Virginia Supreme Court to Decide Insurance Coverage for Climate Change Suits

The Supreme Court of Virginia will soon decide whether a claim for damages alleged to have resulted from climate change is a covered “occurrence” under standard general liability policies. The case, AES Corp. v. Steadfast Insurance Co. (“AES”)[1] is one of first impression and is being closely followed by both insurers and insureds.

AES Corporation, an energy company, is a defendant in a highly publicized climate change nuisance case called Native Vill. of Kivalina v. ExxonMobil Corp. (“Kivalina”). See S. Jones, A. Orford, Before the Deluge: Fifth Circuit Joins Second Circuit in Allowing Climate Change Tort Suits, while District Court Dismisses Similar Claims, Marten Law Environmental News (November 4, 2009). After being sued, AES tendered the claim to its insurer, Steadfast Insurance Company (“Steadfast“). The claim was denied, and, thereafter, Steadfast filed an action for declaratory judgment in Virginia (where AES is headquartered).[2] The trial court granted summary judgment for Steadfast, holding that Steadfast had no duty to defend AES because the allegations in the Kivalina complaint did not constitute an “occurrence” within the meaning of the general liability policies that Steadfast had sold to AES. AES appealed to the Virginia Supreme Court, which heard oral argument on April 19, 2011.

Background Facts

The Kivalina case dates to February 2008, when AES and 23 other oil, energy and utility companies were sued for allegedly causing an Inupiat village in Kivalina, Alaska to literally sink into the Arctic Ocean. The complaint asserted that the defendants’ greenhouse gas (“GHG”) emissions caused warming of the earth, the effect of which was to reduce the Arctic ice pack. Because the ice pack provided protection to the village’s coastline from storms, the plaintiffs claimed that the reduced ice pack accelerated the erosion of the coast, rendering the village uninhabitable.

The Kivalina case was dismissed by a federal district court in September 2009 on the grounds that it raised non-justiciable political questions and because plaintiffs could not demonstrate causation for their injuries arising from the defendants’ actions.[3] The case is currently pending before the Ninth Circuit Court of Appeals. Native Village of Kivalina, et al v. Exxonmobil Corporation, et al., Ninth Circuit Case No. 09-17490 (appeal filed November 5, 2009).

Following AES’ tender, Steadfast sought declaratory judgment sustaining its denial of coverage on three grounds: (1) the Kivalina complaint did not allege “property damage” caused by an “occurrence” under the policies; (2) any alleged injury arose prior to the inception of Steadfast’s coverage; and (3) the GHGs alleged in Kivalina were air pollutants that fell within the scope of the pollution exclusion under AES’ policies.

The trial court accepted the lack of occurrence argument, and consequently did not reach the other two arguments.[4] AES appealed the trial court’s decision as to (1) whether the complaint in Kivalina constitutes an “occurrence” under Steadfast’s policy; and (2) whether GHGs fall within the ambit of the pollution exclusion, resulting in exclusion of coverage for such claims.

Do the Allegations in Kivalina Constitute an Occurrence?

A threshold question under CGL policies is whether claimed property damage was caused by an occurrence, typically defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”[5] For policy holders such as AES, who were sued for allegedly causing third-party damage for emission of GHGs, the argument would be that the damage alleged in the plaintiff’s complaint was “unexpected and unintended” by the insured, even though the insured was generally aware of the emissions and the potential effect the GHG emissions might have on the plaintiff.[6]

The term “occurrence” is defined under the Steadfast policies as “an accident, including continuous or repeated exposure to substantially the same general harm condition.”[7] Steadfast claimed that its policies “did not apply to the Kivalina Plaintiffs’ claims” because those plaintiffs “did not base their claims against AES on any … ‘accident’” but instead on “AES’s recognition in its 2002 Annual Report that it was ‘one of the largest emitters of CO2 in the world’ and that [AES] therefore must continue to strive to economically stabilize greenhouse gas concentrations.”[8]

AES’ claim that the Kivalina allegations constitutes an “occurrence” triggering Steadfast’s duty to defend rests on two contentions: (1) that the Kivalina plaintiffs’ allegations of “negligent” conduct on the part of AES were sufficient to constitute an “accident” under the policies; and (2) that the harm arising from the alleged climate change caused by AES’ emission of GHGs was an unplanned harm constituting an “accident,” irrespective of whether the emissions were intentional or not.

