Climate Change Insurance Coverage: Round One To Insurers
October, 2011
On September 9, 2011, the Virginia Supreme Court decided the first climate change liability insurance coverage case: The AES Corp. v. Steadfast Ins. Co., Record No. 100764, 2011 WL 4139736 (Va. Sept. 16, 2011). It held that there was no covered occurrence and that therefore the trial court properly dismissed the insured's claim for coverage.
Facts
In our ongoing series of reports on Global Warming and Climate Change litigation, we previously described the Steadfast v. AES case, which is the first and only pending piece of liability coverage litigation involving climate change claims. The Steadfast case arose out of the underlying global warming and climate change nuisance damages case, Native Village of Kivalina v. ExxonMobil Corp., CV 08-1138 SBA (N.D. Cal.), in which the Native Village of Kivalina sued several oil and gas companies, electric power utilities, and a coal company for nuisance and other damages due to climate changes brought about by defendants' intentional business activities. Specifically, the Native Village of Kivalina, an island fishing community of native Americans, alleged that defendants' greenhouse gas emissions resulted in warmer winters, which lead to melting of sea ice and erosion of the shoreline around their community to the point that their village was doomed to fall into the sea. The plaintiffs sought nuisance damages, as well the cost to relocate their village, lost profits, and loss of way of life.
AES Corporation, an electric utility, was one of the defendants sued in the Kivalina case, and AES tendered the complaint to its CGL insurer Steadfast, seeking both defense and indemnity coverage. Initially, Steadfast agreed to defend AES under a reservation of rights. Steadfast subsequently filed a declaratory judgment action in Virginia state court (home state of AES, its insured), seeking a judgment that it had no duty to defend or indemnify under its general liability policies. Steadfast then filed a motion for summary judgment asserting that there was no occurrence, and that coverage was barred by the loss-in-progress and pollution exclusions.
In the trial court, AES initially prevailed and defeated Steadfast's motion. AES then moved for summary judgment on the duty to defend and Steadfast cross-moved. This time, the trial court granted Steadfast's cross-motion on no duty to defend. The trial court issued a very brief opinion holding that Steadfast had no duty to defend AES in connection with the underlying Kivalina litigation because no "occurrence" as defined in the policies had been alleged in the underlying complaint. AES appealed.
Analysis
In Virginia, as well as most other jurisdictions, to determine whether a duty to defend exists, some version of an eight corners rule is applied: only the allegations in the complaint and the provisions of the insurance policy are to be considered in deciding whether there is a duty on the part of the insurer to defend and indemnify the insured. 2011 WL 4139736 at *3. Coverage under the Steadfast policies hinged on whether there was an occurrence, specifically defined to mean an accident, including continuous or repeated exposure to substantially the same general harmful condition. Under Virginia law, the terms occurrence and accident are synonymous and an accident is commonly understood to mean an event which creates an effect which is not the natural or probable consequence of the means employed and is not intended, designed, or reasonably anticipated. Id. at *4.
There was no dispute that AES intentionally released carbon dioxide as part of the combustion process at its power plants. But intentional acts do not preclude coverage: "[W]hen the alleged injury results from an unforeseen cause that is out of the ordinary expectations of a reasonable person, the injury may be covered by an occurrence policy provision." Id. (citing 20 Eric M. Holmes, Appleman on Insurance 2d § 129.2(I)(5) (2002 & Supp. 2009)). However, if a result is the natural and probable consequence of an insured's intentional act, it is not an accident and coverage will be barred. Id.
The Court summarized the rule as follows:
Thus, resolution of the issue of whether Kivalina's Complaint alleges an occurrence covered by the policies turns on whether the Complaint can be construed as alleging that Kivalina's injuries, at least in the alternative, resulted from unforeseen consequences that a reasonable person would not have expected to result from AES's deliberate act of emitting carbon dioxide and greenhouse gases. Id.
AES attempted to bolster its argument that the Kivalina complaint triggered a duty to defend by arguing to the Virginia Supreme Court that the Kivalina plaintiffs specifically alleged negligence in the alternative, and that the Kivalina plaintiffs were arguing on appeal before the Ninth Circuit that their claim sounded in negligence. The Virginia Supreme Court distinguished these arguments and strictly adhered to the eight-corners rule:
Kivalina plainly alleges that AES intentionally released carbon dioxide into the atmosphere as a regular part of its energy-producing activities. Kivalina also alleges that there is a clear scientific consensus that the natural and probable consequence of such emissions is global warming and damages such as Kivalina suffered. Whether or not AES's intentional act constitutes negligence, the natural and probable consequence of that intentional act is not an accident under Virginia law. Id. at 5.
Further, [e]ven if AES were negligent and did not intend to cause the damage that occurred, the gravamen of Kivalina's nuisance claim is that the damages it sustained were the natural and probable consequences of AES's intentional emissions. Id. at 6. In sum, if an insured knew or should have known that certain results would follow from his acts or omissions, there is no 'occurrence' within the meaning of a comprehensive general liability policy.
Thus, the trial court was affirmed.
Learning Point: As noted above, this is the first skirmish of what is certain to be a protracted battle between insurers and insureds. The Steadfast decision involves only one issue based on one underlying complaint under one state's law. There is a long way to go before clarity is achieved.
In one of our earlier reports, we discussed how Steadfast argued in its papers and before the Virginia Supreme Court that the pollution exclusion also barred coverage. AES responded that it had not been properly raised on appeal. The Court did not even address the subject, apparently finding that it did not need to reach the issue since it was not cited as a ground in AES's appeal. Therefore, the application of any pollution exclusion in the context of global warming and climate change claims remains wholly untested. Stay tuned to the CM Report for Round Two in this developing coverage arena.
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