Insurers respond to the Law Society guidance on climate change

The Law Society has recently released new guidance addressing the impact that climate change presents to the delivery of legal services (opens a new window). This includes the impact on solicitors’ legal duties, which require them to disclose to a client any risks of which they happen to become aware, where those risks may impact the client’s interests. Crucially, the guidance establishes why it may not be possible to simply exclude climate change concerns from the scope of duties owed and competencies expected of a lawyer.

Following its release, Lockton has canvassed opinion from insurers as to the expected impact on solicitors’ risk exposures, and the implications for solicitors’ professional indemnity insurance (PII).

How significant is the Law Society guidance?

From a PII perspective, insurers have been touching on evolving climate change concerns indirectly over the past few years, but increasingly so more recently. However, while climate change does factor into insurer thinking from a macro level perspective, the SRA guidance itself does not break significant new ground. Rather, the main duties it imposes on firms can be summarised as follows, none of which are new:

  1. Duty to warn clients

  2. Keeping up with a changing regulatory landscape

  3. Being mindful when drafting retainers’

  4. Everyone being entitled to legal representation but an ongoing requirement to report unlawful behaviour per professional rules of conduct

  5. Noting that solicitors shouldn’t advise on topics with which they aren’t familiar

At the corporate level, the majority of insurers already have guidance in place in connection with climate strategy. While this tends to be aimed more towards activities directly related to climate change, such as oil exploits, insurers do remain mindful of indirect exposures, including to professional indemnity.

As climate change regulation increasingly moves from optional to mandatory, it will inevitably become a necessary focus for insurers.

Does the climate change guidance create new exposures?

Despite the above, the Law Society guidance does create exposure across the majority of lawyers’ portfolios, albeit to differing degrees. For smaller, traditional ‘high-street’ practices advising the public, climate change is likely to be lower on their agenda, with exposure probably limited to house purchases. Instead, it is larger firms providing commercial services and business advice with whom most of the exposure will sit.

As with tax, which has caused various issues for law firms over the years (e.g. failure to consider), climate change and wider ESG implications are so intertwined with many transactions that it is difficult to envisage how they might be extricated. Therefore, although climate change concerns are unlikely to be central to firms’ advice, they cannot be ignored or fully excluded. Clients’ objectives with regards to the climate will need to be understood as part of KYC checks, to a similar extent as commercials and financials. Recognising and flagging this for attention by the client and their other advisers will be a necessary competence in its own right, so a minimum level of awareness around climate change concerns will be needed.

Beyond legislative and regulatory concerns, commercial lawyers are expected to be commercially astute and not just to know the law. This may add an extra dimension to potential liability. Some attempts at carving out that liability might be made or responsibilities excluded where specialist advisers or contractors are appointed.

For firms choosing to offer specific advice on climate change concerns, it will be important to build up competence and product offerings accordingly as part of that intent. For most firms, however, change won’t be intentional, with advice around climate change creeping into transactions without lawyers being fully prepared. This will probably be a cause for concern.

Other potential risks arising from the guidance include:

  • Risk for firms if they are involved in providing content, drafting, or checking the legality of claims and disclosures made, which are then deemed to be green washing or impact washing.

  • Pressure from some clients not to act for certain types of businesses, or businesses involved in certain activities, which could increase conflict scenarios. This may also be driven internally by law firm’s own climate change commitments. Firms may be

    concerned about making judgements around their clients’ business activities beyond the clearer-cut sanctions, anti-money laundering (AML), and crime vetting checks.

  • Management Liability exposure – if information about stated climate or ESG objectives and/or metrics is not accurate, either due to errors, or due to pressure to achieve certain targets as part of a firms’ Scope 3 monitoring. Although only listed and larger corporates are currently required to comply with this legislation, trickle-down impacts may pressure smaller firms of any type, including professions, into making promises they can’t keep, or stating claims that aren’t true. This poses a risk of greenwashing.

  • With regards to house purchases, claims may arise where the asset value and/or its condition is impacted by climate-related issues that could/should have been foreseen. Many of these points are already addressed in terms of flood searches, but wider issues about the suitability of properties in a changing climate, or to meet future climate-driven regulations, would probably come down to survey issues. However, as has been seen in the past, surveyor negligence has been closely linked to claims against solicitors, and so failings in survey reports do not necessarily exonerate solicitors from blame.

  • Scope 1, 2 & 3 exposures are explained in the guide (Part 1), but Scope 4 ‘Advised Emissions’ will be new territory for most firms, and require skills or capacity lacking in many firms.

When claims arise in future, there will always be the question as to what point it would have been reasonable for clients to expect lawyers to start advising on the climate implications of their transactions. The answer to this remains to be seen. It could be that the issuing of the Law Society Guidance is treated as a critical date, or it might be argued that awareness levels were significantly raised prior to its release (for instance, following COP26 in Oct 2021), and that advice should have started at that point.

How will climate change concerns affect the renewal process?

Section 4.5 of the guidance suggests that PII insurers may ultimately require climate-specific information from all firms in order to offer terms. For now, however, it remains to be seen whether this is the case.

Primarily, insurers will want to be confident that their insureds have the competence and experience to be able to provide appropriate legal advice to their clients where it’s offered, particularly those which hold themselves out as experts in this evolving area. However, the submission process is already lengthy, so exhaustive information in this regard will be counterproductive rather than useful. As with all areas, investigations will be connected to an insured’s exposure, and not simply because certain activities relate to climate change.

As part of the renewal process, sample questions of investigation are likely to encompass the following areas, although these will no doubt evolve over time in response to the claims picture:

  • Practice area – if a firm is offering advice on climate change as part of their service suite, then what are the systems, processes, and risk management measures in place to undertake this work? What KYC/customer due diligence are firms undertaking in this regard? What type of advice is being given? What additional checks are being undertaken in relation to the veracity of information received? What caveats/disclaimers are in place to protect firms in relation to the information/comments given by clients? Do the terms of business/retainer letters include additional considerations, particularly where other experts are involved?

  • Client selection – what clients/type of clients are firms advising in relation to climate risk?

  • Ethics Committee – do firms have an established Ethics Committee in place? What thresholds are in place? What are the dos and don’ts when it comes to client selection and ongoing advice? What are the parameters in which firms will cease to act?

  • Limits of liability – what caps will firms put in place? What additional considerations are in place in the event that clients request to increase above the standard cap?

For further information, please visit our Lockton for Solicitors (opens a new window) page, or contact:

Steve Holland, Senior Vice President

T:+44 (0)20 7933 2444

E: steve.holland@lockton.com

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