AES v. Steadfast – The First Climate Change Liability Coverage Battle and the Future of Climate Change Coverage Disputes, Contributed by Christina M. Carroll and Christopher Baker, McKenna Long & Aldridge, LLP
In a major victory for insurers, the Virginia Supreme Court held that insurance companies do not have to defend utility companies accused of intentional wrongdoing in connection with climate change liability lawsuits. In AES Corp. v. Steadfast Insurance Co.,1 the court concluded that the underlying climate change claims in Native Village of Kivalina v. ExxonMobil Corp. did not constitute an “occurrence” under AES’s commercial general liability (CGL) policies. Because the court decided the case on the occurrence issue, the court did not reach the issue of whether the pollution exclusion might apply.
The decision in AES has important implications for both insurers and companies with potential exposure to climate change-related tort claims. Although policyholders and their counsel are likely to now press coverage issues in more favorable jurisdictions, the decision nonetheless stands as a significant step towards resolving the question of whether such claims are covered under CGL policies. Future coverage litigation in this area in other states could also focus on the occurrence issue as well as on the pollution exclusion and loss in progress issues not reached in the AES case. Given recent decisions in climate change tort cases, further climate change coverage litigation may emerge in the errors and omissions (E&O) insurance and directors and officers (D&O) liability insurance contexts instead, or in addition to, the CGL context.
The AES Coverage Dispute
Appellant AES Corporation is a defendant in Native Village of Kivalina v. ExxonMobil Corp., one of the first climate change nuisance cases brought in federal court.2 The Kivalina plaintiffs, an Inupiat village located off the coast of Alaska, allege that greenhouse gas emissions from AES and other oil, energy, and utility companies have contributed to climate change which, in turn, has eroded the village’s coastline and rendered it uninhabitable. The complaint alleges that AES intentionally emits millions of tons of carbon dioxide and thereby “intentionally or negligently” created a nuisance, in the form of global warming. The plaintiffs in Kivalina further assert that AES “knew or should have known” that its activities would result in the environmental harm to Kivalina.
After being sued, AES asked its insurer, Steadfast Insurance Company, to defend. Steadfast refused and thereafter filed a declaratory judgment action in the Circuit Court of Arlington County in Virginia (where AES is headquartered). Steadfast denied coverage based on three grounds: (1) the Kivalina complaint did not allege “property damage” caused by an “occurrence” as those terms were defined in its policies; (2) the alleged injuries arose before Steadfast’s coverage incepted; and (3) the greenhouse gas emissions alleged in Kivalina were “pollutants,” excluded from coverage by virtue of the policies’ pollution exclusion.
The policies defined “occurrence” as “an accident, including continuous, repeated exposure to substantially the same general harmful condition.” AES argued that, because the complaint alleged that AES “[i]ntentionally or negligently” created a nuisance, the damage alleged by plaintiffs in Kivalina constitutes an “accident” and thus an “occurrence.” AES further argued that because the Kivalina complaint alleges that AES “knew or should have known” that generation of electricity would result in the environmental harm suffered by Kivalina, the complaint alleges, at least in the alternative, that the consequences of AES’s intentional carbon dioxide emissions were unintended. The court disagreed.
The Virginia Supreme Court’s Decision
In an opinion authored by Justice Bernard Goodwyn, the court held that an allegation of negligence does not equal an occurrence.3 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. Thus, the Virginia Supreme Court held that the underlying Kivalina complaint did not allege an “occurrence,” and therefore Steadfast had no duty to defend AES under the CGL policies.4
Interestingly, in their concurrence, Senior Justices Lawrence Koontz and Harry Carrico cautioned against reading the majority’s holding too broadly. The concurrence emphasized that the insurer is relieved of its duty to defend only where it is certain that no liability could arise from the contract of insurance. The concurrence warned that the mere fact that the alleged harm resulting from AES’s emissions was foreseeable did not excuse Steadfast from its duty to defend. Rather, the concurrence focused upon whether AES was negligent as to the relevant intentional act or in terms of the foreseeability of the consequences. In the Kivalina complaint, plaintiffs alleged that the release of greenhouse gases was an intentional act and did not allege that act was done negligently. Rather, in the concurrence’s view, the complaint alleged that AES was only “negligent” in the sense that it knew or should have known that its actions would cause injury. The concurrence agreed, therefore, that the injury to Kivalina alleged in the complaint did not arise from an accident, and thus was not an occurrence under the CGL policies.
