A recently passed bill aims to prevent discrimination based on ESG factors against fossil fuel companies by the insurance industry, but Texas-based attorneys question the bill’s impact and suggest it might even have the effect of causing such insurance to cost more.
SB 833 would prohibit an insurer from using a score based on environmental, social or governance — commonly referred to as ESG — characteristics to charge a rate different than the rate charged to another business in the same class for essentially the same hazard.
The bill passed both chambers of the Texas legislature during the final days of the 2023 session and is currently awaiting Gov. Greg Abbott’s signature.
Some energy companies have reported that it’s becoming increasingly difficult to obtain insurance and say some insurance companies are under pressure to refuse to insure the fossil fuel industry.
“The degree to which this bill is going to fix that, I guess, depends to one extent on whether you believe that that’s a problem to begin with,” said Micah Skidmore, partner in the insurance recovery group at Haynes Boone. Skidmore, who is based out of the Dallas office, represents policy holders in significant insurance coverage disputes.
The new law has notable limitations: An insurer would not violate the prohibition if the insurer’s actions were based on ordinary insurance business purposes, such as actuarial principles or financial solvency considerations — even if those metrics overlap with the ESG standards.
“The situation you’re faced with is insurance carriers may still make decisions which are unfavorable to the companies that this bill is intended to protect as long as it isn’t overtly based on ESG standards,” Skidmore said.
From a practical standpoint, it will be difficult for a company who is unable to get coverage or whose premium has increased to prove that it is based on ESG standards or something else, Skidmore said.
“I think a lot of people are expecting that this is the exception that will swallow the rule,” said Travis Wofford, chair of the Houston corporate practice at Baker Botts.
Once it becomes law, if it has any teeth at all, the bill would target insurance companies that rely solely on an ESG metric without any other due diligence, Wofford said.
“It’s not customary business practice to do something like that, and there are already laws against that, so I don’t think that moves the needle,” Wofford said.
Wofford represents a number of policy holders, but also works with insurance companies and brokers. Based on his interactions with insurers, Wofford believes SB 833 is trying to solve for a problem that doesn’t yet exist.
“Insurance companies don’t sit there and underwrite to an ESG rating,” Wofford said. “Insurance companies invest based on underwriting risks and actuarial tables. ESG ratings are not part of that. That’s just not how the world works right now.”
While insurance companies do not underwrite based on ESG ratings, ESG at its core represents risk, albeit non-financial risks, Wofford said.
“You have a history of discrimination lawsuits, you’re going to have higher insurance costs,” Wofford said. “Your building is in a 50-year flood zone, you’ve got higher insurance costs. You have a history of safety incidents, no meaningful earthquake compliance program, you have high pollution as compared to other businesses, you will cost more to insure.”
Insurance companies know these risks and either they price them in or choose not to, Wofford said.
In recent years, Republican-led legislatures around the country have taken aim at the ways companies use ESG factors in business decisions. While the Texas legislature passed no other ESG related bills this session, the state’s Republican-dominated legislative and executive branches have had to walk the fine line between halting corporate practices based on what ESG critics see as the influence of non-financial factors impacting businesses decisions and government overreach in enforcing anti-ESG legislation, such as SB 833.
For example, if there is a heavy hand in enforcing the bill, insurers might just walk away. Moreover, the rule also doesn’t discriminate between increases in insurance premiums and discounts on insurance premiums.
“Businesses want to get credit for the good things that they’re doing to decrease their risks,” Wofford said.
Many of the non-financial factors that companies can present to get credit from insurance companies are ESG factors, Wofford explained.
Another limitation of the bill is that it doesn’t create a private writ of action, Skidmore said.
“You have to ask the question: How impactful is this bill going to be if the violation of it doesn’t allow a private party to seek any relief?” Skidmore said.
While the bill doesn’t create a private writ of action, under chapter 541 of the state’s insurance code, there is a private writ of action for unfair claims settlement practices. The question remains open whether a policyholder can use chapter 541 to say they are entitled to damages based on this new statute, Skidmore said.
One area where the new law could have an effect is in director and officer liability coverage claims in greenwashing lawsuits, Skidmore said. If a company makes a statement about its environmental compliance that is later challenged by investors or other parties in greenwashing allegations, the company might seek D&O coverage. Under SB 833, an insurance company can’t use the company’s ESG statements to deny a D&O claim, Skidmore said.
For a number of years now insurance markets have been challenging for policy holders for reasons other than ESG, Skidmore said. Premiums are increasing and terms are tightening in a lot of markets. Blaming ESG is simplistic, Skidmore said.
On the other hand, any limit on a free market approach to underwriting risk could increase costs for the insured, Wofford warned.
“This law does the exact opposite of what it was intended to do if it ever is enforced,” Wofford said. “This law doesn’t affirmatively increase the amount of insurance available in Texas. You can’t force an insurance company to underwrite a Texas coal company if they weren’t going to underwrite the company before. This law is just going to make it more likely they don’t underwrite them.”