant’, some D&O policies remove the ambiguity by expressly including greenhouse gases in their definition of pollutant.
D&O policies that feature a pollution exclusion would typically also contain write-backs to the exclusion or provide coverage extensions for defence costs (typically sub-limited) and shareholder pollution claims (some are limited to derivative claims only).
Climate change exclusion
At the time of writing, although a climate change exclusion can be found in some policies, it is not common. It is possible that climate change exclusions may be introduced by insurers more broadly in the future under D&O policies should boards fail to demonstrate a prudent and diligent approach to climate risk governance in their proposals for insurance.
Geographic coverage limitations
Given some local insurers prefer to work within jurisdictions they are familiar with, some D&O policies limit coverage to within Australian and New Zealand jurisdictions or territories only. This raises coverage issues for climate change exposures, which often have global implications.
Other exclusions
There are several other D&O policy exclusions that may restrict cover for climate change exposures. Some examples include:
- D&O policies can contain a bodily injury and property damage exclusion on the basis that such claims are covered under public and products liability insurance policies or workers’ compensation insurance. If worded in broader terms (e.g. ‘arising out of,’ ‘based upon,’ etc.), the exclusion will likely capture any climate change event that leads to property damage, along with mental and emotional distress caused by associated pollution.
- Some D&O policies specifically exclude cover for fines and penalties. This exclusion will effectively limit any cover that a D&O policy may provide following an adverse regulatory finding into a breach concerning climate change.
- Many fraud and dishonesty exclusions deny claims for loss resulting from the wilful violation or breach of any law, regulation or by-law anywhere in the world, as well as the breach of duty imposed by any such law, regulation or by-law.
- Most D&O policies exclude any matters policyholders were aware of prior to entering into the policy. This exclusion may also give rise to non-disclosures issues.
Although not explicitly related to climate risks, these common exclusions could potentially limit any cover afforded under a D&O policy for climate change-related events or disclosures.
Third party vs first party cover
D&O policies principally cover ‘third party losses,’ which relate to losses sustained by a third party (e.g. a customer, client or supplier) as a result of a director’s wrongful acts, errors or omissions. Loss is typically defined to include damages, judgments, settlements and other associated expenses such as defence costs, claimant’s costs and crisis management costs.
Notably, climate change-related risks can result in various ‘first party losses,' which are direct losses sustained by the company. Damage to property, business interruption, lost market value, remediation and clean up expenses are some of the losses sustained directly by a company as a consequence of a climate change risk. Given these are first party losses, these items are typically not covered under a D&O policy.
Regulatory investigations
Tightening regulatory environment
There is increasing regulatory pressure on companies in Australia and abroad to meet their duties and obligations associated with climate change risks in line with the growing body of climate science. ASIC’s Regulatory Guide 280 makes that abundantly clear.
With the introduction of the Treasury Laws Amendment Act, there is increasing obligation for organisations to meet regulatory requirements in climate-related financial disclosures. To help organisations transition through the mandatory reporting requirements, three-year modified liability (referred to as “limited immunity”) will apply to disclosures related to scope 3 emissions, scenario analysis or transition plans, limiting regulatory actions for breaches to the regulator during this initial period. The limited immunity framework aims to prevent claims related to "protected statements" unless they are brought by ASIC or are criminal in nature.1 I.e. During the first three years, the legislation intends to exclude claims such as securities class actions or third party claims alleging greenwashing in respect of an entity's disclosure statements. After the three years, standard liabilities under the Corporations Act and the Australian Securities and Investments Commission Act will apply.
The legislation also requires a directors’ declaration to accompany climate disclosure statements. The directors' declaration will also be subject to a lower standard for the first three years, which only requires a statement in relation to the reporting entity taking reasonable steps to ensure the climate statements are in accordance with the Corporations Act and the applicable AASB standards.2
Scope of cover for regulatory investigations
Although not the intention of the legislation, there is a possibility that the climate disclosures made by companies could potentially lead to a regulatory investigation. Fortunately, most D&O policies include some form of cover for legal costs incurred by directors or officers in responding to and attending an investigation, albeit policy wordings, hence the scope of cover, vary amongst insurers. The more desirable D&O policies provide this cover to the full policy limit, contain an advance payment promise and apply even before the allegation of a wrongful act, error or omission.
In a worst-case scenario, the consequences of any type of regulatory breach for directors and officers or the company can include criminal prosecutions, fines and penalties, disqualification or imprisonment, follow-on civil proceedings, significant legal costs and expenses, damage to reputation and brand and disruption to business.
If a prosecution is commenced by a regulator following an investigation, a claim will likely trigger under a D&O policy as criminal proceedings are typically covered. However, cover for prosecutions against a company itself is not expressly covered.
Cover would also be typically available for any civil penalty proceedings that may be instigated by a regulator against a director for statutory breaches following an investigation.
Most D&O policies will provide some cover for costs incurred by directors in defending disqualification orders.
The broader D&O policies will cover:
- Reasonable legal costs incurred to bring legal proceedings to overturn orders disqualifying a director from managing a corporation,
- Reasonable costs and charges in hiring a public relations firm to mitigate the effects of any published negative statements,
- Fines and penalties,
- Preparing formal notifications to regulatory bodies in the event of an actual or suspected material breach of a company’s legal duty; and
- Internal investigations requested by a regulator following a company’s formal notifications regarding investigation costs.
For reasons of public policy, all D&O policies exclude matters uninsurable at law so a person may not benefit from his/her own wrongdoing.
Where to from here
The increasing public and regulatory focus on climate change and associated corporate responsibility presents evolving challenges for directors and their companies, with the growing threats of class action lawsuits, significant remediation costs and often irreversible brand damage at both the corporate and individual levels.
While a D&O policy provides some coverage for climate change exposures, it does not necessarily respond to all related losses and liabilities. Directors and officers should carefully analyse their own risk profile and review their insurance coverage to ensure their D&O program is structured to meet their specific needs, combined with appropriate corporate governance and risk management practices.
Navigating the complexities of the new climate reporting requirements can be daunting. Marsh is here to support you in your transition journey, helping you to build internal capabilities and a roadmap to compliance.
If you would like to discuss your D&O cover and exposures, or would like more critical insights that can help inform your climate reporting requirements as well as address your immediate climate risk concerns, please reach out to a Marsh representative.
