How is environmental regulation reshaping and changing D&O and W&I insurance?
Environmental regulation is no longer simply a compliance matter; it has become a central risk in corporate governance. As laws evolve in response to climate change, biodiversity loss, and sustainability targets; insurers must carefully assess the risks associated with non-compliance and breaches of warranties. In the UK, USA and Europe, regulatory bodies such as the FCA, PRA, and the government have strengthened enforcement, resulting in increased fines and class action lawsuits.
Since the introduction of the Companies Act 2006, directors can be held personally liable for the environmental impact of their company’s operation marking a significant shift in accountability. Therefore, insurers must adjust their underwriting practices through tightening policy terms and raising premiums to reflect emerging exposures. This article explores how evolving environmental regulation is reshaping underwriting decisions and driving claims trends in Directors & Officers (D&O) and Warranty & Indemnity (W&I) insurance.
Rise of Environmental Regulation in the UK
Despite decades of global effort, projections for climate-change show little improvement. One aproach to propel these efforts, a key point of discussion during the recent Conference of Parties (COP29), has been tightening regulations so as to clear a pathway to net zero by 2050.
In the UK, the Task Force on Climate-related Financial Disclosures (TCFD) has introduced more rigorous and mandatory climate reporting standards. These bodies now require large companies to disclose how they govern climate risks and address unsustainable practices with 1,300 companies now reporting directly to the FRC (per Marsh). Importantly, loopholes previously used to manipulate or obscure climate data have been removed. As a result, more companies are being reported to regulatory bodies, which has led to an increase in class action lawsuits and significant financial penalties. In addition to disclosure requirements, UK governing bodies have passed several key environmental laws, including the Environment Act 2021 and the Biodiversity Net Gain Act 2024. These acts impose specific and enforceable obligations on corporate directors, such as integrating nature recovery into development plans and meeting minimum environmental standards.
Therefore, overall, this will create new liabilities and reputational risks through changes and further enforcement of climate regulations which have been shown recently shown when an ‘activist shareholder’ sought to bring a derivative claim against eleven which whilst unsuccessful generated liability for director in the form of legal defence costs of Shell’s directors in 2023, creating legal fees which the directors were obliged to pay (Shepherd, J. 2023).
Impact on Directors and Officers insurance
The recent environmental regulation changes, discussed above, are significantly impacting directors and officers (D&O) insurance. Stricter regulation is driving a sharp rise in climate-related litigation, with activist shareholders and NGOs filing claims alleging breaches of fiduciary duty. In 2023 alone, over 230 climate cases were filed against governments and companies globally, with more than 70% decided in favour of the shareholders or claimants (Grantham Research Institute, 2024).
The FCA and PRA also impose personal accountability on board members for failures in governance and transparency. In 2021, a federal judge issued a record-breaking penalty against ExxonMobil of $14.25 million in a citizen-initiated Clean Air Act lawsuit, ordered to be paid by the company’s directors in instalments. Due to the escalation in climate cases, the insurance market will likely respond by tightening policy terms to guard against unforeseen risks and limit liability exposure (Clyde, 2024). Although premiums are currently at relatively low levels, the risks associated with insuring directors continues to mount as environmental regulation evolves. As a result, D&O insurers must prepare for heightened risk exposure by adjusting premiums upward in response to ongoing regulatory developments in the European Union and UK (Clyde, 2024).
Therefore, for underwriters operating within the D&O insurance market, it is imperative to maintain strong ESG oversight to ensure the companies they are insuring are effectively mitigating these risks.
Impact on Warranties and Indemnity insurance
In the evolving landscape of mergers and acquisitions, environmental sustainability and corporate accountability are central to how deals are priced and assessed within the insurance market. As climate-related risks grow and ESG (Environmental, Social, and Governance) standards rise, Warranty & Indemnity (W&I) insurance is adapting to a more complex risk environment.
Due to regulatory frameworks expanding and evolving, W&I underwriters are facing increased uncertainty around compliance-related risks. This has led to more cautious underwriting, with insurers scrutinising environmental due diligence more closely and often excluding liabilities tied to newly introduced or rapidly changing laws. Further, another issue within the broader W&I insurance market has been the increased numbers of failed acquisitions due to unsustainable practices. A survey conducted by KPMG found that 43% of US investors have cancelled deals due to material sustainability findings and in Europe 66% of dealmakers reported deal cancellations due to non-compliance with ESG. In turn, this data shows that the changes to environmental regulation have directly impacted deal volume, which in turn means less business and revenue for the W&I insurance industry as, simply, there are fewer deals to cover.
Another major issue within the W&I insurance industry has been the impact of greenwashing on increasing claims frequency. Greenwashing occurs when a company exaggerates or falsifies its environmental credentials to appear more sustainable or compliant with ESG standards. This practice can have significant legal implications for companies that inherit such misrepresentation. Due to the increased number of companies being accused of greenwashing to misinform consumers; buyers are demanding stronger warranties around environmental and sustainability risks. In turn, the heightened focus on ESG-related warranties increases the likelihood that a misrepresentation will be identified post-acquisition.
Consequently, it leads to a rise in warranty breaches, triggering more claims against W&I policies. As insurers face more claims related to greenwashing, they are faced with increased financial exposures, ultimately eroding profitability within the W&I insurance market.
Conclusion
Looking ahead, UK climate regulation will likely intensify, with a focus on preventing greenwashing and developing legislation that can more directly penalise non-compliant companies. This shift means that businesses which genuinely prioritise sustainability present a lower long-term risk, not just for M&A transactions, but also for insurance providers. As a result, offering favourable terms and customised coverage to these businesses is a strategic and profitable choice. By aligning underwriting decisions with sustainability, the insurance industry has the power to actively support climate solutions rather than passively contributing to the problem.