Future Coverage Litigation Related to Climate Change Liability
While the Virginia Supreme Court’s decision is instructive of the interpretation of “occurrence” in the climate change context, it leaves other climate change coverage issues unresolved. In particular, if a court in another state disagreed with the holding in AES, that court might have to reach the arguments that the pollution exclusion and known loss provisions and doctrines also bar coverage under CGL policies.
The Pollution Exclusion – An Open Question
A significant issue not reached by the court in AES is whether the pollution exclusion applies to greenhouse gases. If greenhouse gases are determined to be “pollutants” as defined in relevant insurance policies, CGL and certain E&O and D&O exposures may be reduced and environmental liability insurance exposure would increase. The pollution exclusion has been heavily litigated in the past and likely will continue to be the subject of litigation in the future as insurers face more and more greenhouse gas-related claims.
Although definitions can vary by policy, the Steadfast policies contained a typical “pollutant” definition:
“Pollutants” mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.5
In the trial court proceedings, Steadfast argued that greenhouse gases constituted pollutants. Steadfast relied in part on the Virginia Supreme Court’s application of the pollution exclusion in City of Chesapeake v. States Self-Insurers Risk Retention Group, Inc.6 There, the court assessed whether the pollution exclusion barred coverage for personal injury claims for exposure to the trihalomethanes (THMs). In its assessment, the court considered (1) whether THMs fell within the plain meaning of the term “pollutant”; and (2) whether the underlying claimants characterized THMs as pollutants. Relying on the United States Supreme Court holding in Massachusetts v. EPA7 and the Virginia Administrative Code,8 Steadfast argued that, just like the THMs in City of Chesapeake, greenhouse gases fall within the plain meaning of the term “pollutant.”9 Massachusetts v. EPA had held that carbon dioxide was a pollutant for purposes of the Clean Air Act.10 Steadfast also noted that the Kivalina plaintiffs had characterized greenhouse gases as pollutants.11
AES countered that carbon dioxide was not unambiguously excluded by the policy language.12 First, it argued that carbon dioxide does not qualify as an “irritant” or “contaminant” in the pollutant definition in the policies. Second, AES contended that the parties had no common understanding that carbon dioxide was a pollutant at the time of contract formation. AES also distinguished the Massachusetts v. EPA holding on the grounds that it did not hold that carbon dioxide is a pollutant for purposes of insurance law, and in any event, it did not reflect a common understanding of carbon dioxide as a “pollutant” at the time the emissions began and the complaint was filed.13 Neither the trial court nor the Virginia Supreme Court reached the pollution exclusion’s applicability.
Although the AES decision did not address the pollution exclusion’s applicability, various jurisdictions have interpreted and applied the pollution exclusion outside the greenhouse gas context. One court noted that “[t]o say there is a lack of unanimity as to how the clause should be interpreted is an understatement.”14 Some courts have found the pollution exclusion to be unambiguous and interpreted the term “pollutant” broadly to encompass many substances.15 Such courts have held that substances such as carbon monoxide,16 nitrogen dioxide,17 hydrogen sulfide,18 styrene,19 and anhydrous ammonia20 qualify as “pollutants” because the substance was a “solid, liquid, gaseous or thermal irritant or contaminant.”
