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New EU corporate social responsibility directive to increase insurance exposure

29/07/2024

Insurers could face increased D&O exposures under the Corporate Sustainability Due Diligence Directive (CSDDD) which is seen as a significant step for corporate social responsibility in the EU.


The CSDDD came into force in July 26, 2024, and will apply from 2027 and introduces obligations for large companies regarding adverse impacts of their activities on human rights and environmental protection. It will require companies to adopt and implement a net zero transition plan in line with the 1.5°C target in the Paris Agreement.


It also sets out the liabilities linked to these obligations, which apply to not only a company’s operations but also its subsidiaries and business partners across the value chain, from upstream production to the downstream distribution, transport and storage of products.


Regulators in each EU member state are empowered to issue potentially “eye-watering” fines, set at a maximum level of not less than 5 percent of global annual turnover.


It will be phased in from:


July 2027: EU companies with >5,000 employees

and >€1.5bn net worldwide turnover, and non-EU companies with

>€1.5bn net EU turnover


July 2028: EU companies with >3,000 employees

and >€900m net worldwide turnover, and non-EU companies with

>€900m net EU turnover


July 2029: EU companies with >1,000

employees and >€450m net worldwide turnover, and non-EU companies with

>€450m net EU turnover.


Despite Brexit, the directive still applies to large UK companies that make significant revenues in the EU. It also applies indirectly to smaller UK companies if they are in the supply chains of EU companies that are caught by the directive.


Mike Newham, partner in UK law firm RPC’s insurance group, described the directive as “far-reaching and onerous” and believes the requirements to carry out due diligence may see increasing derivative-type claims brought by minority shareholders in order to enact changes in corporate behaviour.


He said: “From an insurance perspective, strategic litigation may mean that there is no, or at least a lesser, threat of a large adverse award. However all covered claims will necessitate indemnification for defence costs which will likely be substantial.”


Significantly, the directive contains provisions to support claimants by ensuring that costs of legal proceedings are not prohibitively expensive, as well as enabling NGOs to bring claims on victims’ behalf.


Sophie Tuson, senior associate and lead for RPC’s environment and climate change practice, said: “Where breaches of the CSDDD can be framed as breaches of directors’ individual legal duties to the company under national law, we may well see an increase in these director-focused claims.”


W Denis arrange specialist management liability insurance for businesses of all sizes. To discuss further please contact W Denis:


Eastern Europe

Vida.Jarasiunaite@wdenis.eu


Southern Europe

Christos.Hadjisotiris@wdenis.com


Western Europe &/or elsewhere worldwide

Mark.Dutton@wdenis.com

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