AES’ position relies strongly on the fact that the Kivalina plaintiffs alleged that “AES ‘negligently caused unplanned property damage to a remote Alaska village by generating electricity.’” In support of this position, AES pointed to both the Kivalina complaint and the plaintiffs’ briefing before the Ninth Circuit.[9] AES argued that the allegations triggered Steadfast’s duty to defend because they fall within the definition of an “accident,” which focuses on the unplanned nature of the alleged damage “from the viewpoint of the insured.”[10]

Under Virginia insurance law, an “accident” is “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.”[11] Based on this language, AES argued that, in order for Steadfast to show that there was no “accident,” it was not enough for the insured’s conduct to be intentional – the harm must also be known or expected.[12] Citing extensively from the Kivalina complaint, AES claimed that the damage alleged by the plaintiffs was not “clearly” planned or expected from “the viewpoint of the insured.”[13] Under this reading of the policies, “an accident exists when any aspect in the causal series of events leading to the injury or damages was ‘unintended or unexpected’ by the insured, which would thereby be a fortuitous event legally capable of being insured.”[14]

Steadfast countered by pointing to other portions of the Kivalina allegations, as well as arguing public policy:

CGL policies are designed to insure policyholders against fortuitous circumstances, not to protect them from the foreseeable consequences of doing business. It would violate the purpose of CGL policies to shift AES’s business costs to Steadfast by characterizing them as an “accident.” This is particularly true where, as here, the Kivalina plaintiffs allege that AES continues to engage in the very activity that it characterizes as “accidental.”[15]

Steadfast argued that the Kivalina plaintiffs alleged intentional conduct by AES, as well as the known consequences: “If an ultimate event is the ‘natural and probable consequence’ of a policyholder’s intentional action, it is not an ‘accident.’”[16] From Steadfast’s perspective, the question for the court to decide was whether the event for which coverage is sought is the “natural and probable consequence of the insured’s intended actions,” not whether or not the policyholder intended or wanted it to occur.[17]

Steadfast argued that only three paragraphs in the 68-page Kivalina complaint alleged that AES knew or should have known that those harmed by its intentional conduct would include villages like Kivalina and that their conduct was negligent.[18] It also argued that it was “inequitable to permit AES to call its conduct ‘accidental’ (so as to place the cost of defense and indemnity on Steadfast) and continue to engage in that conduct, reaping commercial and economic benefit from it.”[19]

In rejecting AES’ argument, the trial court found that simply referencing “negligence” in the underlying complaint was insufficient to create an “occurrence” and that “Steadfast had no duty to defend AES in connection with the underlying Kivalina litigation because no ‘occurrence’ as defined in the policies has been alleged in the underlying Complaint.”[20]

Is CO2 a “Pollutant” for Which Coverage Is Excluded?

The second basis under which Steadfast maintained that coverage was excluded was the absolute pollution exclusion that has appeared in most CGL policies since 1986. Under that exclusion, coverage is excluded for “claims of property damage arising out of the actual, alleged or threatened discharge, dispersal, [seepage, migration,] release or escape of ‘pollutants’”[21] The Steadfast policies defined “pollutants” as “any solid, liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste. Waste includes material to be recycled, reconditioned or reclaimed.”[22] Relying on this definition, Steadfast contended that coverage was excluded for the Kivalina complaint.