Courts finding the pollution exclusion to be ambiguous sometimes have held that the pollution exclusion only applies to “traditional pollution” (e.g., environmental pollution such as contaminated groundwater, statutorily required cleanups, and leaching landfills). Courts limiting pollution exclusions to “traditional” environmental pollution have reasoned that insureds have reasonable expectations of coverage for claims involving “non-traditional” pollution or that underwriters never intended the pollution exclusion to apply to such a broad array of substances.21 For example, an appeals court in Wisconsin held that carbon monoxide at high levels in a residence resulting from operation of a fireplace and boiler was not a “pollutant” within the meaning of the landlord’s liability policy, partially because the landlord could reasonably expect coverage for damages caused by the accumulation of a substance that is commonly present.22 Not all courts that restrict application of the pollution exclusion to “traditional pollution” have been clear in explaining the distinction between traditional and non-traditional pollution, lending to further uncertainty in this area. Some courts, however, have explained that the pollution exclusion was created as a reaction to cleanups required by the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)23 and Resource Conservation and Recovery Act (RCRA)24 and thus the exclusion should only be applied to cleanup costs arising from such “traditional environmental pollution.”25
As highlighted in the AES briefing, outside of the insurance coverage context, the U.S. Supreme Court and Environmental Protection Agency (EPA) have deemed greenhouse gases to be pollutants for purposes of the Clean Air Act.26 Some argue that it logically follows that greenhouse gases are irritants or contaminants, and thus pollutants, for purposes of an insurance policy. Courts, particularly those that find the pollution exclusion unambiguous and not limited to “traditional pollution,” might consider these attributes of greenhouse gases and conclude that greenhouse gases are pollutants for purposes of the pollution exclusion. On the flip side, jurisdictions limiting the pollution exclusion to traditional environmental pollution may find that greenhouse gases are not pollutants. Some greenhouse gases such as carbon dioxide and water vapor are commonly-occurring and not always harmful. Carbon dioxide and water vapor are also sometimes occur naturally. Those seeking coverage would likely argue that the Supreme Court only recently deemed carbon dioxide a pollutant for purposes of the Clean Air Act and that such a determination is not dispositive for the interpretation of an insurance policy. Thus, they would likely argue that greenhouse gases are not irritants or contaminants under “traditional pollution” discourse. It remains to be seen how courts will interpret and apply the pollution exclusion in the greenhouse gas context.
Loss in Progress Exclusion? – Another Potential Debate
Another issue briefed by the parties in the AES trial court proceedings, but not on appeal to the Virginia Supreme Court is whether the Steadfast policy’s “Known Loss and Loss in Progress” exclusion precluded coverage for the Kivalina litigation. The “Known Loss and Loss in Progress” exclusion endorsement contains three exclusions including a “loss in progress” exclusion. Relying on the “loss in progress” exclusion, Steadfast argued that the insurance does not apply to “any injury or damage which incepts prior to the effective date of the policy.”27
Steadfast argued that its 2003 through 2008 policies which contained the “loss in progress” exclusion barred coverage because the Kivalina plaintiffs alleged that the damage caused by AES’s greenhouse gas emissions had been occurring for decades.28 In response, AES argued that the “loss in progress” exclusion should not be enforced because it is ambiguous.29 AES claimed that the exclusion conflicted with separate policy limitations that precluded coverage of property losses that occurred prior to the policy’s inception and were known to the insured.30 AES also stressed that Steadfast’s 1996 through 2000 policies did not contain a “loss in progress” exclusion.31 Finally, AES argued that Steadfast improperly relied on extrinsic evidence beyond the Kivalina complaint to demonstrate the applicability of the exclusion.32
While the Virginia Supreme Court did not ultimately adjudicate the issue, the AES litigation highlights the complexity of the application of the “loss in progress” exclusion and any known loss limitation in the climate change context. Application of these exclusions and limitations could vary by jurisdiction and due to differences in these policy terms over time. Coverage also may turn on consideration of what the loss is and when the loss occurred in the particular claim. Whether greenhouse gas emissions or climate change can be considered a “loss in progress” or “known loss” remains to be seen.
Beyond CGL –Errors & Omissions and Directors and Officers Liability Coverage Issues
The issues raised throughout the AES litigation do not encompass all potential climate change coverage issues. AES involved CGL policies. In the future, however, coverage battles also may arise in the E&O and D&O contexts. Insurers should consider potential exposures and insureds operating in areas that may be subject to future climate change liability should review their policies.
Errors & Omissions Coverage
Climate change-related claims could arise out of a wide variety of professional activities such as carbon footprinting, preparation of environmental impact statements and mitigation strategies, green building and greenwashing. As the Environmental Protection Agency (EPA), states, and nonprofits demand disclosure of greenhouse gas emissions, professionals will be called on to account for or calculate greenhouse gas emissions for corporate clients for reports to EPA or other federal or state authorities. Regulated emitters will rely on professionals to help prepare reports pursuant to the EPA Greenhouse Gas Reporting Rule33 and in connection with preparation of environmental impact statements and mitigation strategies related to obtaining permits at the state and local level. If professionals make mistakes in the course of doing such work, their customers may file claims against them.
Professionals will likely seek coverage for these kinds of climate change-related claims. Professional liability policies often do not contain pollution exclusions. Insurers and insureds may need to consider the applicability of the contractual liability and intentional/fraudulent acts exclusions. Furthermore, they may also need to evaluate any exclusions for fines, penalties, taxes, and punitive, exemplary, and multiple damages and products liability.
