Insuring against climate and technology risks for mining companies and directors

Sandra Sithole, partner, Webber Wentzel

To cover any losses related to cyber and climate change disasters, mining companies should be holding sufficient directors & officers (D&O) insurance.

Climate change risks

Directors' obligation to exercise due skill, care and diligence in the performance of their fiduciary duties is increasingly giving rise to personal liability for climate change-related losses.

Globally, a failure to address climate change has been identified as the top risk in terms of global impact. These issues topped the agenda at the recent Davos gathering.

According to PwC's annual SA Mine report (September 2019 11th Edition) climate change is not just “hot air”. In addition to the effect of mining operations on the environment, climate changes are forcing mining companies to consider a range of factors that impact on their operations, such as increased frequency of extreme weather events. Flash floods increase operating costs as they entail repairing damage to infrastructure, operational shutdowns and insurance costs. Regulations require companies to spend on controlling and monitoring emissions and pay penalties where these are exceeded. Long-term changes to the local climate impact the availability and predictability of day-to-day inputs required for mining, such as water and transport routes. The socio-economic impacts of climate change are making communities around the mines increasingly vocal and violent.

The significant risk posed by extreme weather events is increasingly concerning for insurers and there is a growing awareness of the interplay between the fiduciary duties of directors and officers of mining companies and corporate disclosures of climate change-related risks under D&O liability insurance policies. D&O insurance covers directors and officers of a company for claims which may arise from decisions and actions (wrongful actions) taken within the scope of their duties as directors and officers.

Although so far no directors have been found personally liable for the effects of climate change, in a growing number of pending global cases shareholders are attempting to hold mining companies and their directors accountable for climate-related risks. The examples so far relate to: losses to corporations as a result of regulatory sanctions for failure to comply with environmental regulatory obligations; misleading shareholders about the physical impacts of climate change; and failing to disclose climate-related risks to investors. Ironically it can be insurance-on-insurance claims. Litigation funding companies have increased the number of claims against directors which are borne by D&O insurers.

There is legal scope for directors to be found personally accountable if their actions fall short of the expected standards in the performance of their duties.

Cyber risks

Another major threat to the local mining industry is cyber risk and it has become increasingly concerning for mining companies in recent years.

While technology and digitisation are an essential and necessary part of business, affecting all aspects of a mining company's operations from supply chains and handling operations to processing facilities and marketing and sales, they are accompanied by increasing awareness of the vulnerabilities such systems present.

This increased use of advanced technology in mining operations has seen insurance companies placing significant emphasis on risks associated with cyber security. The risk exposure to operations coupled with data privacy threats and fraud means that mining companies need to be more aware of these risks and guard and insure against them.

These are challenging times for the South African mining industry. In addition to the inherent mining risks such as managing health and safety, reducing environmental impacts and managing operations, mining companies need to be acutely aware of the emerging global threats of climate change-related risks and cybersecurity. Mining operations and directors need to ensure that they understand and mitigate against the physical and financial risks of climate change, drawing guidance from their relevant risk committees. There must be a full disclosure of climate change related risks to inform investor decisions and of course directors must comply with their environmental obligations and other statutory obligations and corporate governance requirements.

Critical among all of this is for the mining companies and their directors and executives to ensure that the company has purchased the right insurance to cover the business and the directors and officers for any losses arising from these emerging risks.