In the past, some courts have been hesitant to extend the concept of a “pollutant” beyond industrial substances or substances classified as pollutants in some other context.[23] Other courts have asked whether a reasonable policyholder would have anticipated the substance could be deemed a pollutant giving the particular circumstances of emission which allegedly caused the injury.[24] This argument was made more problematic by the U.S. Supreme Court’s decision in Massachusetts v. EPA,[25] in which the Court held that GHGs were “substances” emitted into the air and, accordingly, fell within the definition of “air pollutants” in section 302(g) of the Clean Air Act.[26]

Subsequent to the Massachusetts decision, the U.S. Environmental Protection Agency expressed the view that GHGs are “without a doubt, physical chemical substances emitted into the ambient air.” This language comes from EPA’s “Endangerment and Cause or Contribute Findings for Greenhouse Gasses under Section 202(a) of the Clean Air Act at 80 (December 7, 2009) (quoting Massachusetts v. EPA, 549 U.S. at 529). When EPA’s Endangerment Finding was issued, it was covered in this newsletter. See S. Jones, EPA’s Endangerment Finding Could Spur More NEPA, Nuisance Litigation, Marten Law Environmental News (December 10, 2009).

Based on the procedural posture of the case, the pollution exclusion was not a primary focus of the briefing for either party before the Virginia Supreme Court. Steadfast filed an initial motion for summary judgment which the trial court denied based on the existence of questions of material fact. After AES filed its own motion for summary judgment on the issue of the duty to defend, Steadfast filed a renewed cross-motion for summary judgment. This time, the trial court denied AES’ motion, but granted Steadfast’s cross-motion, finding that Steadfast did not have a duty to defend because there was no “occurrence.” It was this order that AES appealed. Based on this record, AES argued that, because Steadfast did not assign cross-error in its response to AES’s appeal, it had waived the right to raise the “pollutants” exclusion issue on appeal. Steadfast, countered by arguing that it raised the issue below, and thus did not need to assign cross-error to raise the issue on appeal.

Notwithstanding this procedural dispute, both parties maintained the Virginia Supreme Court could reach and decide the impact of the pollution exclusion. AES argued that Steadfast failed to prove that the exclusion unambiguously applies to CO2, pointing out that, while language in the policies expressly excluded many substances, it did not specifically exclude CO2 emissions.[27] AES also cited deposition testimony from Steadfast’s underwriters, who admitted that they had no understanding that CO2 was a “pollutant” when the AES policies were written. Based on this fact, AES argued that the existence of such issues of fact required the court to find in favor of coverage.[28]

For its part, Steadfast urged the trial court to adopt the United States Supreme Court’s holding in Massachusetts v. EPA that GHGs are “pollutants as that term is commonly understood.”[29] Steadfast also maintained that it was not necessary to enumerate every single item that constituted a “pollutant” under the exclusion: “[P]ollutants cannot, by nature, be defined by reference to a static list. Every substance is proper and benign in its proper place or proper quantity – whether lead, mercury, or radioactive isotopes, or CO2. It is only the violation of proper boundaries that makes any substance a pollutant.”[30] Steadfast asserted that the Kivalina plaintiffs could only prevail by proving that CO2 was a pollutant and that, if they were successful in doing so, they would establish the necessary predicate for application of the pollution exclusion.[31]

Will Supreme Court’s Review of GHG Nuisance Actions Moot the AES Case?

The implication of a finding by Virginia’s courts that coverage exists for GHG claims may be mooted if the underlying claim by the village of Kivalina is thrown out. The district court has already done so, and, as noted, the case is on appeal to the Ninth Circuit. Meanwhile, the U.S. Supreme Court has taken up a companion case that raises many of the same issues as Kivalina, American Electric Power Co. Inc., et al., v. Connecticut, et al. (“AEP”). See S. Jones, Supreme Court to Decide Whether Nuisance Action for GHG Emissions May Proceed, Marten Law Environmental News (December 9, 2010).

As in the Kivalina case, the question presented by AEP is whether states and/or private parties can use the federal common law of nuisance as a vehicle to collect damages for injury due to GHGs and impose court-ordered emissions caps. The United States Supreme Court coincidentally heard oral argument in the AEP case on the same day as the Virginia Supreme Court heard argument on the AES case.

For more information, contact Steve Jones or any member of our Climate Change or Environmental Litigation practice groups.