Directors & Officers Liability
In recent years, shareholders have submitted record numbers of resolutions related to climate change, and investors have demanded increased disclosure of climate change-related risk.34 Voluntary disclosure programs have continued to develop. The Securities and Exchange Commission (SEC) has issued guidance on shareholder resolutions that impact climate change-related resolutions,35 and has issued guidance specifically addressing climate change disclosure.36 The risk will ebb and flow in part due to the political climate including whether there is comprehensive climate change legislation and regulation.
Insureds facing claims related to concealment, misrepresentation, or mismanagement of climate change-related risk will likely seek reimbursement of defense costs and indemnification under D&O policies. Most of these policies (except for some new product offerings) do not specifically address whether climate change-related claims are covered. Some policies have pollution exclusions or pollution-related exclusions.
Courts will have to determine whether pollution exclusions apply to claims arising out of misrepresentation of, or failure to identify climate change-related risks as opposed to claims arising more directly from climate change. Cases assessing the application of the pollution exclusion to D&O claims arising out of company misstatements about asbestos and other traditional pollutants are instructive.37 In these somewhat analogous situations, courts have reached different results.
In Sealed Air Corp. v. Royal Indemnity Co.,38 a New Jersey appellate court considered whether a pollution exclusion barred D&O coverage. In the underlying action, shareholders alleged that Sealed Air’s directors and officers made misleading statements causing the company’s stock to trade at artificially high prices. The alleged false and misleading statements related to the asbestos liability of an affiliated entity. Sealed Air’s insurer denied coverage and argued that the policy precluded claims “arising out of” the discharge of pollutants. The court concluded that the alleged loss asserted by the company’s shareholders arose, not from any underlying pollution, but rather from the allegedly misleading financial statements. The court held that the pollution exclusion allows the insurer to deny coverage where the directors or officers are sued for pollution, not mere misrepresentations with a remote connection to polluting. Thus, the court concluded that the pollution exclusion did not apply to bar coverage of the D&O claim.39
In National Union Fire Insurance Co. of Pittsburgh, Pa. v. U.S. Liquids, Inc.,40 the shareholders of a liquid waste management company also sued based on alleged misrepresentations. In this instance, however, the Fifth Circuit held that under Texas law, the pollution exclusion barred D&O coverage for the shareholder suit. Shareholders alleged that they had acquired U.S. Liquids’s stock at inflated prices due to the company’s concealment from the SEC of its illegal disposition of hazardous waste. The court found that all claims asserted by the shareholders had one genesis, namely, pollution, and that there was no break in the causal chain linking the underlying damages to that pollution. Even so, the court noted that Texas law does not require an unbroken chain of events and “only considers whether there is an ‘incidental relationship’ between the loss and the excluded conduct.” Thus, even though the underlying claims arose out of deceit regarding pollution, not the pollution itself, the court applied the pollution exclusion. The varying results in these cases demonstrate the jurisdiction-specific interpretation of the pollution exclusion in the D&O context.
Courts will potentially reach similarly diverging conclusions when assessing analogous issues in the greenhouse gas context.
Going forward, therefore, the pollution exclusion may be the key issue in the D&O context. The particulars of any intentional/fraudulent acts exclusion, definition of loss, limits of liability provision related to interrelated wrongful acts, bodily injury and property damage exclusions also could potentially be the subject of a climate change-related coverage dispute depending on the particular case at hand.
The Virginia Supreme Court decision in AES is an important step toward resolving key issues in climate change coverage litigation. The pollution exclusion and known loss issues may still need to be litigated depending on if and when new climate change tort claims and related coverage lawsuits are filed in other jurisdictions. As climate change claims evolve, coverage questions related to other lines such as E&O and D&O may need to be adjudicated as well. Both insurers and insureds should stay abreast of the ongoing development of the jurisprudence in this evolving area of the law.
Christina M. Carroll is a partner in McKenna Long & Aldridge LLP’s Washington, D.C., office. Her practice focuses primarily on complex litigation, including insurance, toxic tort, and environmental litigation. Ms. Carroll counsels clients on the risks and opportunities associated with climate change.
Christopher Baker is an associate in the Washington, D.C. office of McKenna Long & Aldridge LLP. He is a member of the Insurance and Financial Institutions Team, where his focus is on insurance coverage and bad faith disputes.
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